Closing the Loopholes: Options for the Trump Administration to Strengthen AI Chip Export Controls

Introduction

As China celebrated the Lunar New Year, the emergence of the AI startup, DeepSeek wiped out nearly $1 trillion in value of US tech stocks. The Chinese tech company surprised the world by matching the performance of top AI models, supposedly at a fraction of the cost compared to leading AI companies such as OpenAI. The development prompted Trump to say that the rise of DeepSeek “should be a wakeup call” for American industries.

While some view DeepSeek as a historic milestone in China’s AI progress, others question China’s true indigenous innovation capability as it may rely on reverse engineering existing AI models. Regardless of DeepSeek’s real impact, it has created urgency for Trump to take further action to maintain US leadership in AI, including lawmakers urging the administration “to place stronger export controls on technologies critical to DeepSeek's AI infrastructure."

Starting during the waning days of the first Trump administration, the US has worked to tighten chip export restrictions on China to curb its development of advanced AI. President Biden further pushed for export controls, which reflected a strategy towards China of “small yard, high fence,” as characterized by his National Security Advisor, Jake Sullivan. It involved imposing stringent restrictions on key chokepoints in the semiconductor supply chain to prevent the development of large AI models that threatened US national security.

The initial restrictions were put in place in October 2022, with another update in October 2023 and additional measures published in December 2024 before Biden’s term ended. According to Gregory Allen, Director of the Wadhwani AI Center at CSIS, the measures were consistent with three strategic rationales, “(1) choke off China’s access to the future of AI and high-performance computing (HPC) by restricting China’s access to advanced AI chips; (2) prevent China from obtaining or domestically producing alternatives; and (3) mitigate the revenue and profitability impacts on U.S. industry by continuing to allow Chinese sales for less advanced (and therefore presumably less threatening) technologies.”

Despite the Biden Administration’s efforts, Chinese tech companies have found ways to evade the export controls, prompting the Trump Administration and Congress to consider options for imposing further barriers to limit China’s AI progress.

How China ‘Jumps the Fence’

China outsmarts and dodges US chip controls by exploiting loopholes and using illegal tactics to access chips. First, China can circumvent through virtual cloud purchases. Renting chips through the cloud is a legal practice that allows Chinese companies, such as Alibaba, Tencent, and Baidu, to obtain chips through services offered by US cloud computing companies. While Chinese companies on the US Entity List cannot acquire physically exported chips, they can still purchase virtual cloud services and bypass such regulations. For example, Shenzhen University accessed Nvidia’s A100 and H100 chips by spending nearly $28,000 on an Amazon Web Services account.

Second, China designs downgraded domestic chips and buys less powerful chips from US companies to comply with restrictions. By modifying chip designs within export control thresholds, China can use semiconductors with similar capabilities while remaining compliant with legal regulations. For example, Chinese AI chip firms MetaX and Enflame submitted less powerful designs to TSMC to comply with US restrictions. China also purchases chips that fall below the computing threshold. For example, DeepSeek claimed that it trained its model using approximately 2,000 Nvidia H800 chips, which were not limited by US restrictions.

It is also important to note that US companies use a similar approach to accommodate the Chinese market. For example, after the US ordered Nvidia to stop shipping A100 to China, the company instead sold downgraded chips to China in compliance with the law. In December 2023, Nivida also unveiled gaming chips tailored for China that comply with US regulations.

Third, China employs illegal tactics to access chips, including smuggling by state-affiliated entities and individuals by snatching up excess stocks of chips when companies ship large quantities to US firms. For example, SenseTime used intermediaries to smuggle banned chips from the US to develop AI software, undermining the effectiveness of US controls.

Chinese vendors sell smuggled chips in stores and on online platforms. In Huaqiangbei, Shenzhen province, vendors sell chips openly, with some managing orders worth millions of dollars. Buyers of these chips include startups, local authorities, app developers, and state-affiliated entities, suggesting that the acquired banned chips could potentially accelerate China’s AI development. Another form of selling occurs on e-commerce sites. By searching #Nvidia, buyers can easily find and purchase various banned GPUs on Xiaohongshu. On Xianyu, one piece of Nvidia’s A100s can be sold for over $30,000.

Another illegal strategy is creating front companies. Sugon, a Chinese AI server manufacturer, was blacklisted by the US for supplying chips to the Chinese military in June 2019. To get around the ban, Sugon soon established another company, Nettrix, as the front, which successfully formed partnerships with Nvidia. Ashok Pandey, the general manager of Nvidia’s China business, described it as an important partner to Nvidia.

Possible Changes to the US Approach

China’s diverse strategies to evade US export controls highlight the challenge of achieving fully effective sanctions and export controls, suggesting an urgency for the Trump administration to improve enforcement or pursue alternative approaches. In the long-term AI competition with China, export controls may remain a critical tool for the US government. As DeepSeek’s CEO Liang Wenfeng said, “Money has never been the problem for us; bans on shipments of advanced chips are the problem.”

To close the loopholes and maintain US AI leadership, the current administration aims to upgrade sanction measures. In January 2025, Trump signed the America First Trade Policy executive order, which orders the Secretary of State and the Secretary of Commerce to assess the export control system and make recommendations, including how to “identify and eliminate loopholes in existing export controls” to enhance national “industrial and technological advantages.”

Potential recommendations could include implementing “Know Your Customer” checks that require strict scrutiny of buyers seeking large quantities of exported chips. In January 2024, the Bureau of Industry and Security (BIS) proposed a rule that would require US Infrastructure as a Service (IaaS) providers to verify the identities of foreign customers. Moreover, current restrictions on exports rely on policy measures such as entity lists, which reactively blacklist companies. Barath Harithas, a senior fellow at CSIS, recommends creating a stringent preapproval system that only grants operation permits to trustworthy chip sellers and logistics providers. He argues that mandating the prescreening of logistics providers would be more effective at reducing the risk of diversion by implementing preventive rather than reactive controls.

To prevent China and US companies from exporting lower-quality chips that are under the technical specifications in export control, the administration could also work more closely with companies to update AI chip export restrictions frequently. Enforcing restrictions presents challenges as companies like Nvidia strongly oppose chip restrictions on China. The company criticized the Biden Administration’s final rules and met with President Trump amid reports that his administration may further restrict the export of Nvidia’s H20 chips, which were designed for the Chinese market.

Congress could also make it more difficult for China to circumvent controls through virtual cloud purchases. For example, the Remote Access Security Act, introduced in April 2024, would expand “the scope of the U.S. export control system to include remote access of controlled items if such access poses a serious risk to U.S. national security or foreign policy.”

Given the Trump Administration’s goal to “sustain and enhance America’s global AI dominance,” it is likely to continue to be hawkish towards China, and advocates for export controls are also likely to push it to take swift policy action. As Gregory C. Allen argues, “there is a broader point that both the current and incoming presidential administrations need to understand: speedy, simple, and frequently updated export controls are far more likely to be more effective than even an exquisitely complex well-defined policy that comes too late.”