US-China Tech Tensions Escalate: New Semiconductor Rules and AI Ban Evasion

U.S. Vs. China: New Semiconductor Rules Threaten Global Tech Balance

U.S. faces industry and diplomatic pushback as new rules, exempting over 30 allied countries, aim to curb China's chip production. The Biden administration is working to overcome resistance from allied nations and the tech industry as it seeks to impose stricter regulations on semiconductor exports to China. The new rules aim to limit China's access to advanced chip-making technology, potentially bolstering Beijing's military capabilities. Proposed regulations would restrict exports of semiconductor production machinery and software to China if they involve American technology, along with certain semiconductor types, reported The New York Times. This move is intended to close loopholes Chinese chipmakers have exploited to acquire technology despite existing international restrictions. The U.S. has been pressuring allies such as Japan and the Netherlands to tighten their own tech export controls to China. These countries, home to major chip-making machinery firms like ASML and Tokyo Electron, have faced U.S. diplomatic pressure, including during a recent Japanese state visit to Washington. Also Read: Biden Administration's Tariffs On China-Made EVs To Protect Domestic Automakers Pushed Back However, there is growing concern among industry stakeholders that these restrictions might disadvantage U.S. companies, The New York Times added. New rules are expected to exempt over 30 allied countries, including the Netherlands, South Korea, and Japan, leading to fears of an uneven playing field for American firms. While U.S. officials continue to negotiate with allies to strengthen these restrictions, some analysts are skeptical about achieving these goals. In response, China has criticized the U.S. for allegedly misusing export controls and hopes other nations will resist American economic pressure. Details of the policy remain uncertain and could change, but the forthcoming rules are clearly aimed at reinforcing existing measures to curb China's development of cutting-edge AI chips. Disclaimer: This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors. Read Next: 'If You Run A Bank And Screw It Up, You're Still A Rich Guy' - Warren Buffett Says This Is Wrong And Proposes CEOs and Spouses Lose Net Worth Market News and Data brought to you by Benzinga APIs

With smugglers and front companies, China is skirting US AI bans

The United States, with some success, has tried to control the export of chips. Still, The New York Times has found an active trade in restricted AI technology -- part of a global effort to help China circumvent U.S. restrictions amid the countries' growing military rivalry.In the southern Chinese city of Shenzhen, a mazelike market stretches for a half-mile, packed with stalls selling every type of electronic imaginable. It's an open secret that vendors are offering one of the world's most sought-after technologies: the microchips that create artificial intelligence, which the United States is battling to keep out of Chinese hands. One vendor said he could order the chips for delivery in two weeks. Another said companies came to the market ordering 200 or 300 chips from him at a time. A third business owner said he recently shipped a big batch of servers with more than 2,000 of the most advanced chips made by Nvidia, the U.S. tech company, from Hong Kong to mainland China. As evidence, he showed photos and a message with his supplier arranging the April delivery for $103 million. The United States, with some success, has tried to control the export of these chips. Still, The New York Times has found an active trade in restricted AI technology -- part of a global effort to help China circumvent U.S. restrictions amid the countries' growing military rivalry. The chips are an American innovation powering self-driving cars, chatbots and medical research. They have also led to rapid advances in defense technology, spurring U.S. fears that they could help China develop superior weaponry, launch cyberattacks and make faster decisions on the battlefield. Nvidia chips and other U.S. technology have aided Chinese research into nuclear weapons, torpedoes and other military applications, according to a review of previously unreported university studies. Beginning in October 2022, the United States set up one of the most extensive technological blockades ever attempted: banning the export to China of AI chips and the machinery to make them. The Biden administration also added hundreds of Chinese companies to a list of organizations considered a national security threat, and it could soon expand the rules. These bans have made it harder and more costly for China to develop AI. But given the vast profits at stake, businesses around the world have found ways to skirt the restrictions, according to interviews with more than 85 current and former U.S. officials, executives and industry analysts, as well as reviews of corporate records and visits to companies in Beijing, Kunshan and Shenzhen. In one case, Chinese executives bypassed U.S. restrictions when they created a new company that is now one of China's largest makers of AI servers and a partner of Nvidia, Intel and Microsoft. American companies have found workarounds to keep selling some products there. And an underground marketplace of smugglers, backroom deals and fraudulent shipping labels is funneling AI chips into China, which does not consider such sales illegal. While the scale of the trade is unclear, the sales described to Times reporters would be far larger than any previously reported in China. More than a dozen state-affiliated entities have purchased restricted chips, according to procurement documents uncovered by the reporters and the Center for Advanced Defense Studies, or C4ADS, a Washington-based nonprofit. The United States has flagged some of those organizations as helping the Chinese military. Nvidia and other U.S. companies say they are abiding by the restrictions but cannot control everything in their distribution chain. There was no evidence that any of Nvidia's banned chips in the markets came directly from the company. "We comply with all U.S. export controls and expect our customers to do the same," said John Rizzo, a spokesperson for Nvidia. "Although we cannot track products after they are sold, if we determine that any customer is violating U.S. export controls, we will take appropriate action," he added. The AI bans have cost American companies billions of dollars in sales, and some executives argue that the restrictions will backfire by giving Chinese competitors an edge. U.S. officials defend the bans as necessary but also say they are testing the limits of their enforcement powers. "This is an enormously difficult job, and I'm under no illusions that we are doing it perfectly," Gina Raimondo, the commerce secretary, said in a recent interview. Near the White House, in an office with worn carpet and antiquated computer systems, the little-known Bureau of Industry and Security oversees the government's growing trade restrictions intended to limit the flow of U.S. technology. One of the bureau's chief tools is the so-called entity list, created under the Clinton administration to prevent adversaries from developing weapons of mass destruction. Companies cannot export products from the United States to a business on the list unless they obtain a license. U.S. officials say American companies generally try to comply with the rules. But some have found loopholes, like rerouting business through new partnerships or overseas subsidiaries. The bureau has tried to adapt, toughening its penalties and creating a so-called Disruptive Technology Strike Force with law enforcement and the intelligence community to pursue technology theft and illegal procurement networks. Nettrix, one of China's largest manufacturers of AI servers, is one example of how business can thrive despite U.S. restrictions. At its first product launch in April 2020, a Nettrix executive described one of the startup's advantages. "In this company we talk about 'new, but not new,'" he said, clarifying that its employees were industry veterans. In fact, Nettrix was an offshoot of Sugon, a firm that provided advanced computing to the Chinese military and built a system the government used to surveil persecuted minorities. In December 2019, six months after the United States put Sugon on the entity list, a group of former executives formed Nettrix. Nvidia, Intel and Microsoft -- which had been partners with Sugon for years, back when the United States was encouraging business relations with China -- quickly formed ties with the new firm. Ashok Pandey, the general manager of Nvidia's China business, said at the product launch that Nettrix had already become an important partner, adding that Nettrix's key personnel were "not strangers to anyone." Rizzo said Nvidia conducted extensive due diligence to confirm that its clients were not restricted by the entity list. Sarah Keller, a spokesperson for Intel, said that it complied with all export regulations and required its customers to do the same. Microsoft declined to comment. Chip experts estimate that only a small portion of the hundreds of thousands of advanced AI chips Nvidia sold to China before the ban went to help its military. But Nvidia, now one of the world's most valuable companies, attracted White House attention because it dominated the market. Jake Sullivan, the U.S. national security adviser, and his deputies saw advanced chips as the most viable chokepoint to control AI, since they were made by just a handful of businesses. U.S. officials met with Nvidia executives in 2021 and 2022 to discuss how their chips were used in China. In August 2022, the government ordered the company to stop shipping China the A100, its most advanced chip at the time. Nvidia adapted quickly. It zapped the A100 with electricity to disable some connections, creating a slightly downgraded chip it called the A800. By November, Nvidia was selling the chips in China, and Chinese companies hurried to stockpile them. U.S. officials believed the A800s would allow China to achieve practically the same results and were irritated, several former officials recalled, speaking on the condition of anonymity. Tim Teter, Nvidia's general counsel, said in an interview last year that the downgraded chip was within the government's parameters. Tech companies ramped up their lobbying. In July 2023, Nvidia's CEO, Jensen Huang, visited the White House along with the leaders of Intel and Qualcomm. They argued that excessive export controls would hurt American companies. U.S. officials proceeded anyway, forbidding the sale of A800s to China in October. Nvidia, Intel and Advanced Micro Devices continue to legally sell less powerful chips to Chinese firms, some with military links. Of the 136 Chinese companies Nvidia listed as partners on its website in July, at least 24 have had procurement contracts with the Chinese military or are partly owned by defense contractors or organizations on the entity list, according to records from Wirescreen and Datenna, a China intelligence platform. The United States leads China in AI for now, but China is making rapid progress as both countries race to create AI that would rival human intelligence. Liu Pengyu, a spokesperson for the Chinese Embassy, said that China firmly opposed the rules and that they would "only make China even more determined and capable in boosting our own strength in technology and innovation."