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Loophole Closed
The United States moved on Sunday to close a year-old regulatory gap that may have allowed advanced Nvidia and AMD AI chips to reach Chinese firms via overseas subsidiaries, with the Commerce Department issuing guidance that enforces licence requirements for advanced chips sold to entities headquartered in China regardless of where those entities are physically located.
“The United States Department of Commerce closed a legal loophole that had allowed the export of advanced artificial intelligence chips from companies such as Nvidia Corp”
The guidance, posted on the Commerce Department’s website, applies to Chinese-headquartered companies operating abroad and targets the ability to bypass export controls by purchasing restricted AI chips through overseas subsidiaries or affiliates.
Reuters reported that the loophole was created in May 2025 when the Trump administration announced it would not enforce the AI Diffusion rule introduced in the final days of the Biden administration.
One chip industry source with supply-chain knowledge estimated that hundreds of thousands of chips may have been exported during the period the opening existed, according to Reuters.
The practical effect described by Reuters is to extend existing chip export controls to overseas subsidiaries of Chinese AI firms, including those based in locations such as Malaysia.
Lawmakers Demand Testimony
Senators Elizabeth Warren and Andy Kim berated the Trump administration for potentially allowing advanced American AI chips to be sent to overseas units of Chinese firms, and Warren called on Commerce Secretary Howard Lutnick to testify before the Senate Banking Committee.
Warren said, "On Sunday afternoon, the Trump Administration revealed that its failure to update export control regulations over the last year and a half may have inadvertently allowed America’s most advanced AI chips to flow to companies headquartered in China, potentially fuelling China’s military capabilities," and she added that Lutnick should testify about how “reckless mismanagement” put national security at risk.
A BIS spokesperson said, "BIS issued guidance clarifying export license requirements that have been in place since 2023," and the spokesperson added that BIS would continue to enforce export controls rigorously.
The guidance was described as an unusual weekend intervention by the Commerce Department that caught the industry off guard, with Reuters noting that neither Nvidia nor AMD responded to requests for comment on the guidance.
What’s at Stake Next
The new guidance does not require data centres to cease using or servicing chips already installed, which Reuters said reduces immediate disruption while leaving questions about the longer-term status of those deployments under tightened rules.
“The US Commerce Department has closed a loophole that may have allowed hundreds of thousands of advanced Nvidia and AMD AI chips to reach Chinese firms via overseas subsidiaries over the past year”
Chris McGuire, a former State Department official identified by Reuters as a technology and national security expert, argued in a Sunday social media post that while the guidance addresses one vulnerability, a separate problem remains involving foundries such as Taiwan-based TSMC and whether they are obligated to apply heightened scrutiny to verify chips are not destined for Chinese shell companies.
McGuire said, "This is a HUGE problem," and he added that Chinese companies had been buying Nvidia Blackwell chips without a licence "very likely on a large scale," according to MarketScreener España.
The guidance also raised compliance uncertainty for semiconductor supply chains routed through Southeast Asia, particularly Malaysia, as firms assess exposure from the period when the AI Diffusion rule was not enforced.
