(June 5): Trump officials have spent the past week embroiled in a remarkable argument — over what, exactly, their China tech policy has been for the past year.
The debate concerns whether the Trump administration narrowed the scope of US restrictions on China’s tech sector far more than intended or publicly acknowledged, according to people familiar with the matter. The potential loopholes may have allowed Chinese companies like Alibaba Group Holding Ltd to legally buy servers with Nvidia Corp’s most advanced AI chips in most countries outside of China itself, the people said, asking not to be identified because the discussions are confidential.
The conversations spilled into public view on Sunday morning with a highly unusual memo from the Commerce Department’s Bureau of Industry and Security (BIS), which is responsible for semiconductor export controls. BIS said that it had recently received questions about whether restrictions on AI chip sales to Chinese companies globally, first imposed in 2023, are still in effect. “The answer is yes,” the Sunday advisory reads.
The drama behind the memo shows how months of wrangling inside the administration over whether to let China buy leading-edge technologies have led to a patchwork of unclear and inconsistent policies, in a domain imperative for national security. President Donald Trump’s team stopped enforcing certain Biden administration restrictions on AI chip exports without implementing a coherent replacement.
Trump officials are now looking into whether companies took advantage of the situation to ship advanced AI chips — such as Nvidia’s Blackwell processors — to Chinese firms in places like Singapore or Malaysia, which would directly contradict the White House’s stated approach to the tech competition with China. At least some officials believe that BIS policy decisions in May 2025 made such shipments legal — up until the agency’s notice on Sunday. It’s unclear whether any such sales actually occurred.
That Sunday move to “close this loophole” won praise from Congressman John Moolenaar, the Republican chair of a House panel focused on China. Democratic Senators Elizabeth Warren and Andy Kim, meanwhile, criticised the Trump administration for policies that “may have inadvertently allowed America’s most advanced AI chips to flow to companies headquartered in China.” A spokesperson for the Ministry of Commerce in Beijing, asked about Washington’s loophole closure at a regular press briefing, repeated China’s longheld opposition to US chip curbs.
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BIS maintains the loophole never existed in the first place, according to an official there who spoke on condition of anonymity. If companies shipped AI chips to Chinese firms without getting a licence from Washington, even before the Sunday notice, they would have violated US export controls, the BIS official said.
It’s an extraordinary situation. The regulations in question are a defining feature of the AI competition with China and a longtime source of tension between Washington and Beijing. They’re among the most important policy issues for companies whose performance undergirds the stock market and global economy. And yet when firms seek clarity from Washington on what exactly the rules are, the answer depends on who they ask.
There’s also been discussion within the Trump administration about a second loophole, which the BIS notice from Sunday didn’t directly address. The concern is that the same May 2025 decisions that created the first loophole also allowed the likes of Taiwan Semiconductor Manufacturing Co (TSMC) and Samsung Electronics Co — which actually make the chips for Nvidia and others — to legally produce advanced semiconductors for Chinese firms like Tencent Holdings Ltd, people familiar with the conversations said as a hypothetical example.
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This risks creating situations similar to a 2024 case in which TSMC manufactured millions of processors for a company that gave them to Huawei Technologies Co, China’s top competitor to Nvidia.
The BIS official denied that this loophole exists. The agency is considering issuing another round of public guidance clarifying its stance on the so-called foundry due diligence rule, which it hasn’t rescinded in any part, they added.
To be sure, the loophole concern isn’t that Trump’s team rescinded the due diligence rule. Rather, the issue is that they arguably nullified it — by not enforcing a separate AI chip framework that provides a crucial legal hook, according to Saif Khan, who worked on both rules during the Biden administration.
The confusion stems from the decision by BIS under Trump to stop enforcing Biden-era global AI chip restrictions without formalising that decision or implementing any replacement, despite twice drafting rules that would’ve rendered both loophole issues obsolete.
That Biden administration framework is called the AI diffusion rule, and it imposed a requirement for companies to seek US licences to export AI chips to all customers in all countries, with a bunch of conditions and caveats. It’s the only US regulation currently on the books that restricts AI chip exports broadly.
Trump’s team didn’t like the framework for several reasons, including its complexity, and decided to scrap it in May 2025. It was widely understood that BIS would continue to enforce AI chip restrictions on the 45 countries that had been subject to US curbs since 2023, including China and most of the Middle East, for all customers. Yet BIS was silent on whether these controls applied to any customers in the rest of the world.
What BIS is now saying is that the agency has indeed been enforcing the AI diffusion rule’s restrictions on Chinese companies, regardless of location, this entire time. And to be sure, some firms have continued to operate under that presumption, such as by applying for export licences to ship advanced Nvidia chips to Alibaba in Malaysia.
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But some Trump officials and export control practitioners have privately said that before BIS publicly communicated its stance on Sunday, the legal requirement to seek an export licence wasn’t actually in effect, according to people familiar with the talks.
An Nvidia official, speaking on condition of anonymity, said they were aware of this legal interpretation, while noting that it didn’t apply to direct shipments by Nvidia itself. Nvidia and Advanced Micro Devices Inc face their own unique controls on AI chip sales to Chinese customers anywhere. The reasoning instead applies to companies that assemble Nvidia and AMD chips into servers, which is how the hardware is typically sold.
An Nvidia spokesperson dismissed the idea of the loophole as a “social media story” and said its partners have consistently operated as though no loophole exists. The “alleged loophole,” the spokesperson said, was “not a live issue for our ecosystem.” AMD didn’t respond to a request for comment.
The reasoning behind both loopholes was outlined in an anonymous memo dated May 29 and entitled “The floodgates have quietly opened”. It was written by individuals outside the Trump administration, according to people with knowledge of the situation, and rapidly circulated across the US government.
“The net result of these loopholes is that the United States effectively now has no restrictions on Chinese companies’ access to the most advanced AI chips, which are the single largest US advantage in the AI competition with China,” the document reads.
This set off confusion and outrage from the White House to Capitol Hill, culminating in the unusual Sunday morning announcement from BIS. One particular point of alarm has been the document’s claim, for which it provides no evidence, that BIS issued a “written advisory opinion” to a company in spring 2026 allegedly confirming that no export licence was needed to ship advanced AI chips to Chinese customers in most countries.
This is false, according to the BIS official. Asked whether BIS issued any other written communication that confirmed the loophole, the official said the agency is reviewing its records.
Uploaded by Liza Shireen Koshy
