US Closes Loophole That Let Chinese Firms Access Nvidia’s Most Powerful AI Chips for Nearly a Year

Washington Moves to Seal AI Chip Export Gap After Months of Exposure

The US Department of Commerce issued emergency guidance on 31 May 2025, closing a regulatory loophole that had allowed foreign subsidiaries of Chinese technology companies to purchase America’s most advanced AI semiconductors — including Nvidia’s Blackwell and Rubin processors and AMD’s MI350x chips — without obtaining special government licences, according to a Reuters report.

The gap exposed a critical weakness in Washington’s semiconductor export controls, which are designed to prevent China from acquiring the chips needed to develop advanced military and commercial AI systems.

How the Loophole Opened

The vulnerability emerged in May 2024, when the Trump administration declined to enforce an “AI Diffusion” security rule inherited from the Biden administration. That decision inadvertently left overseas branches of Chinese companies — particularly those incorporated in countries such as Malaysia — free to purchase top-tier AI hardware without restriction.

Because the purchases were made through foreign subsidiaries rather than China-headquartered entities, they fell outside the scope of existing trade bans. The arrangement effectively allowed Chinese firms to circumvent controls that Washington had spent months constructing.

The precise volume of chips that passed through the gap remains unknown. Industry insiders cited in the Reuters report warned that the damage from the exposure period may already be irreversible.

What the New Rules Require

Under the updated framework, the Commerce Department will impose strict licensing requirements on any acquisition of advanced AI hardware by a company headquartered in China, regardless of where its purchasing subsidiary is physically located. The policy closes the geographic arbitrage that made the loophole viable.

The enforcement shift carries two notable carve-outs, however. International data centres are not required to decommission or return chips already purchased during the exposure window. American technology companies also retain the right to service and maintain advanced computing infrastructure that Chinese subsidiaries installed over the past year.

The Limits of the Fix

The new guidance addresses future purchases but does not unwind what has already occurred. Advanced AI chips already deployed in overseas facilities linked to Chinese firms will remain operational, raising questions about the long-term effectiveness of US semiconductor export strategy.

The episode underscores a recurring tension in Washington’s approach to technology controls: regulatory frameworks designed with specific actors in mind can be outpaced by corporate structures engineered to exploit jurisdictional boundaries.