The biggest ever loophole in U.S. AI chip export controls on China? With Chris McGuire

[MUSIC] Welcome to the AI Power Podcast. I am Greg Allen, and today I have the pleasure of hosting Chris Maguire for a conversation on export controls. Chris is a senior fellow for China and emerging technologies at the Council on Foreign Relations, and a leading expert in US-China AI competition. Before joining CFR, Chris served as a career government official for over a decade, including as the Deputy Senior Director for Technology and National Security at the United States White House National Security Council, where he served from 2022 to 2024. Chris, thanks for joining us. So great to be here, Greg. Good to be here on the launch of the new podcast. Yes, you're a representative here. I'm very glad to be here. You're great, and I was so excited to see the clip announcement on Bloomberg and everything that you have coming. Very cool. Well, I should doubly thank you, not just for coming on the podcast, but for coming on the podcast and recording today. When I understand you literally just got off the plane after a week in Taiwan, so you're what, like, exactly 12 hours offset time zone-wise. So thanks for doing this. Taiwan is basically like the planet Erakus from Dune is to spice. Taiwan is that to semiconductors. So I assume semiconductors were a big part of your trip. What were you up to over there? Yeah, I mentioned it once or twice. So I was out there. I was invited by the Research Institute for Democracy, Society, and Emerging Technology, DeSet in Taiwan, which is a quasi-government affiliated think tank. DeSet is doing all sorts of great research on semiconductor supply chains, on AI, all the things that we're talking about and that they are kind of a hub of research analysis in Taiwan. They in kind of conjunction with Computex, which recently ended, were putting on a conference to discuss many of these issues. Semiconductors, AI, export controls, also supply chain resilience, generally drones, et cetera. Taiwan obviously scanning up a lot of their own kind of drone supply chains at the same time. So that was very productive. They had us meet with senior officials in the government. We met with the Vice President, officials in Taiwanese National Security Council, export controls, big theme of those conversations, and broadly the need to deepen collaboration between the United States and Taiwan on all things semiconductors. Obviously the promote side a big bit of this too, doing more in Arizona, expanding that collaboration that's going well, but more and faster is obviously the kind of constant message from the United States to Taiwan. So very, very positive trip. It's really astounding to see the growth there and the benefit from the IBoom is really astounding. They grew at 14% in the first quarter this year. GDP is 14%. Yeah. I'll take it if you're offering. That's pretty good. It's amazing. It's amazing. And it makes sense. But the boom is unlike anything else, which is great for obviously, you know, that money can go towards all sorts of fantastic things from development to defense and to semiconductor production. So it's great that Taiwan's been having so much, but obviously we really need to work together on all sides of this, including the export control side that we're going to talk about because there are still pretty big concerns there. You know, one thing that came up for my trip is that actually sending AI chips to China. There are no criminal penalties for it in Taiwan. It's only an administrative violation, which is a big problem and something that I think we need to work on together. It just generally kind of countering smuggling. If it's easy to do out of Taiwan, then kind of that's as the hub of all the chip and server manufacturing. That's the most important thing. But the good news is I think there's a lot of people in the government and elsewhere that really do want to work with us more on this and tighten this up and see the national security need for doing so. So hopefully, you know, more to come on that front. Yeah. So the national security need to do so is a lot of what we're going to talk about in this conversation because the basic US policy has been since you were in the White House. Export controls on AI related compute to China, basically trying to limit their access to our chips and our chip making technologies so that we can preserve and extend an advantage in AI. Well, you were a part of this story in the Biden administration from the White House seat. You continued some of that work into the second Trump administration back at your State Department perch. Now you're at CFR where you're continuing to study all these issues. And the reason why I wanted to have you on the podcast on this particular week is that we are fresh from some really big developments in the AI export control story, which is, do we still have export controls on AI compute? Or more accurately, have we had them over the past year? Yes. Yes. It's not clear. Up to now is amazing. So let's start just by framing the second Trump administration. And I want to read from two Trump administration policy documents and a quote from Donald Trump himself, just to frame what the administration says that they want. So let's begin with a document that came out on Donald Trump's first day of his second term as president January 20th, 2025. This is from the America first trade policy section for subsection C quote the secretary of state and the secretary of commerce shall assess and make recommendations regarding how to maintain, obtain and enhance our nation's technological edge and how to identify and eliminate loopholes in existing export controls. Especially those that enable the transfer of strategic good software services and technology to countries to strategic rivals and their proxies. In addition, they shall assess and make recommendations regarding export control enforcement policies and practices and enforcement mechanisms to incentivize compliance by foreign countries, including appropriate trade and national security measures. So that's what he said on his first day in office with his flagship trade policy. We want these export controls. We want to close loopholes and we want to get other countries like Taiwan to enforce these better. So then on the AI action plan, this is still the Trump administration's flagship policy document on artificial intelligence from July, 2025 in a section called Strength and AI Compute Export Control Enforcement. The administration said advanced AI compute is essential to the AI era enabling both economic dynamism and novel military capabilities. Denying our foreign adversaries access to this resource then is a matter of both geostrategic competition and national security. Therefore, we should pursue creative approaches to export control enforcement. And then finally, from Donald Trump on October 30th, right after he met with Xi Jinping in Busan, a South Korea, a reporter asked, and just a clarify, sir, the downgraded blackwell chips. You would authorize those to be exported and Trump responds, not the blackwell. We're not talking about the blackwell. And then the next day, in an interview with CBS is 60 minutes, Trump said that the most advanced chips would be reserved for the United States, stating, quote, "The most advanced, we will not let anybody have them other than the United States." So from all of that, you might think that for all the policy volatility that there's been in the second Trump administration, there's at least been a big threat of continuity across the second Trump administration on AI chip export controls, which is that they agree that AI compute export controls are important for national security and geostrategic competition. They agree that tough enforcement and closing loopholes is important, and that they agree that even as some exports are going to be allowed like the hopper chips that the Trump administration wanted to allow the export of Trump personally drew the line at blackwell chips, saying that those are not going to be a part of this deal. So that for me is the background context to consume this very, very interesting issuance that came out of the Department of Commerce's Bureau of Industry and Security on May 31, 2026, where they said that they had received questions as to whether or not certain categories of AI compute export controls were still in effect. And there was a great June 4, 2026 story by Mackenzie Hawkins over at Bloomberg News that basically said that perhaps this was not the case that these controls were not being enforced, which is why the Trump administration felt the need to issue this clarification. So Chris, I'm looking to you to help us unpack what exactly has happened and what it all means. So this is very regulatory complicated, but the bottom line here is it seems like there was a loophole in controls that allowed that basically dropped controls and allowed blackwell chips or any other types of chips to be potentially legally exported to subsidiaries of Chinese companies located in most countries outside of China. These entities had been restricted from receiving any chips since 2023. But because of some regulatory oversight errors, which we can talk through, seems like controls lapsed on them. We don't have definitive proof that there were shipments to these entities pursuant to the loophole. I will tell you talking with people in industry and elsewhere, there is pretty strong anecdotal evidence and rumors that shipments were going and have been delivered. I don't have a bill of goods to share with you to show you that. I'm sure there are many people that are digging for that information. But I don't want to oversell, but we know that it was legally permissible. So what happened? You have to go back to October 2023, like I mentioned, was when controls were expanded. Initially they were just on China, Russia, Iran, etc. This small group of arms embargoed countries. They were expanded in 2023 in two ways. One was to a broader set of countries that posed diversion concerns, generally Central Asia, other places like that. And the second was to Chinese headquartered firms anywhere in the world. We knew that this was a loophole that, you know, even though they were restricted to say, Tencent in Beijing, they could be bought by Tencent subsidiary in Malaysia. And that obviously went against the intent of what we were trying to do. So they were captured and restricted to. Okay, then fast forward to the end of the Biden administration. The Biden administration issued the AI diffusion rule. Replace some of those regulations with a broader regulation, which was a worldwide license requirement for all AI chips. And actually there were some exceptions to this. So it wasn't as if everyone actually had to apply a license for a license in reality. But from a from a regulatory standpoint, there was now a license that was required for every single transaction anywhere in the world. Now, then we should just say, sorry, interrupt. We should say for one thing, like the way export controls work is not that they per se make it illegal to ship something to a country. It is not theoretically illegal to sell nuclear missiles to North Korea. It is illegal to sell nuclear missiles to North Korea without a license. Right. And what is crystal clear is that we're never going to give you a license to do that sort of thing. So when we say that there is a license requirement, that then is going to be reviewed with either a presumption of approval or a presumption of denial or a case by case review. And so the diffusion rule basically says there's a license requirement for everywhere. But for some places, it's going to be presumption of approval. For some places, it's going to be presumption of denial. And that's them sort of communicating how this is going to be administered, how this is going to be enforced. So that's what the Biden administration left with. That's what the Trump administration inherited. Okay, keep going. Yeah, and actually technically there were some exceptions in the Biden rule that said, even though there is this license requirement sits on top, but then if you meet these further definitions, then actually you don't have to apply for one. So it's not that much. So you can sort of card in and then carve back out. But yes, which is actually important for this rule. The other thing I just know for what you said is license requirements are also helpful because they give the government visibility. If the government has no license requirement, the government has no idea what's happening. So for sensitive goods, it makes sense. You would rather something go with a license than have no license requirement at all because that means that you don't even know what's happening. Like you might get a record that says like my company shipped electronics to China, but it wouldn't say we shipped such and such kind of chips to such and such customer. That's right. Yeah. That's right. So the Biden administration put this global license requirement on. And then when it did that, it also because that was redundant with the previous regulations. So from a regulatory perspective, just think about this as like the lawyers going through it, they also eliminated the parts of the previous regulations that applied only to certain countries or only to certain Chinese headquartered companies, and eliminated the AI chip license requirements in those because there was already this broader overarching one now that captured them. So it just would have been that they would have been double captured if they still were there. Trump administration four months, five months into the Trump administration in May 2025 said they were not going to enforce the AI diffusion rule, which created a bit of confusion as to what they meant. There was a press release where they said they're not going to enforce it. The press release also said they were going to replace it. They did not. So we are over a year later. They still have not replaced it. But there is this statement saying we are not enforcing it. So there was persistent questions for a long time as to what this meant. Initially it was assumed, okay, well, they're going to replace it soon. So let's just assume that the regs go back to how they were before the diffusion rule. But as time went on, that became a little bit less of a legally defensible position. And I think companies started to say, well, we're just going to look at what's in the regulations and we're going to take them literally. Now, actually, if you took it completely literally, what the Trump administration said that we're not enforcing the AI diffusion rule and you just then look at the regs, there actually would be no controls on AI chips to China even. So obviously there were certain things that companies decided we're still there. But there was no clarity. There was no guidance. And there was obvious that there was this worldwide license requirement. And they were going to enforce it for certain things, but not for certain things. But they never said which one. And they never actually published a document that said what their policy was. So because they had struck the provision in or the Biden administration had struck the provision that applied to Chinese headquarters companies when they put this overarching requirement on companies eventually started to determine that because there was no longer any legal requirement in US regulations that prohibited that required a license to ship to Chinese headquarters companies that they were permitted to do so. Wow. Okay. So let me just play back what I think I've heard from you to make sure I understand you correctly. So the Biden administration originally put on a no sales to Chinese headquartered companies restrictions. Yes. They did that in October 2023. Yes. At the end of the Biden administration in December or January 2025 when the diffusion rule came out, they got rid of that requirement not because they wanted to allow selling to Chinese headquarter companies, but because they had this new overarching thing that covered it anyway. So you don't need the you don't need the micro restriction. If you have the global restriction, the Trump administration gets rid of the global restriction arguably for good reasons. I mean, I just I just want to emphasize here, you're not immediately a moron if you didn't like the AI diffusion rule. It was controversial even inside the Biden administration. People are many elements of it beyond just this. Exactly. Like I actually think that we very clearly should have a global license requirement, but I think you could also say we agree with that, but we didn't like other elements of the rule. Yeah. Therefore we're going to do it our own way. That would totally back. And what you just said, right? What you just said, which is there are parts of the diffusion rule that were good. There were parts of the diffusion rule that maybe were not good. That was the Trump administration's stated opinion, right? That's right. They said they were opposed to the diffusion rule, but they weren't opposed to every single thing in it. And they said they were effectively going to repeal and replace it with something better. They did the repeal and we're still waiting for the replace. They did not, but well, the sort of the problem is they'd actually did not do the repeal because they never actually formally repealed it. So they just did this. They're not going to enforce it. This was the issue. This is the issue is that because there was not a repeal and they just said we are not enforcing it. But actually if you look up on the books today, export control regulations online that are like the official policy and law technically are still the diffusion rule with the Trump administration said they're not enforcing, which creates tremendous ambiguity about what he's actually controlled and what is not. And this is like a big distinction between the United States, which is a rule of law country and China, right? Which is either a rule by law or just a rule by vibes, right? You can be punished in China for doing stuff that the regime doesn't like, even if it wasn't illegal at the time that you were doing it. In the United States, if you want something to be illegal, you have to do it. And when you say you're not going to enforce it, if you take that before a judge, you can probably win. A case, right? Saying that like, look, the administration said that they were not going to enforce this. So how can you blame me? So understand that like lawyers who are like, hey, I think we can get away with this. They're not crazy. Because we are a rule of law country and the nitty-gritty details really matter. If you want to do something like export controls and you want to do it in a system such as ours, or such as most of our allies have. That's right. And I think once what matters is what the industry determines is legal. And I suppose they could make a determination that's incorrect and the government could take them to court and win. But there's a real chance that the government would lose. And when we get to the guidance, I'll highlight there's a portion of it that basically acknowledges, I think, that the government thinks that they would lose a case on this if they were to bring one and therefore they won't. Well, so what we're talking about here is not smuggling. And smuggling is a separate issue. The Department of Justice indicted one of the co-founders of Super Micro back in March. Super Micro is one of the biggest integrators of NVIDIA chips into servers and data centers and such. And they were accused of outright smuggling large quantities of chips to China. This is not smuggling. This is a loophole being exploited, which is to say there was no explicit regulatory guidance saying you're not allowed to sell to these companies that are Chinese-owned subsidiaries, not geographically located in China, which means that at least according to the Department of Commerce itself, they were getting questions from companies asking, "Can we do this? It seems like this is legal is you know can we do this so now there's an open question as you said as to just how many chips have been shipped under this guidance and and I want to come back to that. Do you feel like there's strong evidence one way or another that it was number one more than zero like this this actually was taking place and then number two do we have anything to suggest it was a large quantity or a small quantity you mentioned anecdotes from companies. Yeah I think from from just talking with people in industry and others it everyone knew that this was happening. I think that even if you look at the Bloomberg article that Mackenzie Hawkins published about everything that happened here and it says that it is a very good piece yeah it says that in video actually was aware of this legal interpretation which is an interesting line I think and actually is notable and video itself was for various even more complicated reasons we don't have to go into and video itself was restricted from sending to these companies but the server makers and the end the micro for instance super micro exactly we're not and those are all the companies that actually ship the vast majority of these things to the data centers anyway. So the fact that you know you had a video basically seemingly saying we were aware of this legal interpretation which basically says we were this was happening you know you you have Chinese companies that that you know we know that they were getting black wells right there's been US government leaks seemingly intentional about some of the big hyperscalers having black well chips about black wells also being in China so yes this yeah I mean that's what that's what your generation says yeah right and you're right that that's not smuggling but also like once it goes to the Chinese subsidiary it's then obviously extremely easy to smuggle into China yeah so like I think that there's a Singapore you know not the most trustworthy person to keep the chips inside Singapore yeah exactly and you look at the trade flows data and it's very very clear that like it just absolutely massive numbers of chips are going to Southeast Asian particular to to Malaysia Thailand and Singapore way more than there is capacity for the actual data center build out so again why so how many of those are shipped pursuant to this loophole how much is it a shoulder shipped to Chinese cutouts but as long as this loophole exists Chinese firms don't need to use cutouts they could just order the chips directly like why bother with an additional layer when they can just buy them legally you know on the up and up like this so I think that there's strong evidence of what's happening as to the magnitude I think we just really have to wait and see I have my suspicions that it was probably significant but I don't want to get out ahead of that because I think that's a very important fact given the kind of explosiveness of this and we should be precise but yeah what do you what do you say there's there well I I certainly agree with you on the anecdotes I think there's another data point out there that's really relevant here which is China refusing the hopper chips right yeah yeah you know when you see Xi Jinping gloating during these trade-bingo sessions with Trump like ha ha ha we're gonna you're gonna allow the sale of H-200s to my country but I'm gonna ban the import of H-200s my country you know one interpretation of that is well they they don't want the hopper chips because they would rather you know take the hit on compute as a way to promote their domestic semiconductor manufacturing industry right that's that's one plausible interpretation of the fact pattern but this whole anecdote this whole story introduces another plausible interpretation of the fact pattern which is why would I you know allow the purchase of all of these hopper chips when I've got massive smuggling of blackwell chips as the super micro indictment indicates and I've got massive legal purchases of blackwell chips by Chinese owned subsidiaries in non-Chinese countries that is a great reason to not buy hoppers you get all the benefits of buying American compute you get all the benefits of making the Americans look bad and you know think twice about the wisdom of export controls and the public narrative and you it's sort of like you get to have your cake and eat it too kind of a situation for China so to me that's that that is at least a data point that is consistent with the interpretation of this was a lot of chips this was a lot of chips the went through this I think that's right and there's another interesting fact on this which is if you look at the regulation that commerce put out in January that actually permits the hopper exports to China it also specifically says that that only applies to chips going to China and not to chips going to Chinese headquarters firms outside of China and I think the rationale for that is because logically okay you could say what you will about the the policy of sending chips to China obviously I think I've said many times it's a bad idea but but that said let's just let's just take that as a constant selling them to Chinese hyperscalers outside of China is where those companies are going to compete with US firms and that's where we definitely don't want to have competition so I can see why the administration said okay well if we're going to allow them anywhere let's allow them inside China where our firms aren't competing anyway so we're not both giving China extra computing power and creating market pressure for our firm so it's interesting that this was explicitly in the regulation that said we don't want them to go to the overseas subsidiaries because that's double bad for America yeah but then now we have this loophole that's preventing it not good yeah so that I should have mentioned that at the upfront when we're talking about like what the Trump administration has expressed itself as wanting because yes uh Trump was basically saying somebody is going to fulfill the computing needs of Chinese companies inside China it might as well be Nvidia with the hopper chips that was sort of the the frame for that policy but I definitely don't want Nvidia helping Alibaba or Tencent Cloud or whomever competing against Microsoft Google and Thropic OpenAI in Africa in Europe in Asia etc so like that was why as you said you know they didn't allow selling hopper chips to China to Chinese subsidiaries even as they allowed selling it to China directly so all of that makes me think that this is just a straight up mistake I mean the Trump administration didn't want this it's very inconsistent with their publicly expressed policy preferences it's it's inconsistent as you mentioned with their most recent policy update so goodness gracious what a what a bad egg on face moment now there's a whole other oh go ahead it allows these companies to circumvent the tax right because the president and the president is just from favorite part the whole policy right 25% tax okay we're going to sell in the trinons at least make some money now the companies will just use their overseas subsidiaries to buy the better chips without paying tax and it gets around to completely yeah it's it's obviously not consistent with anything that the administration has done so far regardless of whether you think the what the administration has done is good or bad this is this is like out of left field yeah okay and unfortunately it's not the worst part of the whole story for me the worst part of the the whole story is what the current design of the regulations and the current interpretation and enforcement approach of the regulations is for overseas manufacturing of AI chips designed by Chinese companies so why don't you walk us through you know where we are at this moment with that right so we should probably say I don't know if we've gone into detail in what BIS put out but um we'll put if you'd like to start there be my guest yeah I think so and then because that fixes some problems but not others the so BIS put out guidance on last weekend which said this overseas subsidiaries are captured in in the interpretation in our enforcement so we said we're enforcing some but not all the diffusion role and just saying very clearly in paper overseas subsidiaries of Chinese high-quartered firms are they do have a license requirement and therefore they are captured so what that did was two things um it filled this loophole on on chip exports like you said um the other thing that it stopped which is what I think you you were just alluding to is because there was no license requirement previously for these companies they also could they not only could buy chips they could also fab them at TSMC so they don't even need to buy the chips because China can actually just go make their own could it go make their own black wells at TSMC um and interestingly I've always one equivalent not black like a chip of any level of capability I mean take a step back and think about this like the there's multiple layers of the controls there's the controls on equipment that prevent China from manufacturing and then above that there's the controls on chips that prevent them from from you know buying things and then you know maybe down the line hopefully there'll be controls on remote access that also prevent them from you know using the cloud or even models themselves but actually beneath all of that is the restrictions on TSMC because if if they can make the chips at TSMC then they don't need to even build up their own production capacity in China right they don't need to they certainly don't need to buy the chips or rent the chips or anything right like if they can if they can if they have access to the best manufacturing capacity in the world then nothing else really matters the the equipment controls don't matter, the chip controls don't matter, nothing. So because of this loophole, they not only were allowed to buy the chips, but also they could just send the chip designs to TSMC. And Greg, as you have noted many times, when China still had access to TSMC, when Huawei still had access to TSMC, Huawei actually made the best AI chip in the world at the time. It was better than Nvidia's best chip. And what is holding them back is not chip design. They're very good at designing chips. They're not good at manufacturing chips. So you have to hold them back on the manufacturing side. Because we have, Huawei has actually fallen very far behind Nvidia because it's very hard to them to manufacture the best chips. So these were the two really big loopholes. The guidance that was issued closed both of them directly for Chinese headquarters subsidiaries. What it did not do was apply them for basically anyone else. So there were, and there's kind of two elements of the existing rule set before the non-emforcement decision that would have captured this. So keep in mind the global license requirement for chips was mostly intended to prevent smuggling and diversion. We were aware that maybe the Chinese subsidiary overseas can't buy the chips directly, but they can use a cut out to buy the chips and then ship them to themselves and then back to China. So the whole point was like we wanted to prevent that from happening. That can still happen. I think that is kind of core to the global license requirement is something that I think the Trump administration has to think through. I hope they resolve this very soon, but at least we're back to where we were in 2023. But the other element, the Biden administration also put in place what was called the Foundry Due Diligence Rule. That was response to the TSMC soft go violation in 2024 when we discovered that TSMC had been making millions of AI chips for Huawei through a company called soft go. Yeah, three million chips for Huawei, which is the by far the biggest export control violation ever. I think we just need to double down on how important this failure was. That's four of the US export control regime, right? Like you're seeing data out there about how Huawei is providing a lot of the chips to China's domestic AI market, right? Nvidia is complaining about hey, our market share in China is going down. That reflects how the export controls are just making China stronger. No, it reflects how a failure to stop Huawei from accessing Taiwan is making Huawei have a viable path around the export controls. So I think that is still, tell me if you disagree, but I think that is still the greatest failure of American export control policy since October 7, 2022. It's failing to catch that TSMC was still making millions of chips for Huawei through this shell company based violation. And so anything that continues to give Chinese AI chip designers access to TSMC should be like a DEF CON-5 type alarm here. And so what's your sense of where we are now in terms of Chinese AI chip companies ability to access TSMC either through failure to enforce or vagueness of guidance? Where are we right now? Yeah. So it is a big problem still. So one thing the Biden administration did in addition to the diffusion rule, there's a different rule called the Foundry due diligence rule. And basically what we said was for any chip, any customer for which there is a license requirement, which keep in mind diffusion rule meant every customer globally, that every AI chip customer anyway. Yeah. It was a little broader, but any chip that if TSMC is receiving a design from any entity that for which there is a license requirement for an AI chip. So basically, basically any company in the world, if TSMC is receiving a design from any company in the world, and it is for a 14-dynameter or more advanced chip, it is basically anything that could be advanced. The presumption is it is a export-controlled AI chip unless they can prove otherwise. And there's a few different ways they can prove it. It could be a white-listed company that could use like a trusted OSAP provider or it could meet certain counts on how many transistors or in it. And if it's below that, it's okay. But these were very clear technical thresholds. And the reason this was there was to prevent another soft go, because we were very concerned that there was going to be cutouts in other countries that were used to funnel chips back to China. So maybe, yes, like 10 cents subsidiary in Singapore was captured now, but there could be a different company that wasn't that company would just submit the chip design and then just be a pass-through for-- Definitely not 10 cents Singapore code. Exactly. And definitely not 10 cents incorporated right now could still manufacture a black well-level chip at TSMC without restrictions. The actual problem is because of the non-enforcement announcement on the diffusion rule, which was the hook for the foundry rule. So there had to be a license requirement for a chip for the foundry rule to go into effect. But then when the Trump administration said we're not enforcing the license requirement for chips, then that trickled down into the foundry rule and meant that actually there was nothing to kick that into effect ever because the hook no longer existed. So therefore, it was effectively a non-enforcement of the foundry rule too. I don't think that was the intent of the Trump administration. There's no way that would be intent. No, I genuinely don't think so. But the point here is these things are really complicated and they're hard and they're important. And there's a reason that we write these things down because if you just say like, "Ah, now we're just not going to do parts, but it will all work." It won't work. And it didn't work. And it has definitely been failing. We'd have to see exactly what numbers have been assessed and which companies have complied. And I will say, we always talk about TSMC, but also Samsung. There's a lot of reports of Chinese companies fapping a Samsung right now. It's actually more anecdotally again than at TSMC. So it does seem like there's a lot of things in China. And Samsung is saying it used to be the outsourced chip manufacturer for the Apple iPhone chips. They're still a massive. They might be the number two fab outside of TSMC and MediaTex. These are really, really big players in the ecosystem. If they're still providing a chip manufacturing capacity to Chinese chip designers, that's a massive loophole. That's right. That's right. So, I know there's a bunch of pieces of this and it's a little confusing. But basically, where we stand now is the guidance that was issued. Did close the loophole for direct shipments to Chinese companies. It did close the loophole for Chinese companies using their overseas subsidiaries to fab chips at TSMC. It did not close the loophole of cutouts of Chinese companies either receiving the chips directly or fabbing the chips at TSMC. The latter in particular, I think, is an unintended oversight. I think the Trump administration, they recognize where there are license requirements, where there are not license requirements. Depending who you talk to, a lot of people would probably say, "Yeah, we know we need to broaden them." But that's a policy decision that they have to make. I do not think that there is a policy decision to not enforce the Foundry-Dooligence Rule, which is what prevents cutout companies all over the world from fabbing chips at TSMC and Samsung and others. But that has been the effect of these policies because of the ambiguous non-enforcement announcement. And that is what industry has decided is their obligations, pursuant to these policies, and pursuant to the guidance that commerce issued, they didn't close the loophole as it relates to the Foundry-Dooligence Rule, it only applied to the export. So I think this story is probably not done because there is no-- It's better come out this week is how I would put it, right? They need to get this out there as soon as possible. And hopefully, hopefully this week. So let's just talk about who hurts from this policy failure. We've talked about American AI model leadership hurting because they don't have the edge over China that they should, as long as China is still getting American chips or they're getting Taiwanese manufacturing capacity for Chinese design chips. So the frontier AI labs get hurt. The cloud providers get hurt, right? Because Microsoft Azure or AWS, they would like to be competing with weak China, not China bolstered by Nvidia technology or China bolstered by TSMC technology. So they're hurt by this. But I think there's a third person who is hurt by this policy failure. And it's Nvidia based on what you were just saying about the Foundry-Dool. If I'm Nvidia, of course, I'm upset that I can't sell to China and get that money. Okay, sure, whatever. I would be upset about that. I would be furious to find out that At the same time, you're not letting me sell to China. You're letting Cambrakhan and Beren and Alibaba and Tencent and all these people who have their own proprietary AI chip designs, the equivalent of like the Google TPU, right? Like the in-house chip. And they're still getting access to TSMC. You know, if I'm in video like you're cutting me off from access to China, but you're not cutting my competitors off from access to TSMC, I would be livid about this. But it seems like, you know, Nvidia just has this sort of public presence of we're opposed to all export controls. And that's all we're going to say on the subject. Even when, you know, there are export controls that help them a lot. Yeah. I think that's right. I think the only reason that wouldn't be the case would be if Nvidia is actually in such a premium position, which they might be, premium position in the market because they are the biggest supplier. And basically if they're just like the number one customer of TSMC, of the HBM companies, et cetera, that actually they might get squeezed less by this than other AI chip companies like Broadcom or Microsoft or Amazon or the others who are, you know, might be a little bit further down the priority list. I agree with you though that, frankly, like anything that enables the competitors of any USAI chip companies is bad for those companies. And anything that constrains the supply available to those companies is bad for those companies. It might be worse for some companies than for others. And it probably is the worst for the companies that are further down the priority list. Yeah, I mean, to me, this is just like, you know, the cliche, give a manifest versus teach a man to fish. Yeah. I mean, this is like Nvidia being prohibited from selling fish to China, but TSMC is allowed to sell fishing poles to China. Right? Like it's just the worst policy you could possibly design or at least in this case, accidentally stumble into. So let's talk about how bad it might be. As we said, like everything we're talking about here is stuff that the people who are doing it, in most cases, prefer that it not get out. So what do we have to know, you know, how big this problem is? I think we do have some information that is coming out from what Chinese AI chip designers and what Chinese cloud companies are telling their investors. So right now, I'm going to quote from the May 13th, 2026, 10 cent investor relations earning calls, so 10 cent, presumably most folks in the audience are familiar with who 10 cent is, but they make WeChat, which is the most important social network in China, and also they're a massive cloud computing provider in China, among other things. They're a big important tech company in China. So here's what one of their executives said in the investor relations earning call. Quote, we are seeing increased demand, both from internal products as well as from external users of our model for our AI-related services. And we had previously guided that will be increasing capex this year versus last year. And now we're more affirmative, more confident in that guidance. And we and you should expect a substantial increase in capex, especially in the second half of this year, as more China designed ASICs become available to us month by month throughout the year. So this is a 10 cent executive basically saying that we think more and more Chinese designed ASICs are going to be available to us. Now keep in mind, it takes time once you have a chip design to get it actually being manufactured at TSMC. There's a lot of tough engineering problems that TSMC has to solve in terms of the manufacturability of the chip and actually setting up a process not to mention capacity is constrained. So more and more of this capacity coming online is consistent with interpretation of this loophole was being exercised and more and more of it is becoming available. Now here's a second quote from a different Chinese executive at 10 cent quote. And in terms of your question about the various bottlenecks between GPU CPU networking and so forth, to recap that the reason why there's been a GPU bottleneck that's been much more pronounced in China than elsewhere is a combination of policy restrictions on certain foreign design GPUs being brought into China and then the China designed GPUs facing limited fab capacity within China. And as a result, the country has been really short of GPU or ASIC capacity. And that's now being addressed because the China designed ASICs are seeing more supply from fabs within China as well as more supply from fabs in neighboring countries. But by contrast, we haven't faced those sort of artificial additional constraints on CPU or networking chips. We've been a big buyer of CPU and networking chips for many years before GPUs became such a big presence in data centers. We have very long term relationships with the companies that supply the CPUs and supply the networking chips. That's the most explicit acknowledgement I've ever heard from a Chinese executive of the export controls caused our GPU shortage, caused our AI compute constraint problems. And he specifically says like we didn't have them on CPUs, we don't have a shortage, it's worse in China than it is anywhere else in the world. And it's explicitly because of the export controls on GPUs. But oh my gosh. >> Right, not a long quote, but maybe you should make, can you make the title of this show that whole quote? Because it's perfect. And I don't want to change any of it. It's the best, like you just said. It's the best like anunciation of everything that we've been saying for, it's amazing that they said it publicly. But yes, there's nothing else to say. That's everything. >> Yeah. And it's truly amazing. So here's the thing. Like this guy is saying for all the failures, and there have been a lot, for all the failures in the implementation of this export control strategy on AI compute. It still had a big impact, right? He's complaining about the big impact that it's had. But he's also saying that he expects that impact to lessen because of chip manufacturing capacity that is available in other countries. As we've suggested in this podcast, very plausibly, those other countries could be South Korea and Taiwan. If that is the case, that is a loophole that the Trump administration needs to close immediately. >> Yeah. And the regs are on the books to do it. That's the frustrating thing. Like they don't even have to pass anything new. They can just say we're enforcing this whole regulation. That by the way, we've kept on the books. And actually, there's never been a statement that's saying they're not enforcing the Foundry Dullesman's rule, because I don't think that their intent is to. They just need to make sure that how all these fit together is actually how they intend to. Look, this stuff has not been treated seriously enough. That's the bottom line here. Like this, this stuff has been treated like a secondary policy that's kind of a side show that we can manage with a bunch of private letters. And we don't really have to think about this seriously. We don't need to have technical experts in the government that do this. The president just say no blackwells, no happen. And that actually isn't sufficient at all. It's not even sufficient to achieving your no blackwell goal. And look, the way I think about this is the Biden administration, you can critique the approach or you can be supportive of the approach. But it purposely took a relatively targeted approach. And it definitely expanded over time as Chinese tried to prevent things and also AI got more important. But still, the Biden administration did not say no semiconductor manufacturer equipment to China period. It did not say no semiconductors to China. It did not say no AI chips to anywhere in the world period at all. And on all of these things, it was a relatively targeted approach. But like to take a targeted approach, you need to constantly maintain and update the regulations. If you want to have a regulatory approach that you never have to update and it's just a fire and forget and it's all good, then just ban everything. Because it's the only way that works. And if you don't want to ban everything, then you need to actually be constantly smart about this. And you need to be looking at this and making sure that it's working. Like look, if the Trump administration doesn't want to do all the work to actually make sure that it's achieving its intended policy effects, then it should just ban everything. Or it should just give up export controls entirely. But this middle road doesn't work at all. I mean, that's a great point, right? And the Trump administration has chosen a middle road, right? That is what it means when you say no black wells, yes, hoppers, right? You're choosing the middle road. And I think what you've said very eloquently is the middle road is not a simple road. It's not an easy road. There is a million nitty-gritty legalistic bureaucratic implementation type challenges that you will face. And if you don't make sure that all of that goes well, then you get none of the benefits of your middle road approach and all of the consequences, all the bad things of your middle road approach. Very sad. Okay, we got to wrap this up. And I want to end with what should we do now? What should this administration do now? And what are even the options, right, available to it? So what do you think, Chris? What can be done? What should be done? Yeah, I mean, so let me say one thing before I say, well, it can be done. Done. Is that we have to keep in mind that these things have delayed effects? Yeah. And that also means that we're probably going to suffer the ramifications of this for some time. Just like I think we are probably, I think the soft go violation probably delayed the impact of the export controls by a full two years. And I think you see this generally in like data on cap expending and all sorts of other stuff that because there was this big loophole that allowed China to get a bunch of chips that when we thought they couldn't, we didn't start seeing as much effect until a couple of years later. - I think there's been one silver lining. There's one silver lining of the soft go violation. Which is, my understanding is that they were still making ascend 910 Bs and Cs and those chips. - Yeah. - So like, thank God, right? That like it wasn't like once, once Chinese chip designers have like an awesome, you know, three nanometer chip design and you give them unrestricted access to TSMC, that's like a pock elliptically bad. It happens to be the case, you know, that during this period where they had a window of access to TSMC was also a period of time when the chip that they had ready to be manufactured was a pretty lousy chip. But like, oh my gosh, you know, if you leave that door open, it's gonna be a catastrophe. - Yeah, that's right. And actually most of the analyses, including my own analyses of like China vs US compute, actually don't control for the quality of the chip, just because it's a little too hard and we haven't actually done a lot of individuality. - Yeah, yeah, yeah, yeah, yeah, yeah, yeah. - When you run the numbers and by the way, the numbers show that like America has like, I think a recent Chinese tech executive said it was somewhere between a 10X and 100X compute is. - Yeah, I had-- - And that's 50 to 100X, yeah. - And that's just stacking flops on top of each other as though they're apples to apples and they are not apples to apples. - That's taking the Chinese specs at face value. - Exactly, yeah. - That's right. So anyway, look, so the point here is like, we should be aware that there could be ramifications for some time, but that said, look, this stuff is still all scaling exponentially. So this will still bite, it just might bite a little later. What should we do? So it'd agree, it's the same stuff as we've been saying for a long time. You have to cut down on smuggling and diversion to Chinese entities and into China. You have to cut down on remote access and you obviously have to cut down on access to TSMC. And then we should stop selling chips to China too, but put that aside. Like, if you do those things, they are still going to be massively constrained. Like in some ways, what we're saying is like, even this, like, we're still eight months ahead. We're still, you know, the Chinese companies are still saying they have all this compute deficit, et cetera. Even despite these huge loopholes that are allowing them to directly buy black wells. But, you know, there's, so I think if we, if you impose the global license requirement, you could debate what else you wanna do and how to exempt stuff on the diffusion rule, et cetera. But you have a global license requirement and probably one that prioritizes hyperscalers. Like, I don't think that you need to have a global license requirement for hyperscalers. You can just have a notification requirement, basically be like, look, the trusted US hyperscalers that we all know and we wanna support their business around the world. Like, they don't need to apply for a license. They can just go build. This should just tell us what you're doing. But like, go ahead. And then everyone else come in for a license. So like, you do something like that. You're gonna really cut down on the diversion. That would also kick the FDD rule completely into effects very clearly and make sure that TSMC and Samsung and others can't make AI chips for China. And then you also are funneling as much compute as possible into those companies. And then you tell them, like, you can't provide remote access and I generally trust them to follow it. Like, that is the order of operations that I think has always been the way to actually constraining China's compute. And I think it would work. And then a couple of it would obviously tighter controls on SME to make sure that they can't fill. So I think that's still viable. I think that's still a strategy. In the very short term, they come as easy issue guidance that says the FDD rule is in effect. And Chinese companies can't fab it. At TSMC or Samsung. And then they need to issue a rule that expands the license for that makes clear. Actually, first and foremost, makes clear what US export control policy is. Because right now the regulations actually don't say what policy is. They say what policy was. The butt Trump administration has said we're not enforcing that, but what are they actually enforcing? Like, let's write it down for once. And then they probably wanna take that, write that down, make it clear. And then also make it a little bit broader in expanding license requirements to hit at the very least it has to hit Southeast Asia. Like Malaysia is saying in poor Thailand, like we know those are just unbelievable hubs of compute. My personal opinion is there should probably apply globally. I mean, I, look, I was in Taiwan and I came away fairly concerned about smuggling. And obviously Taiwan have great partners. And we should be working closely with them. But I think this is such a significant problem that we probably just want to know where all these chips are going unless they're going to a trusted US company. But you do that. It would really tighten things up. It's also simpler, simpler is good. It's easier to implement. Maybe there's some backend implementation that's harder, but at least it's clear what you are and are not controlling. And at least we'd have a clear policy. But look, last thing I'll say is, the Trump administration really needs to take this seriously as a matter of AI policy. Because I think they really are reevaluating a lot of elements of their AI policy right now in ways that are thinker commendable and good. And I think that mythos has changed the conversation. I think that, you know, Secretary Besan and Chief Stepwiles seem like they're really thinking hard about what they want the administration to be. I think the reason executive order was a very clear, you know, shift. And I think is something that is a step very much in the right direction. But export controls, which is a key part of it, because this is a question of who are we going to give AI policy to is still really stuck in the mud. There's some elements of export controls that are de facto working, like mythos as a model is actually de facto export controlled, right? Secretary Besan is deciding which Japanese banks get access to mythos. That's effectively an export control. - But that's not export controls in the legal sense. That's export controls in the anthropic volunteering. Like that's like a anthropic saying, we don't feel comfortable making this choice. Please, you make this choice for us. - Exactly. So it's de facto controlled and they're just working cooperatively with the company, but like not legally. But we do need to impose legal controls because there's many instances where the companies are not working cooperatively with the government. And so I think this is, there needs to be someone who is put in charge of this, right? Who is the person who is in charge of technology protection and protecting America's AI advantage and our computing advantage and export controls. And like that, we had those people in the White House before they're not there anymore. It could be there, it could be a commerce. It could be someone on Secretary Besan's staff. I don't really care. But like there needs to be someone who's in charge of this as a strategy because otherwise what you get is regulatory chaos that actually undermines the administration's own policy objectives. And that's what we're seeing now and that doesn't serve anyone's interest except for the companies who benefit from this with the government not even knowing. And that's about it. - Yeah. And the companies that benefit the most are not like Nvidia, right? Like this is not a good story for Nvidia. This is not a happy story for Nvidia, everything that we've talked about. It's not like, oh great, we got to sell more chips that we otherwise would've sold. This is a happy story for like companies that are not American, that are happily flouting the law and are making money from China for other people. This is worse than eliminating the export controls in some ways, right? Like just because of who benefits, right? At least if you got rid of all the export controls, you know Nvidia would make some money, like applied materials would make some money. In this case, you've got these corrupt executives at SuperMicro who are making a lot of money. It's like not the story you want to be happening. - America would buy all these chips, all the ones that are getting diverted to Chinese companies or sold to Chinese companies shouldn't say diverted if it's legal. - Yeah. - American companies would happily buy those chips or if not, if they're-- - That's the point. I mean for every chip that TSMC can make for Nvidia, there is a line down the block and around the corner. So it's not like though the sales disappear or they just go to a different customer. Okay, you did a great, you know, rundown of all the nuts and bolts stuff that the government should do. I think I would just add a couple things on the public messaging and the communications side of the story. - Where are the congressional hearings that are bringing in executives? Like I've testified before Congress on this topic, it has been my honor to do so. But like, I'm gonna tell you, you know, everything freely. What we really need in this story is like subpoenas of people who would rather not tell some of these details, but do know critical information that lawmakers need to know that the executive branch needs to know, et cetera. And the second thing I think is really interesting here is the Trump administration, I think to its credit has recognized when America has been too gentle to its allies to both America's detriment and to the allies detriment, right? But if you're gonna smack an ally upside the head and say, no, you can't have a massive trading relationship with Russia, you know, that is gonna provide them critical sub components that we're gonna build weapons that are gonna be used to destroy you. Bring the AI compute part of that into that story. Trump, if this is as bad as we think it is, right? Get mad at Taiwan. If this is as bad as we think it is, you know, get mad at these other people. Talk to them about how like, you should not be willing to like destroy an ally's economy because they're not buying enough of your soybeans, right? That's a bad use of pressure on your allies. But saying like, I cannot let you sell this critical technology to a country that is threatening you profoundly and existentially, that's a good excuse to put pressure on allies. And if Trump is willing to, you know, use those tools in that toolbox, the mean tools and the mean tools, toolbox, this is a much better use case for them than some of the stuff that David will need to be mean over, I would say. Yeah, that's a very good point. And a couple of other notes on that last one. The first is, it's not as if we don't have tools to control this ourselves. We are frustrated with allies, but the most frustrating thing on all of this is we could just put controls on these things ourselves. We could put license requirements on chip exports, but also in-country transfers, etc. inside allied countries and partner countries, just to make clear, like, sorry, it actually doesn't really matter what your legislation or policy is. Everything is now controlled under U.S. law. That would make a huge difference. On the equipment side, we could say anything with U.S. technology is controlled, which would control allied equipment. They might not like that, but we can do it. So that's helpful. So it's not like we don't have options here. We actually have the ability to do this even sans allies, and we're not. That's another way of being tough on our allies is basically saying, okay, we're extending our legal jurisdiction on this topic. We have the leverage here. And the second thing is actually that pressure on allies can be helpful sometimes even to them. Obviously, allies have complicated debates on this because sometimes they're issues of sovereignty and they don't want to be seen as being forced by the United States to do something. There are other times when allies would tell us like, look, we're with you on the national security threat. We get this. If we have to pick between you just controlling it for us or us doing it ourselves, we'd rather you the United States put the control in for us because then we don't have to worry about a blowback from China or anything else. And we can just say, sorry, that we wasn't our call. It was them. And it's just a lot easier for us politically. And we would have those conversations to allies and we'd say, okay, that makes sense. We'll do it. So, there is not as if every time this is actually something allies won't want. Sometimes they actually want the cover of America doing something for them that protects their national security in ways that politically I think would be hard to get through. So this is a complicated issue that honestly, I think there are ally governments that frequently see they're more with us than sometimes they indicate in their regulatory policy. Yeah. And there's one final thing I want to mention on like how it's an allies best interest as well. You know, when a company like ASML, which makes the most important piece of chip making equipment in the world and is a Dutch company, when they sell to China, they're destroying their own future addressable market. In 10 years and 15 years, even if ASML machines are still better than Chinese machines, Xi Jinping is just going to force Chinese companies to adopt the local ecosystem. Sometimes they meet some minimum viability threshold. And so the question for ASML is like, do you want China to be 20% of the global chip making market so that in 10 years you can still address 80% of the global market? Or do you want China to be 50% of the global chip making market in which case in 10 years, 50% of the global market is unaddressable to you when Xi Jinping bans the important foreign technology. The name is true of TSMC, right? If you are arming, Kameber Khan and Byron and Alibaba and Tencent with these ASICs today, you know, today China would love to buy from TSMC as much as it possibly can. But they made crystal clear that they're going to, you know, stop importing foreign technology as soon as their domestic ecosystem reaches some level of minimum viable performance. And so what TSMC is doing is they are destroying their own future addressable market. Because, you know, if Nvidia and Google with the TPU and so on have 100% of the global AI chip market, then 100% of that market is still addressable to TSMC. But if Alibaba and Tencent become 25% or 50% of that, then that's all unaddressable demand in 10 years because Xi Jinping has said, I am willing to take a hit on performance. I want to buy everything I can foreign right now, but that's to build a bridge to a future that does not include foreign technology. And so as I've said many times, the question is not, is China going to eliminate its reliance on foreign technology? They've already decided they're going to do that. The question is, are we going to make that easy for them or are we going to make that hard for them? And the easier we make it, the more painful the long-term consequences are going to be. It feels great this year when you look at your quarterly earnings from all these sales to China, but all you're doing is destroying your future addressable market demand. And that's true, whether you're Taiwanese or Korean or Japanese, whatever you are, just look at what happened to the solar panel equipment manufacturers. They all had great years selling to China, and then they all went out of business when China indigenized everything, and their addressable market was destroyed. I feel like we can call it there, Chris. Is there anything else that we should have talked about that we didn't? I'll say one thing at the end, which is people are going to say, well, okay, you say that the government should do all these things, but obviously we've got the truth with China. So that makes it hard and rare-erous and bloody, bloody, blah. So therefore, we can't really do anything as you said. I would dispute that, because actually all the things that are direct controls on China for the most part in terms of things that we've talked about here, we've already controlled and implemented. What we're talking about is actually not, for the most part, new controls on China. We're talking about new controls on other countries and ways to circumvent Chinese smuggling or diversion or other ways that they are elicitly gaining access to continue. And clarifying enforcement of existing rules. Exactly. Exactly. We could just question whether or not the truth is a good idea or bad idea, but I think this falls well within the bounds of what is permitted under the under, you know, Busan or a per the recent summit. This is about clarifying enforcement of controls and preventing other countries from becoming pass-throughs for our controls to China. That is wholly permissible and something I think the administration can and should do and also defend and saying we're not putting new controls on China. We're just making sure that existing stuff's effective, but we've committed to not putting controls on China. Why are you even like, you're not with us. You said you didn't even want the hoppers, right? Exactly. By the way, China is putting tons of other controls on solar panels and other technologies, biotech controls now. They're also putting a big kind of outbound investment screening on AI. They're putting restrictions on AI, talent flows like China is putting some serious technology protection measures in place. They don't have as many advantages over us. They don't have as many things to protect because we have, you know, many of the key assets, really on compute and some manufacturing equipment. But it's only appropriate for us to be taking similar steps. But they recognize the strategic value of the toolbox, I think, is the most obvious way to interpret that. Yes. Yes. That was a fabulous addition and I'm so glad you added it. Just the final thing, Chris, is where can folks find your work? I'm with CFR, so either CFR.org or obviously on X or various kind of other publications where you know, op-eds and others get published. So those are probably generally the best ways, but I think I'll have a number of things coming out on CFR.org, especially in the coming weeks that, you know, generally related to this problem. Greg, I'd love to work on some other things more. Never slow down. Never slow down. Never slow down. So, yeah, I will keep beating this drum. All right. Well, thank you for doing so. And thanks for coming on the AI Power Podcast. We were delighted to have you as our first guest. So thanks for doing it. I look forward to seeing your future guests being back in the future. And I'm so glad that you're back out there and looking forward to all the great work from decision tree and you and others. This is great. Thanks, Chris. Thanks, Greg.