Commerce Department Admits Failure To Enforce AI Export Controls on China

The United States may have allowed American firms to sell an untold number of high-end chips to China for over a year.  

On May 31, the Commerce Department issued guidance clarifying new enforcement actions to restrict the sale of high-end U.S. artificial intelligence (AI) chips to Chinese subsidiaries located outside of China. This guidance, which notes both that these sales require a license and that firms could continue to operate already-purchased components, suggests that American firms had illicitly sold these components to Chinese firms. 

The updated enforcement posture highlights the Commerce Department’s previous failure to regulate U.S. AI exports to Chinese firms while showcasing the need for stronger, more clearly enforceable controls.

Guidance Acknowledges Enforcement Gaps

The Commerce Department partially suspended controls on the sale of high-end chips to Chinese firms by canceling enforcement of the AI Diffusion Rule in May 2025. The rule, which was introduced under the Biden administration in January 2025, included a licensing requirement for American companies seeking to sell chips to Chinese firms operating overseas. However, once the rule was canceled, Commerce did not clarify whether the licensing requirement would remain active, producing a loophole for American firms seeking to sell abroad.

Though it is unclear exactly how many chips may have been sold to Chinese firms through this loophole, purchase orders to Southeast Asia, where many Chinese subsidiaries are located, have surged over the past year amid a boom in data center construction. 

The Commerce Department guidance will also allow firms that have purchased export-controlled computing items without a license to continue operating them until further notice. The guidance also did not mention any renewed enforcement mechanisms, including due diligence requirements on chip producers to ensure their orders are not delivered to Chinese subsidiaries operating in third-party countries.

Chinese Military Increasingly Seeks U.S. Chips

The public revelation of an export control enforcement gap follows China’s growing effort to integrate AI into its military as part of its shift towards “intelligentized warfare.”

On June 1, The New York Times reported that the People’s Liberation Army (PLA) had sought to purchase advanced Nvidia chips both prior to and following the imposition of U.S. export controls. The PLA reportedly planned to use these chips to provide computing for units that variously develop nuclear weapons, conduct offensive cyberattacks, and design war games. Moreover, the procurement documents also highlight that the PLA has continued to purchase Nvidia chips despite also running a growing share of Huawei processors, reflecting Beijing’s lack of domestic alternatives for high-end computing power.

The gap also reflects dramatic shifts within U.S. AI export control policies over the past year. While the Trump administration ultimately canceled its enforcement of the AI Diffusion Rule policy in May and introduced new guidance to prevent U.S.-made chips being diverted to Chinese firms, these efforts were less effective due to their lack of binding restrictions.

Moreover, the administration introduced conflicting updates to replace the rule. The Commerce Department has prohibited Chinese buyers’ subsidiaries from purchasing key components and warned several American producers of semiconductor manufacturing equipment against selling to Chinese firms. However, the department has also authorized the export of higher-end chips to China in exchange for a share of sales revenue, including the same model of chips requested by elements of China’s defense industrial base.

Commerce Needs Clearer, Stronger Export Control Rules

Whether the breach in export controls was intentional or inadvertent, there is clear evidence that Chinese firms embedded within Beijing’s military industrial base gained access to computing power far greater than they could have otherwise procured from domestic sources.

While renewed enforcement will partially close the gap, the department should begin the process of revoking Chinese firms’ access to unlawfully procured American chips. Congress should launch an investigation into the scale of the breach, which is likely significant, and institute stronger export controls to prevent China from accessing American hardware.

Jack Burnham is a senior research analyst in the China Program at the Foundation for Defense of Democracies (FDD). For more analysis from Jack and FDD, please subscribe HERE. Follow FDD on X @FDD. Follow Jack on X @JackBurnham802. FDD is a Washington, DC-based, nonpartisan research institute focusing on national security and foreign policy.