Seeking Decisive Edge, China Uses Third-Party Countries to Circumvent U.S. AI Export Controls

Chinese firms have embraced an indirect approach to competing with Silicon Valley. On March 2, The Wall Street Journal reported that Chinese firms were circumventing U.S. export controls on AI components via smuggling networks run through neighboring countries. The report follows previous announcements by the Singaporean authorities of a bust of an alleged semiconductor smuggling ring connected to the mainland.

Coming against the backdrop of Chinese AI firm DeepSeek’s success and the release of the Biden-era AI Diffusion Rule, which introduced tighter export restrictions on AI, the latest allegations highlight the role of third-party countries in satisfying Beijing’s rising demand for advanced AI components amid its technology rivalry with Washington.

Chinese Front Companies Buy From Approved Customers for U.S. Technology

Seeking to circumvent U.S. export controls, Chinese firms have reportedly relied on increasingly sophisticated smuggling networks to gain access to advanced AI components. While Chinese buyers have previously used human couriers to smuggle smaller orders of high-end semiconductors, these networks have allegedly evolved to transport servers containing hundreds to thousands of chips across multiple international borders.

These networks reportedly use several transshipment points bordering China, including Vietnam, Taiwan, and Singapore, and allegedly implicate Nvidia-vetted customers. Relying on a combination of front companies and cooperative foreign nationals, Chinese firms have allegedly gained access to advanced servers shipped to pre-authorized Nvidia customers and re-exported their components for either consumption or re-sale.

U.S.-China Technology Competition Heating Up Following DeepSeek’s Launch

The demand for advanced AI components comes as Beijing has pushed its private sector to accelerate the development and deployment of cutting-edge AI models in the face of stringent U.S. controls. Looking to revive its faltering economy and seeking a military advantage over Washington, Beijing has poured subsidies and regulatory support into the sector, from financing model development to reforming its military doctrine with the aim of prioritizing AI capabilities. This push has only accelerated following the launch of DeepSeek’s most advanced models, with Chinese technology leaders such as Alibaba integrating them into their own services, dramatically increasing the sector’s demand for computing power.

However, Beijing’s bid to develop AI has long been hindered by Washington’s increasingly stringent export controls on advanced AI components. Beginning in 2022, the Biden administration introduced a series of restrictions on advanced semiconductors, manufacturing equipment, and other related technologies. These restrictions culminated in the release of the AI Diffusion Rule, which sought to restrict select countries’ access to AI components and advanced models to prevent their diversion to China.

America Must Expand and Strengthen Export Controls

The alleged smuggling highlights China’s willingness to use illicit means to develop its own AI sector, having graduated from less ambitious means to circumvent U.S. restrictions to embrace larger-scale smuggling operations that can match surging domestic demand.

In response, the United States must expand its export control regime while relying on its network of allies and partners to safeguard emerging Western technologies. These measures should include a commitment by the Trump administration to finalize the principles of the AI Diffusion Rule, expanding export controls to cover previous generations of advanced chips, such as Nvidia’s H20, and screening outbound investment into China.

Along with these measures, the Trump administration should aim to starve China’s technology sector by incentivizing allies and partners to align their export controls and restrictions with those of the United States. These efforts should focus on expanding technology-sharing agreements in exchange for countries adopting more stringent economic and technological security policies.

Jack Burnham is a 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 Jack on X @JackBurnham802. Follow FDD on X @FDD. FDD is a Washington, DC-based, nonpartisan research institute focusing on national security and foreign policy.