With Smugglers and Front Companies, China Is Skirting American A.I. Bans
In the southern Chinese city of Shenzhen, a mazelike market stretches for a half-mile, packed with stalls selling every type of electronic imaginable.
It’s an open secret that vendors here are offering one of the world’s most sought-after technologies: the microchips that create artificial intelligence, which the United States is battling to keep out of Chinese hands.
One vendor said he could order the chips for delivery in two weeks. Another said companies came to the market ordering 200 or 300 chips from him at a time. A third business owner said he recently shipped a big batch of servers with more than 2,000 of the most advanced chips made by Nvidia, the U.S. tech company, from Hong Kong to mainland China. As evidence, he showed photos and a message with his supplier arranging the April delivery for $103 million.
The United States, with some success, has tried to control the export of these chips. Still, The New York Times has found an active trade in restricted A.I. technology — part of a global effort to help China circumvent U.S. restrictions amid the countries’ growing military rivalry.
The chips are an American innovation powering self-driving cars, chatbots and medical research. They have also led to rapid advances in defense technology, spurring U.S. fears that they could help China develop superior weaponry, launch cyberattacks and make faster decisions on the battlefield. Nvidia chips and other U.S. technology have aided Chinese research into nuclear weapons, torpedoes and other military applications, according to a review of previously unreported university studies.
Beginning in October 2022, the United States set up one of the most extensive technological blockades ever attempted: banning the export to China of A.I. chips and the machinery to make them. The Biden administration also added hundreds of Chinese companies to a list of organizations considered a national security threat, and it could soon expand the rules.
These bans have made it harder and more costly for China to develop A.I. But given the vast profits at stake, businesses around the world have found ways to skirt the restrictions, according to interviews with more than 85 current and former U.S. officials, executives and industry analysts, as well as reviews of corporate records and visits to companies in Beijing, Kunshan and Shenzhen.
In one case, Chinese executives bypassed U.S. restrictions when they created a new company that is now one of China’s largest makers of A.I. servers and a partner of Nvidia, Intel and Microsoft. American companies have found workarounds to keep selling some products there. And an underground marketplace of smugglers, backroom deals and fraudulent shipping labels is funneling A.I. chips into China, which does not consider such sales illegal.
While the scale of the trade is unclear, the sales described to Times reporters, including the $103 million transaction, would be far larger than any previously reported in China. More than a dozen state-affiliated entities have purchased restricted chips, according to procurement documents uncovered by the reporters and the Center for Advanced Defense Studies, or C4ADS, a Washington-based nonprofit. The United States has flagged some of those organizations as helping the Chinese military.
Nvidia and other U.S. companies say they are abiding by the restrictions but cannot control everything in their distribution chain. There was no evidence that any of Nvidia’s banned chips in the markets came directly from the company.
“We comply with all U.S. export controls and expect our customers to do the same,” said John Rizzo, a spokesman for Nvidia. “Although we cannot track products after they are sold, if we determine that any customer is violating U.S. export controls, we will take appropriate action,” he added.
The A.I. bans have cost American companies billions of dollars in sales, and some executives argue that the restrictions will backfire by giving Chinese competitors an edge. American officials defend the bans as necessary but also say they are testing the limits of their enforcement powers.
“This is an enormously difficult job, and I’m under no illusions that we are doing it perfectly,” Gina Raimondo, the commerce secretary, said in a recent interview.
She said that it wasn’t surprising that China, with its vast network around the world, was gaining access to some chips. Still, her agency was working daily with law enforcement, the intelligence community and allies “to identify the holes and how China gets around them, and filling those holes,” she said.
‘New, but Not New’
Near the White House, in an office with worn carpet and antiquated computer systems, the little-known Bureau of Industry and Security oversees the government’s growing trade restrictions intended to limit the flow of U.S. technology.
One of the bureau’s chief tools is the so-called entity list, created under the Clinton administration to prevent adversaries from developing weapons of mass destruction. Companies cannot export products from the United States to a business on the list unless they obtain a license.
In the last few years, the United States has wielded the power more aggressively. To limit trade in countries that do not recognize American law, President Donald J. Trump expanded the list’s authority, blocking shipments to the Chinese telecom giant Huawei from businesses around the world. If they do not comply, the United States can fine them or bar them from obtaining American technology that they need to make their products.
The Biden administration used the list to further target China’s defense sector, and also banned the sale of technology goods to Russia because of its war in Ukraine.
But the entity listing applies only to a specific company name or address, so businesses sometimes set up a new company or simply move down the road. Some front companies have gone without detection for years, according to former officials.
“They go the next block over, open the same company under a different name, under a different address — they’re just doing the same thing,” said Craig Phildius, a former official with the bureau.
U.S. officials say American companies generally try to comply with the rules. But some have found loopholes, like rerouting business through new partnerships or overseas subsidiaries.
The bureau has tried to adapt, toughening its penalties and creating a so-called Disruptive Technology Strike Force with law enforcement and the intelligence community to pursue technology theft and illegal procurement networks.
Ms. Raimondo, the commerce secretary, who oversees the bureau, said that she was proud of her team’s work, but that they were impeded by limited resources. The bureau has a budget of $191 million, less than the cost of two fighter jets.
Nettrix, one of China’s largest manufacturers of A.I. servers, is one example of how business can thrive despite American restrictions.
At its first product launch in April 2020, a Nettrix executive described one of the startup’s advantages. “In this company we talk about ‘new, but not new,’” he said, clarifying that its employees were industry veterans.
In fact, Nettrix was an offshoot of Sugon, a firm that provided advanced computing to the Chinese military and built a system the government used to surveil persecuted minorities. In December 2019, six months after the United States put Sugon on the entity list, a group of former executives formed Nettrix.
Nvidia, Intel and Microsoft — which had been partners with Sugon for years, back when the United States was encouraging business relations with China — quickly formed ties with the new firm. Ashok Pandey, the general manager of Nvidia’s China business, said at the product launch that Nettrix had already become an important partner, adding that Nettrix’s key personnel were “not strangers to anyone.”
Records accessed through WireScreen, a business intelligence platform, show that Sugon and Nettrix have links to the Chinese Academy of Sciences, a vast research institution that develops chip technology. Nettrix’s owners share a complex with Sugon and other companies owned by the academy in Kunshan, a Times reporter found on a visit, despite having a different registered address.
Kevin Wolf, a former official with the Bureau of Industry and Security, said that having executives in common with a firm on the entity list was a “bright, bright red flag.”
Procurement documents indicate that Nettrix has sold servers, some of which contained Nvidia and Intel chips, to several of the same organizations as Sugon, including one later put on the entity list. Nettrix’s customers also include universities that host defense laboratories and cybersecurity firms that work with the military and on China’s Great Firewall.
In a statement, Nettrix said that it strictly abided by relevant laws. Neither company holds shares in the other, Nettrix said, and it is not part of a network connected to the Chinese Academy of Sciences. “There is no situation in which Nettrix helped Sugon avoid the impact of the U.S. entity list,” the company said.
Sugon said that after it was added to the entity list, it laid off hundreds of employees and some started their own businesses.
Mr. Rizzo said Nvidia conducted extensive due diligence to confirm that its clients were not restricted by the entity list. Sarah Keller, a spokeswoman for Intel, said that it complied with all export regulations and required its customers to do the same. Microsoft declined to comment.
A Wake-Up Call
Six months into the Biden administration, China tested a weapon that shook U.S. officials: a hypersonic missile that circled the earth.
The weapon, which surpassed American technology, could theoretically dodge missile defense systems to deliver a nuclear warhead to the United States, according to a half-dozen current and former national security officials. Much is still unclear about the technology, but several officials said that U.S. chips helped accelerate China’s missile program.
White House officials had already been developing broader restrictions on selling chip-making equipment to China. They later learned more about the role of U.S. chip technology in Chinese cyberoperations, cryptography, disinformation and research valuable to the military.
In southern China, for example, Nvidia’s restricted A100 chips began powering a high-performance computing cluster at Sun Yat-sen University in November 2022. Researchers there used advanced computing to model missiles and torpedoes, according to papers and university press releases.
In China’s northeast, a supercomputing center set up one of the world’s fastest A.I. and computing platforms in 2019. The center uses chips from Nvidia, Advanced Micro Devices and Intel, according to its website, and can analyze satellite imagery of China’s island-building program in the South China Sea and the radar signature of stealth fighters.
And in central China, a university affiliated with the Chinese Academy of Sciences was using Nvidia, A.M.D. and Intel chips to study nuclear weapons, according to university materials. This May, the United States added the university to the entity list.
Mr. Rizzo said that Nvidia’s products were “designed, marketed and sold for beneficial, nonmilitary uses. We do not permit our products to be used for prohibited military purposes.” Intel said it complied with trade law. A.M.D. declined to comment.
Finding the Chokepoint
Chip experts estimate that only a small portion of the hundreds of thousands of advanced A.I. chips Nvidia sold to China before the ban went to help its military. Most were used to power social media platforms, video game graphics and weather forecasts.
But Nvidia, now one of the world’s most valuable companies, attracted White House attention because it dominated the market. Jake Sullivan, the U.S. national security adviser, and his deputies saw advanced chips as the most viable chokepoint to control A.I., since they were made by just a handful of businesses.
U.S. officials met with Nvidia executives in 2021 and 2022 to discuss how their chips were used in China. In August 2022, the government ordered the company to stop shipping China the A100, its most advanced chip at the time.
Nvidia adapted quickly. It zapped the A100 with electricity to disable some connections, creating a slightly downgraded chip it called the A800. By November, Nvidia was selling the chips in China, and Chinese companies hurried to stockpile them.
U.S. officials believed the A800s would allow China to achieve practically the same results and were irritated, several former officials recalled, speaking on the condition of anonymity.
Tim Teter, Nvidia’s general counsel, said in an interview last year that the downgraded chip was within the government’s parameters. If the speed limit is 65 miles per hour and I’m driving 63, he asked, “am I violating the spirit of the rule? Of course not.”
Tech companies ramped up their lobbying. In July 2023, Nvidia’s chief executive, Jensen Huang, visited the White House along with the leaders of Intel and Qualcomm. They argued that excessive export controls would hurt American companies.
U.S. officials proceeded anyway, forbidding the sale of A800s to China last October.
Like A.M.D. and Intel, Nvidia continues to legally sell less powerful chips to Chinese firms, some with military links. Of the 136 Chinese companies Nvidia listed as partners on its website in July, at least 24 have had procurement contracts with the Chinese military or are partly owned by defense contractors or organizations on the entity list, according to records from Wirescreen and Datenna, a China intelligence platform. One of Nvidia’s listed partners had been added to the entity list in May for supporting the high-altitude balloon that traversed the United States last year.
Nvidia’s chips are in such demand it quickly made up lost sales elsewhere. But American companies are concerned that the rules have created a vacuum for Chinese businesses like Huawei, which has been rolling out more powerful A.I. chips. The United States leads China in A.I. for now, but China is making rapid progress as both countries race to create A.I. that would rival human intelligence.
Liu Pengyu, a spokesman for the Chinese embassy, said that China firmly opposed the rules and that they would “only make China even more determined and capable in boosting our own strength in technology and innovation.”
China’s leader, Xi Jinping, delivered a similar warning on a call with Mr. Biden in April, saying his country would not “sit back and watch.”
A Vibrant Trade
In the Shenzhen electronics market, vendors who traditionally sold Nvidia chips to gamers and Bitcoin miners are trying to meet the growing demand for A.I.
Previous reports from Reuters, Nikkei Asia and The Wall Street Journal have uncovered sales of dozens of banned chips. But The Times talked with several vendors in Shenzhen who mentioned deals involving hundreds or thousands. Reporters spoke with representatives of 11 companies that said they sold or transported banned Nvidia chips — including A100s and H100s, the company’s most advanced — and found dozens more businesses offering them online. A local procurement website listed nearly 100 stores that also said they sold the chips.
Leslie Zhou, the market vendor who shared a detailed message arranging the $103 million shipment to a local warehouse, said the chips weren’t hard to obtain. While the transaction could not be independently verified, he said he regularly brought in banned chips from three or four suppliers and sold to repeat customers. “The Shenzhen market cannot be restricted,” he said.
Industry experts said the price was high but within international rates — roughly $380,000 for a server with eight H100s. (Counterfeiting of electronics is widespread in China, but four industry experts said that would be highly unlikely for Nvidia chips on a commercial scale, given their complexity.)
Nvidia’s chips are made in Taiwan, then sent to other manufacturers and distributors. Industry experts said that businesses in Singapore, Vietnam and other countries where it is not considered illegal to export them were probably diverting some into China.
Just how many chips get into China is an important question, because the number required for A.I. is high and increasing fast. By some estimates, the A.I. language model GPT-4 was trained on 25,000 Nvidia A100s. U.S. officials say they don’t expect to capture everything, but the goal is to hold China back during a critical window in which the United States can pull ahead.
Tim Fist, a senior adjunct fellow at the Center for a New American Security, said that with a moderate level of smuggling, the bans would slow commercial developments in China but probably not impede more targeted military research.
Chinese procurement records examined by C4ADS showed that at least 550 restricted Nvidia chips had been sold to state-linked research institutions, including two on the entity list. (That figure is almost certainly an underestimate, because few contracts specified the types of chips being purchased.)
Trade records obtained by C4ADS showed a shipment from Vietnam to Beijing of servers that were marked as containing banned chips. In other cases, companies mislabeled shipments to hide them.
Wang Qiang, an employee of a logistics company in southern China that has sent A100s from Hong Kong to the mainland, said the shipments would not be tracked because Hong Kong was still a free-trade harbor. He advised clients, he said, to label banned chips as tea or toys.
Keith Bradsher contributed reporting from Kunshan. Kitty Bennett contributed research.
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