Major US technology policies, such as the October 2022 semiconductor export controls, are not sudden shocks. They are often telegraphed years in advance through influential government commission reports, like the one from the National Security Commission on Artificial Intelligence (NSCAI), which provided the blueprint for these actions.
Reports of China building a working EUV lithography machine are misleading. The effort appears to be an assembly of smuggled components from ASML's existing supply chain, not a story of domestic innovation. This frames the primary challenge as one of export control evasion rather than a rapid technological leap by China.
Evaluating export controls by asking if China is still advancing is the wrong metric. The true test is the counterfactual: where would China be *without* the restrictions? The controls act as a significant handicap in a competitive race, not a complete stop, and it's highly likely China would be ahead of the U.S. in AI without them.
The U.S. government identified a critical loophole allowing Huawei to acquire advanced High Bandwidth Memory (HBM) but waited nearly a year to close it. This bureaucratic delay, from February to December 2024, provided a significant window for China to stockpile essential components, undermining the broader export control strategy.
China is engaged in a strategic propaganda campaign, exaggerating its technological self-sufficiency in areas like AI chips. The goal is to convince U.S. policymakers that export controls are futile. This narrative aims to pressure the U.S. into relaxing restrictions, which would then allow China to acquire the very technology it claims not to need.
Semiconductor equipment makers like ASML are largely shielded from China-specific export controls. Their business is driven by total global demand for chips, not the location of production. A fab not built in China due to sanctions will simply be built elsewhere, leading to a substitution effect where the equipment sale still occurs.
The most significant sanctions loophole isn't physical chip smuggling but 'compute smuggling.' Chinese firms establish shell companies to build and operate data centers in neutral countries like Malaysia. They then access this cutting-edge compute power remotely, completely bypassing physical import restrictions on advanced hardware.
U.S. chip companies that sell to Chinese tech giants are making a strategic error. They are building a temporary bridge for future competitors who are mandated to switch to domestic suppliers like Huawei once viable. This short-term revenue comes at the cost of shrinking their own long-term global market share.
The most dangerous policy mistake would be reverting to a 'sliding scale' that allows China to buy chips that are a few generations behind the cutting edge. In the current era of AI, performance is aggregatable. China could simply purchase massive quantities of these slightly older chips to achieve compute power equivalent to frontier systems.
A major, clandestine production run by TSMC for Huawei shell companies supplied China with millions of advanced AI chips. This single violation artificially propped up China's AI compute capacity, effectively delaying the full impact of U.S. export controls by two years and obscuring the true state of China's domestic capabilities.
The argument that U.S. export controls accelerate China's domestic tech efforts is a fiction. China's "indigenization pedal has been on the floor" since 2014, long before recent controls were implemented. It is a core national priority, meaning U.S. policy has little marginal effect on an already maxed-out effort.
Contrary to the narrative of a close race, Huawei's AI chips are falling further behind NVIDIA's. The performance gap is projected to widen from a 5x difference to a 17x difference within two years. Shockingly, Huawei's next-generation chip is actually projected to be less powerful than its current leading model, indicating significant production struggles.