Chinese entities have obtained advanced Nvidia GPUs for AI and HPC applications despite U.S. restrictions through an advanced underground smuggling network from third-party countries. The U.S. government is unhappy about this, so it plans to implement new regulations to limit Chinese companies from acquiring these AI GPUs from intermediary countries. The rule will purportedly go into effect by the end of the month, reports the South China Morning Post.

The proposed regulations, reportedly developed by Commerce Secretary Gina Raimondo and National Security Advisor Jake Sullivan, would include national quotas on GPU exports and a global licensing system with reporting requirements. These steps target countries that are major transshipment hubs but are not yet subject to U.S. export restrictions. They address a key vulnerability in current policies that allows hardware to be re-exported to restricted countries.

National quotas on GPU exports will somewhat restrict the development of AI infrastructure in various countries. However, facing AI GPU shortages for their AI development, these countries will unlikely tolerate re-exporting this hardware to China. Furthermore, companies with access to advanced AI GPUs, like Nvidia’s offerings, such as the H200 or B200, will sell these products to legitimate local customers rather than little-known entities.

Chinese entities mainly used certain Middle Eastern countries, Malaysia, Singapore, and Taiwan, to get restricted GPUs, including Nvidia’s latest H200 GPU. Although Saudi Arabia and the United Arab Emirates faced restrictions, other countries in the region did not, so some of them were used to re-export advanced Nvidia GPUs to China. Also, the U.S. Department of Justice (DoJ) is investigating Supermicro’s possible violations of U.S. export regulations to China and Russia by using Taiwan-based companies to re-export its advanced AI servers to the aforementioned countries.

In compliance with U.S. export rules, Nvidia does not sell its latest GPUs to Chinese entities or even ship these devices to Chinese sites. However, Nvidia supplies its H100 and H200 processors to major clients, who use them to produce and sell AI servers, and resellers could abuse the purchasing system to ship systems to intermediaries that then smuggle the GPUs into China. 

Although all parties assert compliance with U.S. export regulations and claim to address violations when identified, sales to smaller intermediaries often bypass their control and feed into smuggling operations. Consequently, as of August, over 70 vendors were openly advertising these restricted processors online in China, with several promising deliveries of standalone GPUs or complete servers in weeks.