Two Can Play at That Game
Washington has now spent over three years teaching Beijing not to buy American AI.
US chip export controls rested on the premise that restricting Chinese access to advanced hardware would restrict Chinese AI development. Three and a half years of escalating restrictions later, Beijing blocks the chips that Washington spent the intervening period deciding whether to sell, while Huawei’s domestic replacements enter mass production and China’s most capable AI lab launches frontier models on Chinese silicon. The trajectory between those two points followed a logic that each round of restrictions made more predictable.
How to lose a customer
The United States began restricting Chinese access to advanced AI chips in October 2022, when the Bureau of Industry and Security imposed controls on GPUs and semiconductor manufacturing equipment. The Biden administration tightened those controls in each successive year, closing loopholes that allowed modified chips to slip through the original thresholds, expanding restrictions to cover chip design firms, and negotiating parallel controls with Japan and the Netherlands. In January 2025, BIS published an AI Diffusion Rule that established a global three-tier licensing framework for advanced computing exports. The Trump administration rescinded that rule the following May, partially relaxed export restrictions in December, then watched Congress respond with the Chip Security Act in March 2026, a bill that proposed embedding tracking technology directly into exported chips. Three smuggling prosecutions in the same month demonstrated that the existing enforcement framework leaked at every seam. Each reversal taught Chinese industrial planners the same lesson: access to American silicon could be revoked, restored, and revoked again on a political timeline that no supply chain can absorb.
The January 2026 BIS rule formalized a shift from blanket denial to case-by-case review for H200 and equivalent chip exports, the first substantive loosening since controls began. The concession arrived after Beijing had already committed the capital to make it irrelevant. China’s third national semiconductor fund, launched in May 2024 at $47.5 billion, directed investment toward SMIC and domestic equipment manufacturers. SMIC moved in January 2026 to acquire full control of its Beijing subsidiary for $5.8 billion, consolidating its most advanced fabrication capacity under direct management. Shanghai and other municipal governments had begun requiring that state-owned data centers source over half their chips domestically. The relaxation offered access to hardware that the Chinese government had already committed to replacing.
That same month, Chinese customs agents received instructions to block H200 imports, effectively banning the chip that Washington had just cleared for sale. US export conditions required that the chips stay inside China. Beijing instructed firms to restrict Nvidia purchases to overseas operations. The contradictory mandates produced a customs stalemate. Commerce Secretary Howard Lutnick confirmed in April that Nvidia had recorded zero revenue from China H200 sales. Smuggling prosecutions over the previous two years had demonstrated that Chinese demand for American chips was intense. Beijing chose to redirect that demand toward domestic suppliers rather than satisfy it through legal imports.
Escape velocity
SMIC plans to double its 7nm production capacity in 2026 while running pilot production on a 5nm process, both milestones built on older DUV lithography that US controls were designed to make insufficient. Huawei’s Ascend 950PR, the chip that supports DeepSeek V4’s inference workload, entered mass production in April with a target of 750,000 units by year’s end. Huawei expects AI chip revenue to reach $12 billion in 2026, up from $7.5 billion in 2025. ByteDance, Tencent, and Alibaba have all placed bulk orders for Ascend chips, driving prices up roughly 20 percent in recent weeks. The domestic ecosystem’s three largest consumers have committed their procurement budgets to the transition.