America’s Ai Push In Southeast Asia Faces A China Problem

SINGAPORE — America’s campaign to dominate the global AI market has collided with an uncomfortable reality here in Southeast Asia: The same investments that extend the reach of U.S. technology could also help China evade Washington’s controls and catch up in the AI sprint.

Every advanced chip shipped to the region and every U.S.-powered data center expands the market for American artificial intelligence. But the investments also create another potential route for Chinese companies to obtain computing power the U.S. wants to deny them.

That spiraling conflict will loom over talks as President Donald Trump meets Chinese leader Xi Jinping on Thursday in Washington. Meanwhile, the issue is driving a new bipartisan push in Congress for tougher controls on chip shipments and access to U.S. data centers, despite industry warnings that further restrictions could cost American companies business and push Southeast Asian governments closer to Beijing.

The stakes are growing as U.S. tech giants pour billions of dollars into a region that is rapidly becoming a global data-center hub. Washington wants U.S. companies to supply Southeast Asia’s booming digital economies, fearing China could otherwise capture the market as it did during the global build-out of 5G telecommunications networks.

But experts say the illegal smuggling of chips to banned Chinese companies — and Chinese access to servers in Southeast Asia that use advanced chips — are undercutting U.S. export controls, even as governments across the region step up enforcement.

“The demand for smuggling is, if anything, growing,” said Chris Miller, author of “Chip War” and a professor at Tufts University’s Fletcher School. “AI chips are absolutely critical for the future of AI and therefore the future of national power.”

AI is set to play a major role in the Trump-Xi summit, with top U.S. AI leaders including Nvidia CEO Jensen Huang planning to attend a state dinner. And the Trump administration is ramping up coordination with Southeast Asian governments to stem smuggling of chips. The U.S. co-hosted a summit in Jakarta, Indonesia, last week focused on AI, semiconductors and supply chain security.

However, the White House didn't comment on the fresh legislative push or whether chip smuggling would come up at the Trump-Xi summit but defended the United States' export control regime as strong.

Rapid advancements in AI mean the U.S. needs to stay ahead in competition with China, according to policymakers and U.S. industry. While AI can be used to advance life-saving medical innovation and other arguably beneficial causes, its power can also be unleashed for nefarious ends, leading many experts, including some at top U.S. AI labs, to spell out doomsday scenarios.

Now, lawmakers are scrambling to tighten U.S. controls and prevent China from obtaining the most sophisticated chips. The Chip Security Act, which would crack down on smuggling by requiring advanced chips to contain location-verification and tracking mechanisms, is likely to be included in the Senate’s defense authorization legislation that lawmakers aim to pass by the end of the year.

Sen. Tom Cotton, author of the Chip Security Act and chair of the Senate Intelligence Committee, said the bill would “ensure our advanced chips don’t fall into the hands of those who seek to do America harm.”

“Communist China continues to lie, cheat, and steal in order to undermine American AI innovation,” the Arkansas Republican said in a statement to POLITICO. “Recent events demonstrate the stakes for economic and national security if China were to develop frontier capabilities that match America’s.”

The bill is also supported by top Democrats.

"China has always been desperate to get our AI chips. They've set up elaborate ways to smuggle them," Senate Minority Leader Chuck Schumer, a co-sponsor of the Chip Security Act, said at a press conference Wednesday. "We can and must both maintain our lead on AI by restricting China's access to our technology."

Vivek Chilukuri, a senior fellow at the Center for a New American Security and a former Capitol Hill staffer, said there’s “strong bipartisan consensus in Congress that we should not be allowing Chinese companies or entities to buy American chips or access American chips.”

Chilukuri said Congress has been “really important for building pressure on the administration” to address smuggling. But U.S. export controls did not surface in preliminary negotiations this weekend, according to U.S. Trade Representative Jamieson Greer.

On the Senate floor last Thursday, Schumer called for export control measures in the defense bill, saying Trump “is the biggest barrier standing in the way.”

‘A strategic resource’

Also known as semiconductors or integrated circuits, chips are small silicon-based devices that house advanced processors containing millions or billions of microscopic transistors. Widely regarded as some of the most advanced technology in human history, they’re used to build servers in data centers, where large language AI models like ChatGPT are trained and AI programs are deployed to businesses and the public.

Since the Cold War, the U.S. has battled to stay ahead globally in the chip business. And in 2022, the Biden administration imposed sweeping export controls on advanced chips. Even though the U.S. still restricts advanced chip exports to China, the Trump administration halted a last-minute Biden administration regulation, called the AI Diffusion Rule, that capped chip shipments to countries in Southeast Asia and elsewhere across the globe.

Southeast Asia is cracking down on smuggling — at least ostensibly. As part of a series of law enforcement operations over recent months, Malaysia seized millions of dollars worth of AI chips. Singapore seized a luxury villa tied to smuggling. And U.S. prosecutors suspect a firm in Thailand is linked to smuggling, according to Bloomberg.

Authorities in Taiwan are also prosecuting illegal shipments, most recently charging a ring of people in late August that included employees of Nvidia and Supermicro. The most powerful chips are designed by California-based Nvidia and produced in Taiwan.

The operations follow a handful of high-profile U.S. Justice Department prosecutions over chip smuggling since 2025. Still, experts say the efforts are not enough to keep China at bay in the epic battle over AI supremacy.

“There's no point where you restrict China's access to compute enough,” said Erich Grunewald, a Berlin-based researcher at the Washington-headquartered Institute for AI Policy and Strategy, referring to the computational power needed to train and deploy AI models.

"It's better to think of compute as a strategic resource, like oil or steel production in the past,” he said.

U.S. hyperscalers Amazon, Microsoft and Google, along with cloud provider Oracle, are expanding big in the region, while other American companies like CoreWeave seek entry. The region’s data centers are set to hit 9.4 GW by 2035, which is more power capacity than nine U.S. nuclear power plants, the consultancy Wood Mackenzie said in a recent report.

Southeast Asia is attracting investment because of its rapidly-growing economies, cheap land and other resources, as well as access to undersea cables, which are laid on the ocean floor to facilitate internet traffic and are critical for the data transfers needed for AI.

High-powered chips are continuing to flood into the region. On top of U.S. hyperscaler projects, Singapore-founded Aolani will deploy 22,000 controlled Nvidia chips at sites in Malaysia and the Philippines, according to an announcement Monday. Zankore, a Singaporean firm operating in Indonesia, also announced progress earlier this month in plans to build a data center and cloud service that will use controlled Nvidia chips.

China is also pushing full throttle on tech infrastructure in the region to strengthen already tight economic ties. Meanwhile, Chinese companies like Alibaba, Moonshot and Z.ai are producing AI models that compete with Anthropic and OpenAI in sophistication. But Chinese firms are far behind in designing and manufacturing chips.

That, on top of the enforcement operations, is leading experts to conclude that smuggling — largely through Southeast Asia — is playing a critical role in Chinese innovation. In July, Michael Kratsios, director of the White House’s Office of Science and Technology Policy, said that Chinese company Moonshot "acquired" servers equipped with high-powered, highly restricted Nvidia chips, "likely to train its AI models."

“China is six or seven years behind the cutting edge in Taiwan, and it's actually fallen further behind TSMC, the Taiwanese leader, over the last 24 months in terms of both the quality of chips it produces and its share of the market,” said Miller, referring to the Taiwan Semiconductor Manufacturing Co.

The Washington-based nonprofit C4ADS released a report earlier this month identifying 50 shipments of Nvidia GPUs diverted through Vietnam, Malaysia and India to China and Hong Kong between 2023 and 2025, totaling $13.4 million.

“Some actors may avoid detection entirely, moving chips through fishing boats or other channels that bypass legal reporting mechanisms,” the report said. “Others may relabel products as goods from unrelated sectors and move them through regular shipping channels.”

C4ADS said it took a “conservative approach,” adding that the “actual scale of illicit transfers is almost certainly higher than this report’s findings indicate.”

Industry vs. Congress

Experts say the U.S. needs help to stifle smuggling.

“Economic security is national security, and that means closing the gaps that allow sensitive technologies to be diverted to those who would do all of us harm,” said Thao Anh Tran, chargé d’affaires of the U.S. Mission to the Association of Southeast Asian Nations, said at the Jakarta summit.

Kate Koren, a former top official at the Commerce Department’s export control-focused Bureau of Industry and Security who attended the summit, said the event was focused on “capacity-building” with ASEAN countries to develop and expand export control regulations, rather than cracking down on chip smuggling.

“In terms of the actual smuggling of chips, we know it happens,” said Koren, now with the Center for Strategic and International Studies. “These are physical devices. They’re not that big. Determined adversaries can and will find a way to move them where they want them to be.”

Cooperation on smuggling is a hard sell. Countries in the region don't want to be seen as anti-China. And enforcement can be bad for business.

“These countries just don’t want to pick sides,” said Irene Zhang, a researcher with the influential think tank and media outlet ChinaTalk.

Miller said there’s “not much political interest in” cracking down on chip smuggling in Southeast Asia “unless pressure is brought to bear from the U.S. side.” Customs and commerce agencies in Thailand, Malaysia and Indonesia didn’t respond to POLITICO requests for comment.

The State Department says the U.S. AI ecosystem, which relies on advanced chips, is a major geopolitical priority.

“The United States is actively engaging with global partners to advance responsible, pro-innovation, pro-growth AI development, both bilaterally and through multilateral fora,” a State Department spokesperson said. Asked about the Jakarta summit, the spokesperson said that “export controls are one of the most important tools governments have to protect national and economic security in an era of rapid technological change and intensifying strategic competition.”

Nvidia, for its part, suggests concerns over smuggling are overhyped.

"Smuggling is a nonstarter,” said John Rizzo, an Nvidia spokesperson. “We primarily sell our products to well-known partners … who help us ensure that all sales comply with U.S. export control rules."

The spokesperson said that “any diverted products would have no service, support, or updates,” adding that Nvidia’s “strict diligence process led to prosecutions of would-be smugglers, and we continue to work with the government to enforce the rules."

BIS didn’t respond to multiple POLITICO requests for comment.

“The question is really scale,” Koren said. “You typically can’t move thousands of these things at the same time. It has to be more elaborate and piecemeal.”

A White House official, granted anonymity to speak candidly, said, “The administration has implemented an even more robust export control regime on cutting-edge technologies that the previous administration let freely flow to China.” The official did not respond to questions about whether export controls will be part of the Xi summit.

Chinese authorities also did not respond to requests for comment.

Some U.S. industry groups say the Chip Security Act would cause international companies to think twice about purchasing advanced U.S. chips, fearing that the U.S. government could shut down the chips.

“Advancing the Chip Security Act would directly undermine American diplomatic engagement by reinforcing the perception that U.S. products and services cannot be trusted,” a letter earlier this month from the Information Technology Industry Council, the U.S. Council for International Business and other groups said. “To win the AI race, the U.S. must ensure that our AI stack — not the Chinese stack — is deployed in countries around the world.”

The letter also denounced two other likely contenders for inclusion in the defense authorization bill: the AI OVERWATCH Act, which would give congressional oversight over BIS chip licenses, and the MATCH Act, which would restrict global sales of chip production equipment to countries like China. A spokesperson for Schumer said passage of all three bills this year is “an utmost priority.”

Other groups, like the Anthropic-backed Americans for Responsible Innovation, are pushing hard for the Chip Security Act.

“China builds its AI systems on American silicon, on American chips,” said co-founder Brad Carson. “Nvidia kind of turns a blind eye when their chips are going to China. If we’re serious about China, it means we can’t be providing them with this technology.”

Rep. Bill Huizenga, author of the Chip Security Act in the House, said the bill is key to U.S. national security.

“The evidence is clear: The Chinese Communist Party is engaged in an all-out effort to defeat the United States and our allies in the AI Arms Race,” said the Michigan Republican. “Every chip China steals can be used to boost its military and cyber capabilities that directly threaten American service members in the Indo-Pacific.”