Plugging the PRC’s Southeast Asian Semiconductor Pipeline

Abstract

The United States must do more to crack down on the diversion of semiconductors to the People’s Republic of China (PRC) through Southeast Asia, as maintaining a lead in advanced chips is critical to US national security. The United States should engage in more robust enforcement, increase funding for the Commerce Department’s Bureau of Industry and Security, and boost cooperation with Southeast Asian countries.

During the Vietnam War, China used Southeast Asian proxies to attack the United States and allied forces militarily. Today, China is using Southeast Asian proxies to illicitly acquire US-origin advanced semiconductors in preparation for a potential future war between the two superpowers themselves. These chips power advanced intelligence collection systems, precision-guided munitions, and much of the rest of the United States’ next-generation military technology. The United States can, and must, do more to block this illicit flow.

US efforts to prevent China from acquiring advanced US chips have largely failed because the PRC uses Southeast Asia’s looser regulations as a diversion route. Unable to purchase high-end semiconductors directly from US companies, some Chinese entities are using Southeast Asian intermediaries – including shell companies, foreign subsidiaries, and third-country distributors – to illegally acquire such US-origin semiconductors.

Large-Scale Diversion

 In March 2026, Senators Jim Banks (R-IN) and Elizabeth Warren (D-MA) urged Secretary of Commerce Howard Lutnick to take “immediate action on a serious and documented national security concern: the large-scale diversion of advanced American AI chips to China through Southeast Asian intermediaries.” Banks and Warren named Malaysia, Thailand, Vietnam, and Singapore as intermediary countries of concern.

Banks and Warren specifically referenced the March 2026 Justice Department indictment of three individuals for a conspiracy to violate export controls by illegally diverting billions of dollars’ worth of Nvidia-powered AI servers to China through Supermicro, a company based in Singapore.  Previously, a Wall Street Journal investigation had revealed in June 2024 that China facilitates illicit chip transfers by “using entities set up in Singapore, Malaysia,

Vietnam and Taiwan to circumvent U.S. restrictions.” In August 2025, federal law enforcement announced they uncovered a scheme where operators sent at least 20 shipments containing tens of millions of dollars’ worth of sensitive AI microchips to “shipping and freight-forwarding companies in Singapore and Malaysia, which commonly are used as transshipment points to conceal illegal shipments to China.”

Gaps in Enforcement

If the United States is to stop China from illicitly acquiring advanced US-origin semiconductors through Southeast Asia, it must strengthen the US export control regime. Current enforcement mechanisms are insufficient to prevent the diversion of restricted semiconductor chips through third-country markets. In its November 2025 Annual Report to Congress, the U.S.-China Economic and Security Review Commission concluded that there were “significant gaps” in the enforcement of US national security export controls and sanctions that “urgently” require reform and more focused attention “to counter China’s systematic and persistent circumvention tactics.”

Additionally, a pair of US Senate reports, issued in September 2024 and December 2024, concluded that while “export controls have emerged as one of the United States’ leading tools to advance its geopolitical goals . . . enforcement of export controls is a shadow of what it should be, and inadequate at every level.”

US Manufacturers Could Do More

The Senate reports asserted that US semiconductor manufacturers could be doing far more to ensure their chips don’t end up in prohibited destinations.  The September 2024 report said that “[t]he U.S. export control regime for semiconductors relies heavily on corporate compliance and diligence.”  The report “found that U.S. semiconductor manufacturer efforts have been abjectly lacking.”  Noting that “willful ignorance” of customer violations “violates the law,” the report stated that “[s]ome companies have done the bare minimum required by law, conducting cursory checks on their customers, while trying to wash their hands of any real responsibility for their distributors’ role” in diversion.

The report also asserted that “[e]xport controls compliance policies” at four leading semiconductor manufacturers—Advanced Micro Devices Inc., Analog Devices Inc., Intel Corporation, and Texas Instruments Inc.— “fail to meet best practices and recommendations from the Department of Commerce.” The report specified that proactive compliance by major US semiconductor manufacturers would “pay dividends in ongoing efforts to use semiconductor export controls to constrain China’s ambitions in artificial intelligence.”

The December 2024 Senate report complained that Commerce “has not charged companies with sufficiently serious violations or imposed fines sufficiently robust to compel better compliance. . .despite publicly acknowledging the need for larger penalties.” If Commerce is to stop the illicit flow of semiconductors to China, it must heed the Senate report’s advice and robustly investigate whether American manufacturers are exercising adequate due diligence to prevent their products from being diverted to China through intermediaries.

Additional Funding for Commerce

More robust enforcement will require additional personnel and other investigative resources for the Commerce Department’s Bureau of Industry and Security (BIS). Fortuitously, the administration has sensibly proposed a significant increase in BIS funding. This increased funding will enable BIS to shift from a reactive enforcement approach—relying on voluntary self-disclosures and tip-offs—to a proactive approach that leverages data analytics and strategic intelligence to predict smugglers’ next moves.

The Commerce Department has requested $450 million for Fiscal Year 2027, an increase from the Fiscal Year 2026 budget of $235 million. With these funds, the agency intends to “add 290 Export Enforcement Agents and enhance its international presence with 40 additional Export Control Officers (ECO), strengthening the United States’ ability to disrupt illicit procurement networks wherever they operate.”

The bulk of the requested funding is explicitly earmarked for enforcement operations, and the Department states that these resources are intended to combat the diversion of sensitive technology, such as semiconductors and advanced manufacturing equipment, to “adversary countries” including China. Congress should approve the Commerce Department’s funding request and fully fund BIS to ensure the agency has the resources necessary to incentivize and assist companies to implement sufficient due diligence procedures.

Enhanced Cooperation with Southeast Asian Countries

The United States should also make it a bilateral priority with Southeast Asian countries to crack down on semiconductor diversions to China. Since China is using Southeast Asian countries as intermediaries to acquire advanced semiconductors, strengthening cooperation with Southeast Asian governments would be pivotal to disrupting these diversionary supply chains. In a letter to Commerce Secretary Howard Lutnick, Senator Tom Cotton (R-AR) wrote, “Malaysian officials have begun cracking down on illicit diversion of chips and strengthening their own controls to ensure continued access to advanced U.S. chips, but proactive leadership from the United States is welcome.”  Cotton urged Commerce to “provide Malaysia with the support and resources it needs” to curb chip smuggling.

Singaporean officials have also expressed openness to cooperating with the United States on this issue.  For instance, Home Affairs and Law Minister K. Shanmugan has publicly described how “we have told the US that we would be happy to work with them, and support any investigations” into the diversion of US export-controlled items.  He explained that “it is in our interest . . . to protect Singapore’s reputation” and “we will not tolerate individuals and companies” using “Singapore to circumvent the export controls of other countries.”

The United States can help further persuade Southeast Asian governments to cooperate on export-control enforcement by highlighting it as a matter of regional national security. As former Assistant Secretary of Commerce for Export Administration Thea D. Rozman Kendler explained in a December 2024 BIS press release, “the PRC’s Military-Civil Fusion strategy presents a significant risk that advanced node semiconductors will be used in military applications that threaten the security of the United States, as well as the security of our allies and partners.”

Concerns that heavy-handed US pressure will push Southeast Asian nations toward Beijing overlook that, by framing export controls around the region’s strategic priorities, Washington can preserve these alliances by establishing a mutual national security benefit of compliance.

Conclusion

 Maintaining the United States’ current semiconductor lead over China is critical to protecting America’s national security and preserving our economic competitiveness and ability to shape the global rules that will govern the future of AI.  Blocking China’s semiconductor diversion pipeline through Southeast Asia is essential to limiting China’s ability to acquire the advanced technology necessary to close the AI gap.