Kennedy also cited research by the Centre for a New American Security (CNAS), a non-partisan Washington think tank, which reported in October that “there are already underground markets for small quantities of smuggled AI chips, according to on-the-ground reports from Shenzhen”.

Kendler – previously a national security lawyer in the US Justice Department who worked on the criminal case against China’s Huawei Technologies and its chief financial officer Meng Wanzhou – defended Commerce’s work by insisting that “any diversion of our controls would be a matter for export enforcement and we are tracking that very closely”.

The exchange, the most heated in the two-hour hearing, underscored the concern that both US political parties have about China’s ability to pull ahead of the US in the most advanced technologies, particularly artificial intelligence innovations, many of which rely on Nvidia semiconductors.

Much of the hearing concerned efforts to address sales of advanced semiconductors and chipmaking equipment by other countries to China as well as networks that channel restricted US products to Chinese markets.

The Commerce Department announced rules in October to further restrict China’s access to advanced chips and chipmaking tools, after it found that companies – including Nvidia – were designing products that fell just below the performance threshold of rules rolled out a year earlier and were thus being exported.

Thea Kendler, assistant secretary of commerce for export administration, at the Senate Banking Committee hearing on Thursday. Photo: C-Span

These restriction efforts have pushed Chinese companies and research groups to seek other ways to obtain the chips for AI platforms, which have become increasingly important in next-generation military applications.

According to The Journal, the merchants it tracked are selling the restricted Nvidia products, or servers containing the company’s advanced chips, to Chinese AI start-ups or research institutions because the vendors cannot source enough to satisfy the demands of the country’s larger tech companies.

“Despite impressive progress to date, indigenous Chinese chips will likely lag in performance compared to chips from the United States and its allies for years to come. This all makes smuggling a potentially lucrative endeavour,” CNAS concluded.

“Only a relatively small number of controlled AI chips will make it into China in 2023, likely in the hundreds, but plausibly in the low thousands.”

Earlier in the hearing, Kendler appealed to the committee for more funding, which she said was needed to enable the Commerce Department’s networks to track circumvention.

Sympathetic to the request, Senator Catherine Cortez Masto, Democrat of New Mexico, said that she had been told the division had not received a funding increase since 2010. “I would imagine it is challenging now because of the increased capacity of your jurisdiction and oversight to cover some of the coverage that you need,” she said.

Kendler replied that her department needs “roughly $100 million to take antiquated systems and turn them into useful, productive data and analytic support”.

“With more funds, we would enhance our technical expertise. We would work on data and analytic capabilities, and then certainly our enforcement capacity as well,” she said.

Kennedy, though, dismissed Kendler’s request, contending that Kendler’s staff only needed an internet connection to conduct the work.

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