(Bloomberg) -- Even as Donald Trump blasts Anthropic PBC's Dario Amodei over his call to hit the brakes on AI development, the two agree on the need to prevent China from catching the US. But doing that remains difficult in practice.
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In his 3,800-word missive titled "We Must Pace the Frontier," Amodei called on policymakers to avoid selling China advanced AI chips, crack down on chip smuggling and prevent "unauthorized distillation by companies in authoritarian countries," among other steps. He urged democracies to maintain a lead "as large as possible," echoing language from the Biden administration.
While Trump maintains export controls on the most advanced chips and chipmaking equipment, he's also been open to selling China semiconductors such as Nvidia Corp.'s H200s, which Beijing has avoided to develop its own sector. So far his administration has refrained from more punitive measures to crack down on chip smuggling in Southeast Asia, and demurred on sanctions or entity-list designations for Chinese companies found to have carried out systematic distillation from US systems. The main challenge for the US is keeping China at bay without prompting Beijing to further restrict rare earths used in high-tech products like precision-guided missiles and drones. Trump and Xi Jinping reached a truce last year that saw Beijing guarantee flows of rare earths in return for reduced tariffs, a deal likely to be extended next week when the Chinese leader visits the White House.
"Washington has to tread carefully now that Beijing has sharper retaliatory tools, such as export controls on rare earths," said Kyle Chan, a fellow in the John L. Thornton China Center at Brookings. "Also, American AI boom relies on many data center components from China."
China has continuously narrowed the gap with the US on AI despite the restrictions, as Xi pours money into becoming self-sufficient on the entire tech stack. Although China remains behind on chip production, AI models from companies like Deepseek and Moonshot have reduced the gap with US frontier offerings in capability, often at a fraction of the cost — threatening to pull away market share from Silicon Valley giants Anthropic and OpenAI.
Trump administration officials, US security agencies and American AI developers alike have accused Chinese firms of distilling from US AI models in the past to build their own products. The practice, which can be legitimately deployed by an AI developer that uses its state-of-the-art model to effectively teach a more power-efficient version, is seen as an improper shortcut when done without approval.
US lawmakers are also considering measures aimed at penalizing Chinese companies found to be copying unfairly from their American counterparts. A harder loophole to close is Beijing's ability to remotely rent America's best semiconductors at Southeast Asia cloud data centers — especially after Trump alienated many of those countries with last year's trade war.
Competition is also expanding throughout the world. Huawei Technologies Co., China's biggest competitor to Nvidia, has bid to build AI data centers for the Egyptian government, drawing alarm and a scramble from Washington to make a counteroffer.
"Both countries see AI as one of, if not the most important arena of strategic competition," said Daniel Remler, a senior fellow at the Center for a New American Security who led AI policy at the State Department under the Biden administration and took part in the first US-China AI dialogue two years ago. "But leaders and senior policymakers on both sides have to see AI in the context of every other issue they have to contend with, from the war in Iran to rare earths."
The fight to stay ahead is creating fresh tensions as the US government doubles down on accusations that Chinese companies have engaged in "industrial-scale" theft of American AI labs' intellectual property through a technique known as distillation. Anthropic last week took those accusations a step further by claiming Moonshot AI had routed nearly 300,000 user requests through Claude and passed the results off as its own.
Those issues will be on display when US and Chinese officials sit down for AI talks planned around the Sept. 24 summit between Xi and Trump. AI is also likely to feature prominently in leader talks next week, according to a senior White House official, who said Trump had been in touch with some CEOs to gauge their views on the recent controversy over AI safety.
China has dismissed the recent US claims as groundless, accusing Washington of applying a "double standard" to stifle competition. Beijing has vowed to "resolutely" retaliate against further US actions against Chinese companies.
If the US wants cooperation on AI, China would also like the Trump administration to remove "containment measures" such as export controls and entity-list designations, said Jiang Tianjiao, a research fellow at the Center for Global AI Innovative Governance and associate professor at Fudan University in Shanghai. "China has always maintained that if you want a dialogue — especially on sensitive technical issues — there must first be mutual political trust," he said. "That means establishing mutual respect without triggering unnecessary friction in bilateral relations."
China may also be looking to crack down on distillation due to its own national security concerns. On Chinese e-commerce platforms like Taobao, merchants offer account top-ups and pre-made profiles for Claude, routing queries through domestic services that relay requests via overseas proxy servers — an industry dubbed "API transit stations."
Data leakage and high-profile user activity are drawing scrutiny from Chinese regulators, opening the door to targeted crackdowns as domestic security agencies take a harder line against reliance on foreign AI infrastructure, Lyu Yizhou, a lawyer with Shanghai Qianpeng Law Firm, wrote in an online post this week.
The last time the two governments held talks on AI in May 2024, the US enjoyed a comfortable lead. China was still months away from its "DeepSeek moment," and hadn't deployed its rare-earth supply chain as leverage against the Biden administration's export controls.
Since then, Xi has used rare earths to push Trump to retreat from three-digit tariffs and thwarted a proposed rule that would have dramatically expanded the number of Chinese companies subject to US sanctions.
China increasingly dominates global markets — and supply chains — across swaths of advanced manufacturing, from electric vehicles and clean energy gear to drones. Washington has responded by shutting some Chinese products out of the US on national security grounds, most recently with an effective ban on Chinese humanoid robots and power inverters. Beijing in turn stiffened controls on drone exports and sanctioned US entities.
Things could escalate further. A bipartisan bill is currently pending in Congress, with an aim to curb China's remote access to Nvidia chips via cloud computing. The Commerce Department's Bureau of Industry and Security, which oversees chip export curbs, is also scrutinizing the loophole.
But implementation may be challenging.
"It would involve some degree of monitoring for data centers across multiple countries, particularly in Southeast Asia as well as Japan," said Chan at Brookings. "As with any effort to restrict China's access to advanced AI chips, it will be a matter of degrees and effort, not a black-and-white solution."
--With assistance from Luz Ding, Zheping Huang, Hadriana Lowenkron, Josh Wingrove and Jordan Fabian.
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