By Wu Qiaoxi | 2025-08-01

Malaysia has abruptly tightened export controls on high-performance US-origin artificial intelligence (AI) chips in a bid to shut down a growing smuggling pipeline to China.

Malaysia's Ministry of Investment, Trade and Industry on July 14 announced a new requirement mandating strategic trade permits for the outbound shipment of advanced AI chips.

Companies and individuals must now provide 30 day's advance notification to the government and declare any suspicion of misuse, effectively closing a regulatory loophole that may have allowed thousands of US-made processors to reach China.

"Malaysia stands firm against any attempt to circumvent export controls or engage in illicit trade activities by any individual or company, who will face strict legal action if found violating the STA [Strategic Trade Act] 2010 or related laws," the ministry warned in its statement.

The move comes amid Washington's efforts to contain Beijing's AI ambitions.

The Trump administration on July 4 proposed a new rule to restrict shipments of advanced chips to Malaysia and Thailand, suspecting both of being exploited as smuggling conduits into China.

Large-scale smuggling

AI chip smuggling to China is rampant, especially via Southeast Asian nations, say experts.

In January 2025, Singapore authorities arrested three individuals for misrepresenting the ultimate destination of $390 million worth of AI servers containing NVIDIA chips shipped to Malaysia, according to a report published by the Center for a New American Security (CNAS) in June.

In one smuggling case involving Malaysia, a Malaysian broker helped a Chinese company seeking chips establish a Malaysian shell company, including a Malaysian business website and email address, the report found.

The broker also rented space in a Malaysian data center to temporarily house the chips and fool inspectors before sending them to China after several weeks.

AI chip smuggling into China ranged anywhere from 10,000 to several hundred thousand chips in 2024, with a median estimate of 140,000 smuggled NVIDIA GPUs, the report said.

One smuggler reportedly shipped 2,400 NVIDIA H100s, valued at $120 million, to a Chinese customer using shell companies and false labeling.

The smugglers, often based in Southeast Asia, use shell companies and front operations to move chips across borders, according to the report. They also use tactics such as relabeling chips as toys or tea and leveraging multiple shipping routes.

"Bad actors use these methods to smuggle varying quantities of chips, ranging from small orders to massive shipments worth hundreds of millions of dollars," according to the CNAS report.

"It is accepted among buyers and sellers of AI chips in the PRC [China] that large-scale smuggling of US AI chips is occurring," it added.

Enforcement needed

Malaysia, with its booming data center industry and proximity to major shipping routes, has become a convenient intermediary.

A Cushman & Wakefield report in June projected Malaysia to have the fastest data center capacity consolidation in Asia-Pacific through 2030, ahead of Thailand and Japan.

Malaysia's trade minister, Tengku Zafrul Aziz, said on July 15 that authorities have not found any evidence of large-scale smuggling of AI chips.

He emphasized that "the investigation continues" and pledged that the government would "definitely take action" if any wrongdoing is uncovered, according to Malay Mail.

However, smuggling networks are quick to adapt, setting up front companies and concealing illicit shipments with relative ease, while enforcement agencies often struggle to keep pace.

The CNAS report warns that unless enforcement is scaled up, chips will continue to flow illegally.

"The challenge of AI chip smuggling is unlikely to go away on its own: as the capabilities of US-designed AI chips grow, so will their black market demand."