The U.S. Department of Commerce is further curtailing the ability of American companies to sell China advanced chips for artificial intelligence. The national security objective is to avoid providing Beijing with sophisticated silicon that could potentially fuel breakthroughs, giving the nation an advantage in what’s been couched as an “AI arms race.” China is a large market for semiconductors, and the move is said to be fueling tension on both sides of the globe. The new restrictions attempt to plug loopholes in rules the Biden administration introduced in October 2022.

The practical effect is a hit to the bottom line of companies like Nvidia and Intel, which will find it harder to get around guidelines with existing products and tougher to create new ones that skirt the rules.

“Shipments of high-end AI chips, including those developed by Nvidia and Intel for the Chinese market, are banned without a license. And ‘gray zone’ chips just below those thresholds will now require notification to the government, which can then deny their sales,” according to The Wall Street Journal.

Nvidia says it does not expect the expanded rules to materially affect sales.

Commerce Secretary Gina Raimondo says AI chips are a key component of military applications development for China, as they are for the U.S., which passed the $53 billion CHIPS Act to end domestic reliance on foreign-made semiconductors, “especially those used by the Pentagon,” WSJ writes, calling CHIPS “the latest example of the federal government using its cash to remake an industry it sees as crucial to national security.”

Semiconductor Industry Association President John Neuffer tells The New York Times the continuing escalation of controls potentially harms U.S. chipmakers’ ability to compete globally, adding that “China is the world’s largest market for semiconductors, and our companies simply need to do business there to continue to grow, innovate and stay ahead of global competitors.”

But NYT reports a senior administration official “said that the United States had seen people try to work around the earlier rules, and that recent breakthroughs in generative AI had given regulators more insight into how the so-called large language models behind it were being developed and used.”

The expanded rules seem to indicate shipments through third-party regions like Macau and Hong Kong. The timing could exacerbate tensions with China as the White House prepares for a potential meeting in California next month between President Biden and Chinese leader Xi Jinping.