Cabinet Bosses Brawl Over Chips While Markets Take Bets

Baird analyst Tristan Gerra expects a new ban on Nvidia H200 exports to China, and he's already put a number on what it costs: a possible $5 billion write-down tied to inventory sitting in Asia-based warehouses. "We believe low-level shipping is taking place into Asia-based warehouses with some inventories awaiting China demand," he wrote in a Wednesday note. The people who make these calls aren't the ones who'll absorb the hit. That's what the note is for.

Who Has the Power

The real action happened in the Situation Room last week. Treasury Secretary Scott Bessent challenged Commerce Secretary Howard Lutnick over his department's reluctance to label Nvidia customer Megaspeed a possible national security threat, two people familiar with the matter told CNN. Treasury staffers argued the company belongs on Commerce's entity list of China-connected companies that could pose national security risks. Confronted by Bessent last Thursday, Lutnick did not immediately commit to taking any specific action.

Think about what that means. Two cabinet officials argued behind closed doors over whether a company that has bought more than $4 billion worth of Nvidia semiconductors by some analyst estimates gets a label. The people who'll live with the consequences weren't in the room. The Commerce Department hasn't added a single company to the list in more than a year.

What They're Calling "Security"

Trump officials have long harbored concerns that Megaspeed has circumvented US law and funneled advanced chips into China. Senior officials, Lutnick among them, were briefed months ago about Nvidia CEO Jensen Huang's relationship with Alice Huang, a Megaspeed executive whom the intelligence community suspected of being a Chinese spy, people familiar with the matter said. Despite those warnings, Commerce has so far refused to put Megaspeed on the entity list.

Megaspeed started in 2015 as a Chinese video game developer called 7Road International. Eleven years later it's a Singapore-based company and one of the largest buyers of Nvidia chips in Asia. It says it is a "compliant and legal company." China's Ministry of Foreign Affairs called the spy allegations "groundless speculation and an attempt to smear and malign China." Everybody's denying, everybody's briefing, and nobody's accountable.

Adding Megaspeed, the report notes, could risk inflaming tensions with China amid Trump's efforts to manage the trade relationship. So the entity list, one of the US's most significant tools for stopping American firms from selling to foreign organizations, sits idle while the trade deal gets managed.

The Reform Trap

Gerra also expects new export control limits on Southeast Asia data center loopholes, and sees potential for the Department of Justice to take action against Megaspeed. Another rule, another loophole, another enforcement threat. The pattern holds: the rules get written, the shipping finds a warehouse, and the next rule follows.

Meanwhile, the two heads of state will talk. Bessent said Tuesday that Trump and Chinese President Xi Jinping are expected to progress a new bilateral dialogue on advanced AI during their meeting next week in Shenzhen, on the sidelines of the Asia-Pacific Economic Cooperation summit, according to Reuters. The two countries have also agreed to a direct communication channel to alert each other to serious AI-related incidents, an arrangement reached at their September White House meeting. Two governments are building a hotline for AI incidents. Nobody else gets a vote on what these chips do.

Who Pays

Gerra says U.S. chip demand alone could make up for lost demand in Southeast Asia, but it's not a guarantee. "Revenue impact could be concentrated in a given quarter with cash flow constrained hyperscalers not able to pick up the slack within that given quarter," he wrote. That's the language of the ledger: quarters, write-downs, slack. The cabinet fight, the spy allegations, the unlisted company and the warehouses full of inventory all get priced the same way, as exposure for shareholders. The apparatus protects itself first and calls it national security.