Microsoft Pushes Trump Administration to Avoid China Optical Chip Ban That Could Slow US...

Microsoft and other major technology companies are urging the Trump administration to reconsider a proposed ban on Chinese-made optical transceivers, warning that restricting the components could disrupt the supply chains needed to connect powerful AI chips and slow the expansion of US data centers.

The lobbying effort, which was first reported by Reuters, citing sources, exposes a growing tension in Washington's technology policy. The US government wants to reduce reliance on Chinese suppliers in critical infrastructure, but technology companies say that moving too quickly could undermine the country's ability to build the computing capacity needed to compete with China in artificial intelligence.

The dispute centers on optical transceivers, components that transmit data through fiber-optic cables and connect servers, routers and switches inside data centers. Although they are smaller and less prominent than advanced AI processors, they are essential to the operation of large computing facilities. Without them, processors installed in data centers cannot communicate efficiently across the network.

Reuters reported in August that the Trump administration was considering banning imports of new models of Chinese optical transceivers over concerns that they could provide Beijing with opportunities to steal data, install malware, or disrupt services in US data centers.

Microsoft and other companies have since raised objections with administration officials, arguing that a broad restriction could create shortages at a time when the industry is racing to expand infrastructure for cloud computing and AI services.

Two sources familiar with the discussions said Microsoft was among a handful of companies that met officials from the White House Office of Science and Technology Policy and the National Security Council weeks after the Reuters report to explain the potential supply-chain consequences.

The scale of Microsoft's expansion illustrates the stakes. The company has 35 data centers under construction in the United States and another 134 planned, according to Cleanview, a market intelligence company tracking data center development.

For Microsoft and other hyperscalers, the concern is not simply the price of optical equipment. A shortage could leave expensive computing hardware installed but unable to operate at its intended capacity.

John Miller, executive vice president of policy and general counsel at the Information Technology Industry Council, said the proposed restriction could severely disrupt data center construction.

"It really threatens to arguably grind (the data center rollout) to a halt," Miller said.

He added that cloud companies had already purchased many of the AI chips required for expansion, but those processors could remain unused without the optical transceivers needed to connect them.

"Those chips, without optical transceivers literally could just sit there waiting around un-utilized until you actually have the transceivers to essentially connect them together," he said.

China's Dominance Creates a Difficult Supply-Chain Dilemma

China controls approximately two-thirds of the global optical transceiver market, according to Counterpoint Research. Its manufacturers, including Eoptolink and Zhongji Innolight, have become major suppliers to the global data center industry, including leading American hyperscalers.

The concentration of production gives Beijing-linked supply chains an important position in the infrastructure supporting the AI boom. It also makes replacing Chinese suppliers more complicated than imposing restrictions on imports.

US companies Coherent and Lumentum produce competing optical technologies, but a report by the Foundation for American Innovation said they lack the scale needed to replace Chinese manufacturers.

That gap has resulted in a difficult policy choice for Washington. Restricting Chinese suppliers could reduce potential security vulnerabilities, but the domestic industry may not yet have sufficient production capacity to meet the requirements of American data center operators.

The problem is amplified by the sheer volume of equipment required. Some large data centers need millions of optical transceivers to connect their servers, routers, and switches. A disruption affecting even a portion of that supply could complicate construction schedules and delay the deployment of computing capacity.

For technology companies, the timing is especially sensitive. They are investing heavily in AI infrastructure, with major spending commitments already made on processors, buildings, electricity and networking equipment. A shortage of one relatively small component could prevent much larger investments from generating revenue.

The dispute also highlights the difference between reducing dependence on Chinese technology and achieving supply-chain independence. US manufacturers may be able to compete in the market, but expanding production requires time, capital, and sufficient manufacturing capacity. An import ban introduced before domestic suppliers can scale could produce a gap that American companies would struggle to fill immediately.

The Information Technology Industry Council has formally opposed the proposed restriction. In an August 13 letter to the Federal Communications Commission, the trade group urged the regulator not to add optical transceivers to a trade blacklist, warning of potential disruptions to data center deployment and US AI leadership.

The FCC, which oversees the US telecommunications industry, is working on the proposed ban.

Washington Considers a Narrower Restriction

A possible compromise is emerging around the technical capabilities of the equipment targeted by the restrictions.

Morgan Stanley said in an October client note that the administration was considering prohibiting Chinese optical transceivers capable of handling 3.2 terabits of data per second. Production of equipment at that performance level is not expected to ramp up until 2028, with widespread installation projected for 2029.

Two sources said the 3.2-terabit threshold was under consideration by the FCC, although the regulator has not publicly addressed the issue.

A restriction focused on future, higher-capacity products could give American manufacturers time to expand production without immediately disrupting existing data center projects. It could also limit the immediate impact on US technology companies and reduce the risk of provoking a broader confrontation with Beijing.

However, the approach would not eliminate the underlying security concerns. Chinese suppliers would retain a significant position in lower-capacity equipment, while US officials would still have to assess the risks associated with foreign-made components operating inside sensitive infrastructure.

The House Select Committee on China, led by Republican John Moolenaar, has argued for a tougher approach. Following the Reuters report, the committee said Chinese military-linked companies should not be supplying equipment used to connect America's data centers.

"A Pentagon-listed Chinese military company, including Zhongji Innolight, should not be wiring America's data centers," the committee said in a social media post, urging the FCC to keep China-linked optical transceivers out of US networks.

Zhongji Innolight was added to the Pentagon's list of Chinese military-backed companies.

In September, a bipartisan group of US lawmakers introduced legislation seeking to prevent the federal government from using Chinese-made optical transceivers in sensitive government systems. The proposal suggests that congressional pressure for restrictions may continue even if the FCC adopts a narrower approach for commercial data centers.

Beijing has rejected Washington's position, accusing the US of using national security concerns to suppress Chinese companies.

"The U.S. overstretching the concept of national security and abusing state power to unjustifiably suppress Chinese companies," the Chinese embassy in Washington said in a statement.

It added that China would continue to protect the lawful rights and interests of its companies.

The dispute comes as the US AI infrastructure industry faces growing scrutiny over electricity consumption, water use and the local impact of data center construction. Technology companies are under pressure to expand capacity while addressing public concerns about the resources required to operate these facilities.

A shortage of optical transceivers would add another constraint to an already complicated expansion programme. The challenge it introduces for the Trump administration is to reduce exposure to Chinese technology without creating supply disruptions that delay American AI projects.