Shares of Nvidia (NVDA -4.86%) are falling on Monday. The company's stock lost 4.5% as of noon ET, but was down as much as 5.3% earlier in the day. The drop comes as the S&P 500 (^GSPC -0.05%) slipped 0.3% and the Nasdaq Composite (^IXIC -0.31%) lost 0.4%.

Circumventing controls

A report released Sunday by The Wall Street Journal revealed that despite strict U.S. export restrictions, Nvidia's latest chips are finding their way into China.

Since 2022, the U.S. has sought to keep the best artificial intelligence (AI)-powering chips from entering the Chinese market. Nvidia, the undisputed market leader, is barred from selling the latest versions of its chips to Chinese companies.

However, a gray market has emerged, allowing Chinese firms to purchase servers filled with Nvidia's latest Blackwell chips. The chips are sold to legitimate partners in the region and are then being routed into the Chinese companies, unbeknownst to Nvidia. The company said it would "investigate every report of possible diversion and take appropriate action."

More action may be required

The Trump administration is currently weighing its options in escalating trade tensions with China. In contrast to Canada and Mexico, China did not make overt concessions after the initial round of tariffs were imposed earlier this year. It's entirely possible that the administration intends to raise tariffs already, but news that export controls on critical AI-enabling Nvidia chips are being circumvented could lead the administration to up the ante. Additional controls or tariffs could have a direct effect on Nvidia's bottom line.