Microsoft is pressing US President Donald Trump's administration to abandon a proposed restriction on Chinese-made technology used in artificial intelligence data centres, warning that the move could slow America's race to dominate the global AI industry.
The dispute centres on optical transceivers, specialised components that transmit data through fibre-optic cables and connect servers, routers and switches inside large data centres.
The Federal Communications Commission (FCC) is considering restrictions on imports of new models of Chinese-made optical transceivers over national security concerns, including fears that the equipment could be exploited to steal information, install malicious software or disrupt data centre operations.
Microsoft and other technology companies argue that restricting the components before alternative suppliers can meet demand would create serious supply shortages and delay infrastructure projects.
Microsoft representatives met officials from the White House Office of Science and Technology Policy and the National Security Council in September to explain the potential supply-chain consequences of the proposed restrictions.
The company has 35 data centres under construction in the United States and another 134 planned, according to infrastructure market intelligence firm Cleanview.
The technology giant is concerned that a shortage of optical components could leave expensive AI processors sitting idle because they cannot be connected into functioning computing systems.
Some large data centres require millions of optical transceivers to connect their servers and networking equipment.
John Miller, general counsel of the Information Technology Industry Council, which represents technology companies, warned that the proposed restriction could significantly slow data centre construction.
The supply-chain challenge is particularly pronounced because Chinese manufacturers account for approximately two-thirds of the global optical transceiver market, according to Counterpoint Research.
Companies such as Eoptolink and Zhongji Innolight are major suppliers to global technology firms, including American cloud infrastructure operators.
US manufacturers Coherent and Lumentum produce competing technology but currently lack the production capacity to replace Chinese suppliers at the scale required, according to research cited by Reuters.
The industry has therefore urged the FCC not to add optical transceivers to its trade restrictions list without ensuring sufficient alternative supply.
One option under consideration is to restrict Chinese transceivers capable of handling 3.2 terabits of data per second. Their production is not expected to scale significantly until 2028, while widespread installation is anticipated in 2029.
Such a threshold could give American manufacturers time to expand capacity before restrictions take effect.
The debate reflects a growing conflict between Washington's national security objectives and the technology industry's demand for affordable, reliable components as investment in AI infrastructure accelerates.
The proposed restriction has not yet been finalised. A bipartisan group of US lawmakers has separately introduced legislation seeking to prevent Chinese-made optical transceivers from being installed in sensitive federal government systems.
For Microsoft and other cloud providers, the outcome could influence the cost and speed of building the infrastructure needed to support the next generation of AI services.
