In June 2023, rumors swirled online in China that Microsoft Research Asia would be rapidly shuttering its presence in China and relocating to Vancouver. Such a move would have made sense given intensifying U.S.-China tensions and heightened stakes of a global Artificial Intelligence (AI) race. It would have been a natural moment for Microsoft, an American company, to choose sides.
But the rumors proved false. Microsoft stayed put and remains deeply invested in China’s AI ecosystem today. Job postings from as recent as October 2025 bear this out. As documented extensively in a recent report, Microsoft’s entanglements with state-linked institutions in China are not new. They reflect a long-standing pattern of engagement that has repeatedly created security risks for the United States.
Microsoft is a global player. The company’s products – whether AI, cloud storage, or operating systems – know no borders. That’s just the reality of “Big Tech” in this day and age. Giants like Microsoft might argue that this stance, including an embrace of the Chinese market, is necessary to win the AI race; that they need a broad, ever-growing, and global user base to support critical investments into next-generation infrastructure, data, and technology.
But the point of winning the AI race should be to strengthen U.S. prosperity, values, and national security. Embracing the Chinese market in order to win the AI fight is to defeat that fundamental purpose from the start.
China has its own designs. Xi Jinping is overseeing a massive effort to modernize China’s military and upgrade the country’s economic productivity – in a zero-sum fashion. Xi and comrades in the CCP are not playing for short-term profits or “win-win” outcomes. China wants to overtake the United States, to claim not just regional but global hegemony.
That reality should be obvious in the security realm. Microsoft is, after all, a giant in U.S. federal government and Department of War contracting. The company’s U.S. government revenues are projected to be in the mid-to-high single-digit billions per year. But even in supporting U.S. national security customers, Microsoft’s ties to China have been blinded. ProPublica, over the past year, uncovered egregious security vulnerabilities that Microsoft ushered into U.S. defense IT systems through its “digital escorts” program. That program involved Microsoft employees overseeing China-based engineers managing work on Department of War systems. Secretary of War Pete Hegseth has since made clear that “the program was designed to comply with contracting rules, but it exposed the department to unacceptable risk … If you’re thinking America first and common sense, this doesn’t pass either of those tests.”
Microsoft outsourcing sensitive work to China shouldn’t come as a surprise. The company has consistently traded security in favor of short-term market interests in China. Take, for example, Microsoft’s Azure China cloud, operated by 21Vianet under the reach of Chinese government oversight and Beijing’s National Security law. It has allowed the Chinese market and a variety of state-linked entities to access advanced AI models developed in the United States. That contemporary example is consistent with the past precedent of offerings necessary for accessing the Chinese market. Since 2003, for example, Microsoft has voluntarily shared Windows and Office source code with the Chinese government. In doing so, Microsoft has granted Beijing visibility into the software that underpins the U.S. federal government’s IT infrastructure.
The digital escorts fiasco is simply the latest – and perhaps most egregious – example of complicity with China. Unfortunately, it seems unlikely that this will be the last. Microsoft seems just as fixated on the promise of the boons of the Chinese market today as it was in 1992 when the company opened its first office in Beijing. And those guiding strategy at Microsoft are likely only to see more temptation in the Chinese market as AI adoption picks up pace, across Chinese society and industry.
But Microsoft’s posture is becoming untenable. U.S.-China tensions will ultimately force companies to choose sides. China’s expanding legal regime, which compels data sharing and tightens localization rules, will soon make the U.S. and Chinese markets fundamentally incompatible. As a Microsoft Global Vice President based in China, Zhang Qi, has said, “In the AI era, the competition will no longer be about manpower, but about computing power, electricity, energy, and chips.”
Microsoft is positioned to be an important player in that competition between the United States and China. It should pick a side.