The release of the Chinese open-weight AI model Kimi K3 has compressed a year’s worth of unresolved AI policy debate into a single news cycle. On July 21, Treasury Secretary Scott Bessent threatened sanctions against Chinese labs found to have built their models on “theft,” reporting that the government is “finding watermarks of our U.S. large language models on many of the Chinese models.” The following day, White House science advisor Michael Kratsios clarified that the Chinese AI lab behind K3, Moonshot AI, had built a sophisticated platform to copy Anthropic’s Fable model while evading detection. Industry has been vocal, with Nvidia’s Jensen Huang declaring that American companies should “absolutely” use Chinese models that outcompete American counterparts on price, while investor Bill Gurley argued that treating open models as a danger runs afoul of free-market principles. China’s open-source AI models now account for the majority of global AI workloads. The debate has polarized Washington into two camps: one alarmed by security risks and theft of American intellectual property, favoring restrictions or bans on Chinese AI models; the other, championed by software engineers, warns of undue costs and maintains nothing untoward has happened. The Trump administration is walking a tightrope, supportive of open-source software while seeking to punish covert, industrial-scale extraction of American trade secrets. The article argues Washington should sanction Chinese AI labs engaged in industrial-scale fraud, not the underlying practice of “dist