With two actions and two proposals, President Donald Trump has signaled his desire to cut a trade deal with America’s biggest geopolitical rival.
In a controversial deal announced Monday, just before the United States and China were to raise import tariffs on each other’s goods, President Trump said he would allow two U.S. computer chipmakers to sell advanced chips to China in return for a federal cut of those China sales. He also said that he would extend the current trade talks deadline for 90 days.
In addition to these steps, President Trump proposed that one of those companies, Nvidia, could sell a lower-quality version of its most advanced chip to China, the No. 1 buyer of American artificial-intelligence chips.
Why We Wrote This
As Beijing faces off against the United States over tariffs, President Donald Trump’s latest trade maneuvers indicate his need to work out a deal – and the leverage that China retains through its control of rare-earth minerals.
Mr. Trump also floated the idea that China should quadruple its level of soybean purchases from the U.S.
These unilateral moves by the U.S. suggest that, in China, President Trump may have met his match.
On paper, the U.S. should have an advantage. Because of the trade imbalance, China has more to lose from a trade war than the U.S.
But in practice, Beijing has stood up to Mr. Trump’s trade aggression. Its secret weapon: rare-earth minerals that are used in everything from smartphones and electric vehicle batteries to military applications. China controls some 70% of the global supply and an even higher share of rare-earth refining, and America needs these minerals.
China’s “choke hold on rare earths and critical minerals … really demonstrated that it has enormous leverage,” says Mary Gallagher, a China expert at the University of Notre Dame. “And I think the Trump administration vastly overestimated its leverage vis-à-vis China.”
Mr. Trump’s efforts to wrangle an improved trade relationship with China, through the new AI chips deal and extended negotiating period, underscore the extent to which he views the country as a near-equal competitor to the U.S.
An unusual and unpopular deal
The computer chip deal is, by all accounts, unusual, if not unprecedented. The president has now granted export licenses to two companies, Nvidia and AMD, to resume their sales of chips to China, which his administration had earlier stopped. In return, the two companies have agreed to give 15% of their China sales to the U.S. government.
The deal was roundly condemned in foreign policy circles as a significant departure from U.S. national security policy norms, given the sensitivity of the semiconductor and chip technologies. Both the Republican chairman and Democratic ranking member of the House Select Committee on China condemned the move.
“We should not set a precedent that incentivizes the Government to grant licenses to sell China technology that will enhance its AI capabilities,” Republican Rep. John Moolenaar of Michigan, who is the committee chair, said in a statement.
The unusual deal also drew criticism for its commercial implications. Forcing individual companies to pay 15% of their China sales to the federal government after allowing them to make those sales is “extortion,” said one writer for the conservative National Review.
But the controversy diverts attention from the fact that President Trump is making conciliatory moves toward China, without any public concessions from China. The U.S. advantage in the negotiations was supposed to be its cutting-edge technology, especially powerful computer chips that run AI chatbots. But there is real debate about whether the export controls were doing more good by slowing Chinese AI advances – or more harm by denying U.S. chipmakers sales to the huge Chinese markets, says Dr. Gallagher at Notre Dame.
Awaiting final terms of a truce
After a brief punch-counterpunch battle in the spring, when President Trump kept raising tariffs and China kept retaliating with its own tariffs, reaching 145% and 125%, respectively, both sides backed off in May.
Since then, trade relations have remained relatively stable, with U.S. tariffs at 30% and China’s at 10%. The three-month extension of the deadline for talks suggests that the president wants to reach a longer-term arrangement that will avoid another trade war.
What that deal might look like is anybody’s guess. President Trump may want to knock down some of the subtle, nontariff barriers that China and other nations use to keep foreign products out. Or he might be looking to reduce the trade imbalance by convincing China to buy more American goods. His proposal that China boost its purchases of U.S. soybeans suggests that reducing the imbalance remains an important goal.
The irony is that Mr. Trump’s trade war with China during his first term caused trouble for soybean farmers in the first place. Before, Beijing was their best customer; now, China mostly buys elsewhere, and American farmers have struggled to find alternative markets to make up for the loss in sales.
Officially, Beijing has complained about U.S. AI chips, warning of potential security flaws. According to Bloomberg, it has urged companies to buy domestic chips instead. But the push to catch up to the U.S. in AI is luring Chinese companies to use the faster U.S. chips.
Free trade, unfettered by government activity, is the optimal method for economic growth, says Pau Pujolas, a professor of economics at McMaster University in Ontario. In a world of tariffs, the U.S. should still do better than China, if the trade moves are well thought out, well computed, and done by the book.
“But in my opinion, they are doing it not by the book, so I am fairly sure that they are going to lose with all this.”
