The Trump administration has a difficult balancing act ahead of it with regards to regulating the sale of U.S.-developed AI chips to China.
On the one hand, it wants to keep artificial intelligence capabilities out of the hands of China's government, especially its military and intelligence branches. On the other hand, it doesn't want to hurt American companies by cutting off access to major sales markets.
President Donald Trump has said he wants the U.S. to dominate the AI race. He recently showed his support for the big-budget AI effort Project Stargate, a venture of OpenAI, Oracle and SoftBank. Plus, he issued an executive order aimed at "enhancing America's global AI dominance."
Nvidia Chief Executive Jensen Huang met with Trump at the White House on Friday. Likely items on the agenda included export restrictions and tariffs impacting the sale of Nvidia's leading-edge AI processors.
"The meeting is the latest sign of Trump's growing commitment to the rapidly evolving sphere of AI technology," Bloomberg reported.
In a statement, an Nvidia spokesperson said, "We appreciated the opportunity to meet with President Trump and discuss semiconductors and AI policy. Jensen and the president discussed the importance of strengthening U.S. technology and AI leadership."
'AI War' With China Has Begun
Meanwhile, China is advancing its own semiconductor manufacturing capabilities and finding technological workarounds for its AI systems. That was evidenced by the hullabaloo created by Chinese AI lab DeepSeek.
On Jan. 20, DeepSeek released an AI model that rivals U.S. models but was made at a much lower cost with less powerful AI chips.
Alexandr Wang, CEO of Scale AI, described the artificial intelligence race between the U.S. and China as an "AI war" in an interview with CNBC on Jan. 23. Scale AI provides training data to key artificial intelligence players including OpenAI, Alphabet-owned Google and Meta Platforms.
Wang said he believes China has significantly more Nvidia H100 GPUs (graphics processing units) than people may think, despite U.S. export controls.
Other Chinese firms are making promising AI models, including Alibaba and Moonshot AI's Kimi.
Carrot-And-Stick Diplomacy
Trump's diplomacy with China will likely involve both carrot-and-stick approaches, Robert Maire, president of consulting firm Semiconductor Advisors, told Investor's Business Daily.
In addition to export controls on advanced semiconductors and chipmaking gear, the Trump administration can use trade tariffs and a decision on whether Chinese social media service TikTok can operate in the U.S. as part of negotiations.
Meanwhile, Trump is hoping to reshore semiconductor production to the U.S. using incentives and deterrents. He started the incentive approach in his first term in the White House with the CHIPS Act. Among deterrents, Trump has promoted the use of tariffs on foreign-made goods, including semiconductors, such as those made by Nvidia.
But tariffs are a tricky tactic.
"I don't know how you balance not hurting U.S. industries involved with AI with an import tax," Maire said. "It would be shooting ourselves in the foot to increase the cost of AI-related data centers and devices, as opposed to what it might cost in Europe and other countries, let alone China."
China Ramps Up AI Spending
Ironically, it was U.S. trade restrictions on selling advanced chips to China that spurred that country's domestic semiconductor industry.
"They're spending a pile of money to catch up and likely pass the U.S.," Maire said. "Right now, by my math, they are spending about six times as much as the U.S. on semiconductor-making equipment."
Trade restrictions have not stopped China's development of AI technologies. Setting even lower performance thresholds for AI chips that could be sold to China likely would further stimulate its domestic chipmaking goals, Morgan Stanley analyst Joseph Moore said in a Jan. 28 report.
"China is going to be competitive in AI software and eventually hardware," Moore said.
U.S. trade restrictions on the sale of advanced chips to China have clearly not worked, Jefferies analyst Christopher Wood said in a Jan. 27 report.
"It highlights the self-defeating nature of the misguided efforts of Washington's national security establishment to block China's technological progress," Wood said. "If this starts to be understood by Donald Trump, it could lead to the relaxation of some of these controls, most particularly if that can be used as a bargaining chip as part of a broader deal with China."
More Curbs On AI Chips?
However, others on Capitol Hill are calling for further restrictions on the type and quantities of AI chips that can be sold into China. Last-minute actions by the Biden administration looked to close loopholes that may have allowed China to access AI chips using other countries as intermediaries.
Trump is set to begin a round of tariffs on goods imported from Canada and Mexico on Saturday. He has pledged tariffs on products made in China and Taiwan, but hasn't specified the timing.
On another front, Trump also will have to deal with China's desire to regain control of Taiwan, which it considers a runaway province. Taiwan Semiconductor Manufacturing, the world's largest chip foundry, would be the main prize if China were to take over Taiwan. TSMC makes the most advanced chips available today. Its customers include Nvidia, Apple, Broadcom, Qualcomm and many more.
Taiwan "is likely to be taken over by China within the next 10 years," Maire said. "I think the probability of that increases under Trump not decreases."
Maire noted Trump's lack of interest in protecting Ukraine from Russia and his past comments that Taiwan hasn't paid enough for U.S. protection.
China's negotiating playbook includes its exports of rare earth elements, which are necessary for a range of high-tech electronics, including defense gear.
Need To Boost U.S. Chipmaking
President Trump should focus on strategies to reinvigorate U.S. chipmaking capabilities, John Neuffer, chief executive of the Semiconductor Industry Association, said in a Jan. 14 set of policy recommendations for the Trump administration.
He noted that the U.S. share of global chipmaking capacity declined from 37% in 1990 to 10% by 2022.
"To be the world's economic, technology, and security leader, America must lead the world in semiconductors," Neuffer said.
Follow Patrick Seitz on X, formerly Twitter, at @IBD_PSeitz for more stories on consumer technology, software and semiconductor stocks.
