Politics Beats the Market in Trump’s Pay-for-Play Chip Scheme

The U.S. government has restricted Nvidia’s chip sales to China since Oct. 2022. (Annabelle Chih/Bloomberg)

About the author: Christopher Tang is a distinguished professor at the UCLA Anderson School of Management.

The Trump administration’s recent reversal of export restrictions on certain Nvidia and AMD’s AI chips to China marks a major shift in U.S. policy and has raised legal concerns. But the deeper risks are political and economic—and warrant scrutiny.

His administration decided in July to re-allow Nvidia and AMD to sell their H20 and MI308 chips to China—conditional on a 15% revenue remittance to the U.S. government. Export controls on AI chips were initially implemented by the Biden administration in 2022 to curb China’s access to advanced processors critical for artificial intelligence and supercomputing, citing national security concerns.

But Nvidia’s H20 chip was specifically designed for the Chinese market. Even though it is reportedly incapable of training large AI models, the H20 chip is effective for inference tasks—allowing AI systems to respond to queries based on pre-trained data. Chinese engineers have leveraged the H20 chips for applications using open-source models such as DeepSeek and Alibaba’s Qwen, which are increasingly popular in China’s AI ecosystem. Trump continued these controls—until recently.

Critics, such as Rep. Don Bacon (R., Neb.) and Liza Tobin, who served as China director at the National Security Council under the first Trump and Biden administrations, have argued that the sale of these chips, even under revenue-sharing constraints, undermines the strategic intent of the original export controls. Rep. Raja Krishnamoorthi (D., Ill.) likened it to gambling with national security.

The Trump administration’s reversal appears motivated by revenue generation. Bernstein Research estimates that Nvidia could sell approximately 1.5 million H20 chips in China in 2025, generating $23 billion in revenue; a 15% cut would yield more than $3 billion for the U.S. government. It aligns with Trump’s broader strategy of using tariffs and trade deals to bolster government income.

However, this revenue-centric approach raises concerns about the erosion of principled policymaking. The arrangement resembles a “pay-to-play” scheme, where export licenses are granted in exchange for financial contributions.

Legal scholars argue that this violates the Export Clause of the U.S. Constitution, which prohibits taxes or duties on exports. Moreover, the Export Controls Reform Act of 2018 —signed by Trump himself—explicitly forbids charging exporters for licenses.

The deal with Nvidia and AMD may also reflect a broader diplomatic calculus. China dominates the global supply chain for rare earth materials, which are essential for military technologies like guided missiles, fighter jets, and radar systems. These materials are also used in manufacturing key components for smartphones and electric vehicles—including batteries, touch screens, and camera lenses.

The U.S. is investing in domestic mining and processing of rare earth minerals, such as at the Mountain Pass mine in California, which is the only rare-earth mining and processing facility in the U.S. But it remains heavily reliant on Chinese exports. By easing chip restrictions, the Trump administration may be signaling goodwill in hopes of securing a stable supply of rare earths.

This strategic compromise, however, risks emboldening China. If Beijing perceives U.S. export controls as negotiable or monetizable, it may be less inclined to make concessions in other areas of trade or security. The precedent set by this deal could weaken the credibility of future U.S. restrictions, making it harder to enforce technology bans or secure allied cooperation.

And then there are the corporate interests. The role of Nvidia CEO Jensen Huang in shaping this policy shift cannot be overlooked. Huang reportedly argued that restricting Nvidia’s access to the Chinese market would inadvertently benefit domestic Chinese competitors like Huawei. He emphasized that China’s AI development is deeply intertwined with Nvidia’s chips and software ecosystem, suggesting that continued engagement would allow the U.S. to retain some influence over China’s technological trajectory. Nvidia also maintains a research center in Shanghai.

While Huang’s argument has merit, it reveals the tension between corporate interests and national security. Nvidia’s dependence on the Chinese market and talent pool may compromise its ability to align with U.S. strategic interests.

Investors may view all of this as a slippery slope, in which political considerations begin overriding free-market principles, potentially undermining confidence in U.S. financial markets.

Ultimately, the reversal of export restrictions on Nvidia and AMD’s AI chips to China reflects a transactional approach to national security—one that prioritizes revenue over resilience.

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