Has Trump’s "Chip for Rare Earth" strategy backfired?

Investing.com -- President Trump’s attempt to use U.S. chip concessions to gain leverage over China’s rare earth exports has stumbled, with Beijing moving decisively to block the intended trade-off.

The initiative to lift the ban on downgraded U.S. AI chips, such as Nvidia’s H20, in hopes of securing looser rare earth export controls “has backfired, as China has already banned H20 purchases ‘until further notice’,” Jefferies analysts said in a note.

“The ‘chip for rare earth’ strategy failed,” they stressed.

Media reports and industry checks show that Chinese companies have stopped procurement of H20 and other downgraded U.S. AI chips, and Nvidia (NASDAQ:NVDA) has suspended related packaging and server production.

As a result, “in the near term, NVDA will not be able to generate any AI chip revenue from China, likely until the U.S. and China come to an agreement on trade,” Jefferies team led by Edison Lee wrote.

The breakdown highlights Beijing’s strategic priorities. Rather than seeking access to more advanced U.S. AI chips, China appears more focused on securing advanced wafer fab equipment (WFE) needed to scale domestic semiconductor production.

Analysts believe that “the simple reason is that China’s long-term goal is to make its own AI chips, thereby eliminating dependence on U.S. tech.”

They added that U.S. restrictions on WFE—particularly in critical areas such as lithography and metrology—remain a major obstacle for China’s foundries.

While complete relaxation of controls on WFE is seen as highly unlikely, partial adjustments—particularly if Washington eases pressure on allies Japan and the Netherlands to enforce restrictions—could prove a “deal maker.”

Such a move would also have significant market implications. With China already accounting for about 40% of global WFE capital expenditures, Jefferies argued that an easing of restrictions “would likely reverse the market’s bearish outlook for global WFE demand in 2026.”

“We believe this could be the most significant unexpected event for investors who, like us, are generally cautious on WFE demand in the second half of 2025 and 2026,” the analysts said.

Trade data underscores China’s reliance on semiconductors. In 2024, the country’s semiconductor imports totaled $387 billion, surpassing even its oil imports at $323 billion. Meanwhile, WFE imports were only $34 billion.

Despite efforts to build a self-sufficient chip ecosystem, China’s semi trade deficit rose 6% year-on-year to $227 billion.

For now, Trump’s gambit has left Nvidia shut out of the Chinese AI chip market and underscored the leverage China holds with rare earths. At the same time, the standoff reinforces Beijing’s determination to reduce its dependence on U.S. technology by prioritizing tools over chips.