The Trouble With Trump's Deal With Nvidia And AMD: Its An Export Tax

Forbes

5 days ago

Two of the nation's most prominent chipmakers have agreed to pay the US government 15 percent of their revenues from the sale of artificial intelligence chips to China. In effect, the firms will be paying an export tax, though neither they nor the administration describe it this way. One reason why: Such a levy appears to be unconstitutional.
Whatever it is called, this arrangement may prove bad for the economy, for national security, and even for many of the president's own priorities.
The Backstory
In April, the Administration banned sales to China of Nvidia's H20 chip and Advanced Micro Devices' (AMD) MI301 chip. While these are not the most sophisticated AI chips the companies make, they are advanced enough that national security experts raised concerns about US firms selling them to China.
In July, the Administration reversed course and announced it would approve the sales but delayed issuing the necessary export licenses. On August 6, Nvidia's CEO and President Trump agreed to the 15 percent payment. Two days later, the Commerce Department approved the licenses.
At an August 11 news conference, Trump recounted his talks with the corporate leader: 'I said, 'If I'm going to do that, I want you to pay us something. So I said, 'Listen, I want 20 percent if I'm going to approve this for you, for the country.'' Trump eventually agreed to a 15 percent payment.
Conflicting Goals
As with Trump's import taxes, these export levies come as he tries to achieve multiple, conflicting goals. He wants:
A Constitutional Problem
Like Trump's recent tariff agreements with Japan and European Union, few details accompanied this arrangement. How exactly will it be structured? What guardrails will be put in place to limit avoidance and evasion?
Neither the companies nor the Administration is calling this a tax, for at least two possible reasons.
First, raising taxes on US businesses is a bad look for an Administration that wants to be seen as cutting corporate taxes.
Second, and perhaps most important, export taxes are explicitly prohibited by the US Constitution. Article I says, 'No Tax or Duty shall be laid on Articles exported from any State.'
Trump and the firms may be trying to avoid that ban by implying the payments are voluntary. But if the firms could not get export licenses without agreeing to the payments, their optionality is questionable.
Problems With An Export Tax
Developing countries often impose export taxes on low-value goods, such as agricultural products. But they create well-known problems.
Export taxes are economically inefficient since they encourage firms to produce and sell goods not subject to the export levy. Understanding the impact of these levies is challenging because Trump is imposing them in a complex policy environment for chipmakers, filled with carrots and sticks.
President Biden curbed semiconductor sales to China. During his Administration, Congress also passed the CHIPS Act that provided $52 billion in subsidies and tax credits for chips made in the US.
Trump has vowed to repeal that law. However, the just-passed 2025 budget bill that he backed includes new and expanded subsidies for US chipmakers.
Trump also threatened to withhold CHIPS Act subsidies and impose 100 percent tariffs on imports of certain chips, then backed off when manufacturers promised to produce more semiconductors in the US.
Trump has made no secret of his desire to greatly expand government's ability and his personal authority to manage investment decisions normally made by business. This goes well beyond broad policy initiatives to encourage domestic manufacturing. For example, the Administration reportedly is considering acquiring a stake in another chipmaker, Intel and Trump says he'll personally control a share of foreign investment in the US.
The export tax will be difficult to collect. Chip smuggling already is a serious problem. This tax is likely to increase the practice.
And without guardrails, what will prevent US producers from selling to a middleman who can resell to China? For example, firms avoided paying 2018 tariffs on goods from China by first shipping them to Vietnam and then to the US. The same can happen in reverse with export taxes.
The levy will create additional incentives for China to find other markets or, more likely, produce domestic versions of AI chips.
The Administration seems inclined to frame its arrangement with Nvidia and AMD as the US becoming a sort-of business partner with private companies. But that won't avoid other problems.
The government would share upside profit with no downside risk, an unusual business relationship at best. It could make policy decisions that benefit its partner, perhaps to the detriment of competitors. And it could attempt to influence business decisions, a practice unlikely to result in the most efficient use of a firm's capital.
Finally, levies such as this create serious potential for corruption. If government can pick and choose what products and what producers are subject to an export tax, there is nothing to prevent a firm from using political influence to gain an exception that is unavailable to its competitors.
This export tax by any name is a poor idea. It will generate relatively little revenue, fail to protect US security interests, and ultimately make US chipmakers less competitive in world markets.