How the EU Plans to Break Free from China—and Build Its Own AI Chip Future

At a Brussels summit on 18–19 June 2026, the 27 EU leaders gave von der Leyen a formal mandate to develop new tools to counter the effects of low-cost, heavily subsidised Chinese imports . The centrepiece is the diversification instrument.

Key provisions:

• The instrument is a mandatory framework designed to force companies to avoid excessive reliance on any one country for strategic inputs, with China as the primary target .
• The European Commission's chief trade negotiator, Maroš Šefčovič, stated that one proposal would require companies to shift supply chains if they receive more than 40% of stocks from a single source .
• Firms would need at least two or three sources, none from the same country .
• The instrument is part of a broader new trade defence toolbox, alongside potential sector-specific tariffs .
• It is still in development; exact compliance thresholds, enforcement mechanisms, and timelines will come in a Commission proposal later in 2026 .

Targeted sectors:
The priority sectors mirror the EU's most acute dependencies: critical raw materials (rare earths), semiconductors, batteries, solar panels, electric vehicles, steel, and defence-related supply chains .

Chips Act 2.0: The Semiconductor Hedge

The Chips Act 2.0 was proposed by the European Commission on 3 June 2026 as part of a "Tech Sovereignty Package" that also included a Cloud and AI Development Act . Its stated goals are to reduce strategic dependencies in semiconductors and support advanced chip production in the EU .

Among its key features:

• Introducing "Grand Challenges" to spur industrial development of chips of strategic importance, most notably AI chips .
• Stimulating demand for cutting-edge AI chips through a massive EU data centre buildout .
• A mandatory review clause by September 2026, under Article 40 of the original Chips Act framework .
• The Commission gains emergency powers to override semiconductor firms' commercial contracts during a shortage and compel them to prioritise EU crisis-critical orders .

The Nvidia Question: No Explicit Exclusion Clause

A recurring question is whether Chips Act 2.0 gives Brussels discretion to exclude Nvidia from EU AI projects. The available official sources do not contain a direct provision that would authorise an explicit Nvidia ban. However, the "Grand Challenges" mechanism is designed to support development of EU-made AI chips and reduce reliance on foreign suppliers . The broader policy direction — reducing strategic dependencies in advanced semiconductors — strongly implies that EU AI projects receiving public funding could prioritise European or allied chip suppliers over non-EU vendors like Nvidia. No explicit "Nvidia exclusion clause" appears in the publicly released text . This remains a point of active political debate.

The Geopolitical Pressures Driving the Dual Push

Four simultaneous pressures explain why the EU is acting now.

1. China's Rare Earth Export Restrictions

On 4 April 2025, China imposed export controls on seven rare earth elements (terbium, dysprosium, samarium, gadolinium, lutetium, scandium, yttrium) and permanent magnets used in defence, energy, and automotive sectors, citing national security . In October 2025, China expanded the controls to five more elements with stricter checks on semiconductor manufacturers . The second wave was suspended until November 2026 , but the European Central Bank warned these restrictions could cause "supply-driven output losses and higher inflation" in Europe . Chinese shipments of rare earth magnets dropped by approximately 75% in May 2025 following the first wave . The EU responded by accelerating critical raw materials partnerships and imposing its own export restrictions on rare earth magnet waste in early 2026 .

2. US AI Chip Export Controls

The United States has maintained and tightened controls on advanced AI chip exports to China since 2022–2023. This creates a cascading effect for the EU: it must both comply with US-led export regimes and build its own autonomous AI chip capacity so it is not caught between US export policy and Chinese supply chain leverage. The EU's AI Continent Action Plan explicitly aims to "achieve strategic autonomy in the design and production of AI semiconductors" .

3. The Record €360 Billion Trade Deficit

The EU recorded its largest-ever trade deficit of €360 billion in 2025, and for the first time every single member state ran a trade deficit with China . Von der Leyen called this a "real challenge" requiring a fundamental reset of the EU-China trade relationship .

4. Avoiding a Full Trade War

The EU's stated strategy is "de-risking, not decoupling" . The diversification instrument and Chips Act 2.0 are designed to reduce vulnerabilities without triggering a full-blown trade war with Beijing, which remains Europe's second-largest trading partner. The EU has also pursued diplomatic channels — von der Leyen raised overcapacity and reciprocity issues at the EU-China Summit in July 2025 and at the G7 in June 2026 — while simultaneously building defensive trade tools. French President Emmanuel Macron proposed a "European equivalent of Section 301," and Berlin signalled openness to new tools if "not targeted at specific recipients" .

What Comes Next

The diversification instrument is still a proposal in development. The Commission will produce a detailed legislative text later in 2026, which will face negotiations between member states and the European Parliament. Chips Act 2.0, proposed on 3 June 2026, is on a parallel track with final adoption targeted for Q2 2027 .

For businesses operating in Europe — especially those in critical raw materials, semiconductors, batteries, EVs, solar, steel, and defence — the message is clear: the era of single-country supply chains is ending. Companies should begin mapping their supplier concentration by country and preparing diversification strategies now, before the legal mandate arrives.