The magnitude of the geopolitical, technological and economic impact from the breakthrough Artificial Intelligence (AI) model the small Chinese firm DeepSeek released late last month was never a matter of conjecture. U.S. $1 trillion was wiped off the stock exchange in a single day on January 27, demolishing in a single stroke, as it were, current assumptions on the hefty investments and elaborate infrastructure that underlie AI innovation.
DeepSeek then beat OpenAI’s ChatGPT to record the maximum free app downloads on the U.S. iOS App Store. Its release has breathed fresh life into the intensifying competition for global dominance between the world’s two biggest economic and military superpowers.
The shock development, widely dubbed China’s ‘Sputnik moment,’ has caused consternation in Silicon Valley as to the likely threat to U.S. dominance in the high-tech and superconductor arena, as well as the effectiveness of Washington’s export curbs to contain Beijing’s AI ambitions.
The subject of export controls, perhaps, assumes urgency above all others, as an already hostile President Donald Trump seeks to further consolidate on the predecessor Biden administration’s aggressive policy stance vis-a-vis China. Of the torrent of clampdowns by Washington, portrayed by one commentator as “chip choke” and a war on China by others, arguably the most audacious was the Commerce Department’s October 2022 prohibition.
American citizens and companies were barred from exporting advanced computer chips to slow Chinese progress in AI and supercomputers with military applications. Washington took recourse to the far-reaching Foreign Direct Product Rule to ban U.S. and non-U.S. companies from providing targeted Chinese entities hardware and software sourced from supply chains that involved American technology.
In its twilight days, the Biden administration in December 2024 banned exports of advanced High Bandwidth Memory (HBM), a crucial component in AI chips. A provocative final measure unveiled on January 13 sought to grant select U.S. allies unlimited access to AI chips, while stipulating licensing requirements for others and clamping a blanket ban on access to the remaining countries.
The aim is to make it hard for China to use other countries to circumvent American restrictions. The flip side of Washington’s export restrictions is the huge impact on U.S. multinationals, as per a Reserve Bank of New York report. Conversely, several Chinese firms have been quick to replicate the resilience demonstrated by the country’s telecommunications group Huawei in the wake of the U.S. assault during President Trump’s first term in office.
President Xi Jinping has derided the various moves as an attempt to stymie China’s right to development; a definite red line. Four government-backed industry associations followed the President’s lead, urging companies to drop American chips that they labelled as no longer safe or reliable and diversify purchases from local producers or third parties.
Another stinging blow was the prohibition on exports to the U.S. of key minerals such as gallium and germanium, used in military communications and semiconductors, where the country enjoys global dominance. Such retaliation is said to especially hurt the likes of Intel, America’s early chipmaker, Nvidia and Qualcomm.
The breakthrough from DeepSeek, founded in 2023 by the hedge fund manager Liang Wenfeng, a high-tech outsider until the other day, has shone a light on the ineffectiveness of Washington’s expansive controls on chip exports. One of the three most striking features of its new R1 “reasoning” model is said to be its ability to distill the capabilities of larger models into smaller ones. Its Large Language Model (LLM) can even learn all by itself without human supervision.
The second stunning aspect is how DeepSeek has accomplished this feat at a fraction of the investments the likes of billionaire pioneers of OpenAI, Google’s DeepMind and Anthropic have poured into their own innovations. Finally, the real danger to competitors is DeepSeek’s singular focus on research and engineering and a propensity to share rather than protect any breakthrough for commercial gain.
It is hard to speculate on the real substance or shape of recent talk in the U.S. of stepping up export restrictions to protect its dominance in the wake of China’s successful efforts to mitigate the effects of U.S. high-tech restrictions. There has also been some debate on whether the Chinese firm’s aha moment has pushed the frontier and eventually turned the tables on the U.S.-China competition. It would, however, not be rash to suggest that this landmark will spur further innovation and, over time, ease the stranglehold of Wall Street oligarchs on the AI industry.
Indeed, Washington’s preoccupation with national security concerns may be both appropriate and legitimate, what with the increasing frequency of cyberattacks in many parts of the world. The sighting of a mysterious Chinese surveillance balloon in February 2023, which hovered over sensitive locations in Montana state housing nuclear weapons, ratcheted bilateral tensions between Washington and Beijing.
The incident that came close on the heels of then Secretary of State Antony Blinken’s meeting with President Xi had even prompted talk of the balloon being shot down by the U.S. fighter jets. The rest of the world cannot be held hostage to the lunacy that is the current clash between President Xi’s ‘Made in China 2025’ and President Trump’s ‘Make America Great Again’. The overwhelming majority of the world’s least developed and developing countries must make common cause to fight this global lurch towards unipolarity.
