For once, Donald Trump was not guilty of hyperbole. The arrival of a budget Chinese chatbot called DeepSeek to rival ChatGPT really is a wake-up call. It is a wake-up call to the US tech giants. It is a wake-up call to Wall Street. It is a wake-up call to any developed nation keen to enter the AI race.
All of that is true even if it turns out that DeepSeek is not all it is cracked up to be. If it is the real deal then the Chinese have created a premium-quality AI product that is available freely and at a tiny cost. That’s quite something. In 1957, the US was stunned when the Soviet Union became the first country to launch an artificial satellite. It has been equally taken aback by the arrival of DeepSeek. Truly this would be a Sputnik moment.
To be sure, there are those who question whether a Chinese startup can manage to achieve on a shoestring what US tech companies have been forced to spend billions of dollars on. Their doubts may prove to be correct, but that doesn’t affect the bigger picture: China’s threat to western technological dominance is real. The rush to win the AI race will be just as competitive – and perhaps even more so – than the space race of the 1950s and 60s. China carries a bigger economic clout than the Soviet Union ever did.
In the early days of its rapid economic development, China was seen as the place where US and European companies could outsource production. Labour was cheap and moving manufacturing offshore held out the promise of higher profits. The idea was that all the really advanced stuff – the product design, the research and development – would be done in the west. It would only be the assembly work that would end up in Guangdong. The creativity needed to come up with new ideas and new products would be stifled by China’s Marxist-Leninist system.
That has proved to be too complacent a view. In 2023, China filed more patents than the rest of the world put together. Chinese universities are turning out on average more than 6,000 PhDs in Stem (science, technology, engineering and maths) a month – more than double the number in the US. As DeepSeek shows, China has a growing cadre of very bright people quite capable of thinking outside the box when they are allowed to do so, as has certainly been the case with the development of AI, lithium-ion batteries and electric vehicles.
The US is aware of the threat to its hegemony, and the determination to curb China’s economic strength is a bipartisan issue in Washington. The tariffs on Chinese imports into the US imposed by Trump in his first term were kept in place – and added to – by Joe Biden when he became president. A week before leaving office, Biden imposed fresh restrictions on the export of US-developed computer chips to prevent countries such as China gaining access to advanced technology. Biden’s Inflation Reduction Act offered subsidies to encourage climate-friendly products to be made in the US.
In some sectors it may be too late. China is already the biggest exporter of electric vehicles, prompting protective tariffs from the US and the EU. The lithium-ion batteries being produced by Chinese factories cost a seventh per kWh of what they did 10 years ago. It should not have come as a surprise to the US and other western nations that a global division of labour, in which they did all the low-cost grunt work, would have only limited appeal to the Chinese. Instead, China has made a concerted attempt to keep producing shoes, toys and TV sets while also moving into higher-tech sectors.
The strategy may have its limitations. There is an argument that China’s economic model will eventually become incompatible with its political model, and that the demands for democracy will force the Communist party to become less repressive. Nor is China entirely free of economic problems. Many of its state-owned companies operate at a loss. The bubble in the property market has well and truly burst.
Even so, it is clear that the battle for AI supremacy is hotting up. Trump thinks that some competition from China is no bad thing for the US tech sector, and he is right. Share values of tech stocks on Wall Street took a tumble after the DeepSeek news broke because it called into question whether the massive investment in US companies was worth it, but the availability of lower-cost models will speed up the use of AI. While there are clearly risks in this – for privacy, security and for jobs – there are also potential benefits.
Keir Starmer says he wants Britain to be an “AI superpower” and achieving that goal should become easier as the cost of development comes down. But talk is cheap. China’s hi-tech sectors have not just magically appeared, and it is no accident that it has cornered the market in budget EVs. Like other east Asian countries before it, China took a strategic view of the industries in which it wanted to be competitive, invested heavily to get them established, protected them when they were in their infancy, and waited patiently for the results. There has been no dogged belief in market forces, nor has there been an aversion to picking winners. The contrast to the UK could not be more stark.
Larry Elliott is a Guardian columnist
