George Magnus
On the day of Donald Trump’s presidential inauguration, a small Chinese tech company founded in only 2023, DeepSeek, shocked the AI industry, rattled US financial markets, and created a truly global stir. Notwithstanding controversies about cost and intellectual property surrounding what is still a genuine and significant accomplishment, it is fair to say that DeepSeek’s commoditisation of AI is exactly how transformational technology happens. Innovation and competition drive down costs, leading to the technology becoming embedded in the whole economy, not just the narrower, innovative parts.
These AI industry implications are centre-stage for now. It has also been argued that DeepSeek’s model represents not so much a ‘Sputnik’ moment as a case of hyperbole, and that the consequences of the AI arms race will throw up many surprises. Not the least of these is China’s persistent dependency on semiconductor technology developed by the US and its close allies, heightened by tariffs and export controls, which Trump’s administration looks set to tighten. American tech companies will want to exploit this in developing artificial general intelligence themselves.
Wider economic and geopolitical considerations are equally important. DeepSeek is, after all, part of China’s dichotomous economic state. On the one hand, China has many dynamic, modern sectors. Several firms and industries are in the vanguard of scientific and technological development in clean energy, electric vehicles, and batteries, as well as other so-called strategic emerging industries in which China seeks to dominate and become self-reliant. These include industrial machinery, semiconductors and computing, artificial intelligence and robotics, life-science industries, biotechnology, and pharmaceuticals. These industries, which, in Xi Jinping’s Marxist framing are called ‘new productive forces’, accounted for about 13 per cent of GDP in 2022. Beijing’s heavy emphasis on industrial policy and exports, and its uniquely large state-assistance programmes aim to push this proportion up.
At the same time, over 80 per cent of China’s economy is in the doldrums. The lion’s share of this part of the economy, roughly two fifths, comprises real estate and infrastructure, both of which feature over-expansion, excess supply, shrinking demand as the working age population falls, and severe financial problems among heavily indebted local and provincial governments. In this part of China’s economy, the principal features are slowing economic growth, stagnating productivity, and the misallocation and inefficient use of capital, as well as weak household income, consumer demand and employment.
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