The Geopolitics of AI

China’s latest AI model, and why it’s rattling folks across Silicon Valley and Washington, DC

🔎 The Story

Back in September, OpenAI dropped the world's first-ever 'reasoning’ AI chatbot back, called 'o1'. The Silicon Valley-based pioneer spent vast amounts of cash and time to release this AI bot that can ‘reason’ its way through more complex problems. And notwithstanding OpenAI’s name and founding philosophy, it again kept its coding secret.

But, a relatively unknown Chinese startup might have achieved what many thought was impossible: matching America’s best artificial intelligence systems at a fraction of the cost.

Just last week, China-based AI startup DeepSeek dropped its own rival called ‘R1’, which apparently took only 60 days to build, less than $6M to train according to the New York Times (<10% what US firms spend), and now costs ~98% less than US rivals to run. Oh, and the entire code is open-source, basically now free online…

If you take DeepSeek at its word, then China has managed to put a major player in AI on the map without access to top chips from US companies like Nvidia — at least those released in the past two years. Joe Biden’s administration placed strict export controls on these chips, so if the company has had access, it may not be forthright about that.

The revelation about DeepSeek has come as Donald Trump tries to spur AI infrastructure in the United States, heralding the $500 billion Stargate project as a major achievement on the road to ‘Making America Great Again’. But China’s new open-source model might have just changed the landscape when many thought the United States was running away with the race.

In a speech Monday evening, Trump called news of the DeepSeek model a “positive” due to its cheap cost but said American industry needs to compete. “The release of DeepSeek, AI from a Chinese company should be a wakeup call for our industries that we need to be laser-focused on competing to win.”

That’s all rattled not only Silicon Valley but also Wall Street (they’re always rattled…) and Washington, DC (arguably, so are they when it comes to China). So let's take a quick tour:

🌉 Why Silicon Valley is rattled?

First, DeepSeek basically just released a legit Ferrari at the price of a Honda—building off existing US open-source models, it used sweet software tricks to radically reduce AI's reliance on expensive hardware (chips). So, who's going to pay for a US-based OpenAI Ferrari now that there’s a China-based equivalent for a tiny fraction of the cost?

Second, there are now real questions around Silicon Valley’s moat strategy—i.e., relying on sheer cost and complexity to keep your competitors at bay. Sure, you can try to keep the 'how' a secret, but once you announce the 'what' (AI reasoning, in this case), the DeepSeek story suggests your moat might only last days. That might mean...

Third, by lowering the cost barrier to entry, DeepSeek has now opened the field for countless smaller firms to start driving more AI-based disruption across more industries and at a faster pace. That potentially means Silicon Valley’s reward leans less on any moat and more on the 'final mile' of connecting the underlying AI to end users.

But fourth, this also raises the prospect of a China-based firm now setting the standards for how AI progresses — DeepSeek’s open-source model is twice as big as Meta’s, potentially entrenching its role in AI's future by making it twice as attractive for developers.

And that takes us to...

🇺🇸 Why DC is rattled

First, and to give some context: chips are needed in every aspect of our daily lives, more so than we would understand. Although there are different varieties of microchips with varying processing power and use cases, we use them in everything from daily appliances such as washing machines and TVs to consumer electronics like smartphones and electric cars. Not to mention everything related to advanced weapons like precision-guided missiles and fighter jets and communication equipment. Anyway, let’s get back to the subject:

Maybe US export controls simply don't work — when Biden first started tightening US rules in 2022, DeepSeek didn't even exist. Now, even with shrinking access to the top US tech, DeepSeek has still closed an AI gap in days.

Second, even factoring in DeepSeek’s pre-existing stash of chips from its CEO's hedge fund, he's been open about the fact that the US cutting off China's access to chips just motivated him to cut China's dependence on them.

Third, this might also prompt a Washington, DC rethink around the role of tech monopolies — a top US official long argued they harm US competitiveness by reducing innovation, but that puts Trump in a bind: truly helping his Silicon Valley allies might mean cutting them loose. (Note, that the use of US sanctions as a political tool, were made prominent under the Obama administration). The worry is their overuse might prompt rivals and even allies to reduce any dependency on a US abusing its dominant position.

And finally, this will all revive US fears about China-based tech, a la TikTok: ask DeepSeek about Taiwan and you'll get Communist Party propaganda (see picture below). Ask it about Xi Jinping, and it'll refuse to even acknowledge his existence. You can even watch the bot type out answers, then suddenly hit delete once it realises it's crossed a Party line. If you ask her about Winny the Poo, my guess is it won’t answer either. Mainly, since any mention of Xi Jinping’s resemblance to Winny is now banned in China.

Sure, someone will eventually just tweak DeepSeek’s open-source code to ditch this kind of censorship. But it's still a reminder of what's ultimately at stake here: AI is arguably a race to shape what humans see, think, feel, and believe.

🇨🇳 An Outlier in China's Innovation Landscape?

China’s rise as a technological and innovation powerhouse in the last decade will unnerve some and inspire others. a reminder, that China has managed to lift more than 800 million people out of poverty in the past 30 years by sheer grit and hard work.

Any fears of China displacing the US as the prominent economic global power should be viewed with a healthy dose of pragmatism. After all, what difference does it make it to the wine maker in Bordeaux or the factory worker in Istanbul, which country takes the trophy for most advanced economy? The goal here is not to let innovation be weaponized by the Chinese Communist Party.

Back in November, U.S. President Joe Biden and Chinese President Xi Jinping agreed that human beings and not artificial intelligence should make decisions over the use of nuclear weapons (phew 😮‍💨)

The two leaders affirmed the need to maintain human control over the decision to use nuclear weapons. They also stressed the need to consider carefully the potential risks and develop AI technology in the military field in a prudent and responsible manner. Well, at least that. We can all breath a small sigh of relief… (for now)

I've seen many recent takes that frame DeepSeek as evidence that China's innovation system is thriving. If we count any innovation that originates from a Chinese firm as part of China's innovation system, then I suppose this is true.

However, I think this framing is a misreading of the situation. Unlike the rise of China's electric vehicles, batteries, or even solar PV, DeepSeek is neither a state-led project nor a direct beneficiary of China’s AI-focused industrial policies. In this way, it’s an outlier, not a representative case, within China’s innovation ecosystem. The fact that the company was self-funded by a former hedge fund manager and emerged from the periphery of China’s tech landscape rather than from the country’s established AI giants like Baidu or Tencent is a testament to this point.

Asking how China’s innovation system produced DeepSeek is, therefore, the wrong question. DeepSeek’s success arose not because of China’s innovation system but, in many ways, in spite of it. The debate around Chinese innovation often flip-flops between two starkly opposing views: China is doomed versus China is the next technology superpower. This back and forth, which we often see play out in popular media, can make understanding Chinese innovation utterly opaque to the casual reader. As I see it, this divide is about a fundamental disagreement on the source of China’s growth—whether it relies on technology transfer from advanced economies or thrives on its indigenous ability to innovate and upgrade.

This is where DeepSeek diverges from the traditional technology transfer model that has long defined China's tech sector. Instead of relying on foreign-trained experts or international R&D networks, DeepSeek’s exclusive use of local talent signifies that China now has the indigenous capacity to innovate in this domain. Much like its advancements in solar PV manufacturing, batteries, and electric vehicles, DeepSeek symbolizes a critical turning point in tech/AI: China is no longer merely playing catch-up but is now competing on equal footing with the leading innovators in the West.

🇪🇺 Why Europe is (quietly) rattled

👁️⃤ Europe’s AI Blind Spot: Security and Competitiveness Over Consumer Innovation

Many argue that Europe is lagging behind China and the US in AI development (and they’re right), but there’s one domain where Europe consistently leads: regulation. Last week, I mentioned Ursula von der Leyen’s efforts to push for a more uniform and competitive AI regulatory framework—(in a continent where 27 stakeholders must reach consensus, it hardly ever is)

But Europe’s approach to AI is fundamentally different from that of the US and China. Rather than viewing AI through the lens of consumer innovation—as a transformative tool to improve services, and user experience—Europe sees it almost exclusively through the prism of national security and economic competitiveness.

Louis XIV’s famous quote “L’Etat, c’est moi” is still very much applied today in Europe.

⚖️ Europe’s Role in the Global AI Geopolitical Order

Europe has been highly critical of China’s state-driven AI model, often citing its use of AI for mass surveillance, censorship, and population control. Yet, under the latest European AI Act provisions, similar tools could soon be deployed across the EU.

Initially, the law placed strict bans on AI-powered surveillance in public spaces, but intense lobbying—particularly from France—has led to new exceptions (Particularly for the 2024 Paris Olympics)

• France, for example, could circumvent European restrictions by outsourcing AI-enabled satellite surveillance to China, purchasing commercial imagery under the guise of “private sector data acquisition.” (highly unlikely but still possible)

You could see how problematic (if not paradoxal) embeding foreign AI technologies into Europe’s own security framework could be, especially once we factor in foreign data centers and consumer data transfers outside the EU.

Unlike the US, which builds AI around commercialization and consumer adoption, —as well as what we call PPP (Private-Public-Partnership)— and China, which uses AI as a strategic pillar for state-driven economic dominance, Europe views AI largely through a defensive economic lens: maintaining competitiveness without falling behind US Big Tech or Chinese AI supremacy.

This pressure is directly linked to France’s ambitions to establish itself as an AI hub, housing startups like Mistral AI, which (tries to) competes with OpenAI and Google DeepMind — and now DeepSeek. But Europe’s approach is reactive rather than proactive—it prioritizes regulatory loopholes for industry survival.

In the geopolitics of AI, Europe is neither the leader nor the innovator—it is the regulator and the reluctant competitor. Europe has defined the rules, but it has yet to play the game.

What we know is the increased use of unfetered AI will only deepen geopolitical fractures, and strategic mistrust (even, and maybe especially, between allies)

🧐 What to make of all this

There are so many ways to think about all of this. For example, the sheer shock of DeepSeek’s latest developments has spawned theories, like maybe DeepSeek has secretly and illegally used a huge stash of America’s top Nvidia chips. But the beauty of open-source coding is that an independent lab can now just check DeepSeek’s low-chip claims itself, though most US competitors are now too busy adopting DeepSeek’s advancements.

Another way to think about this story is as a modern Sputnik moment for the US — ie, a shock to its complacency around any technological, economic, or military edge, while also highlighting China's perceived advantages (huge datasets, state support, and an open-source tech culture). So maybe the US will now just redouble its own AI efforts.

But here’s a third way to think about this: DeepSeek licensed its impressive gains via America’s MIT, published its findings on US-based academic platforms, and did so in English no less, after building on US open-source coding, which all still sits atop a hardware tripod that’s still dominated by the US and its partners: chip design (US), manufacturing (Taiwan), and extreme ultraviolet lithography (the Netherlands).

Also worth noting:

• DeepSeek's CEO reportedly just told China's Premier Li that US chip controls are still a bottleneck for China’s AI progress.

• OpenAI accuses DeepSeek of IP misuse. The US company says it’s seen evidence that China-based rival DeepSeek got unauthorised access to OpenAI models to train its own low-cost open-source rival that’s taken the world by storm. The release of DeepSeek’s R1 reasoning model triggered a huge crash in US tech stocks on Monday, though markets have since steadied.

Meme of the day: