New US-China tensions will slow down AI development

In general, both sides do not have too much trump cards on hand

12.Jul.23 5:31 PM
By Abigail Richards
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New US-China tensions will slow down AI development

The tensions between China and the US have been escalating for some time, now also extending to the field of artificial intelligence (AI). This has economic consequences not only for the two superpowers themselves but also for other regions, such as Europe. In our investment strategy, we consider a scenario where high inflation persists for an extended period.

Visit without concrete agreements

US Treasury Secretary Janet Yellen paid a visit to China over the weekend. The purpose of her trip was to alleviate the tensions between the two superpowers. At the end of the visit, Yellen emphasized that the two countries have significant shared interests, but no concrete agreements were announced.

Slowing down AI development

The US is doing everything to hinder China's military advancements, particularly in the field of artificial intelligence (AI). Washington is blocking the export of advanced chips to China, seeking to restrict China's use of American cloud services, and considering imposing investment restrictions on certain Chinese companies.

In response, China announced export restrictions on critical raw materials such as germanium and gallium, which are necessary for chip manufacturing.

For now, China is at a disadvantage in this conflict. The Chinese economy is slowly recovering from the COVID period and still grappling with a struggling real estate sector. The country cannot afford these additional trade and investment restrictions. On the other hand, the US economy is performing better, is a global leader in AI, and can afford more leeway.

Where does the decoupling end?

Nevertheless, this gradual decoupling is not without risks for the US either. Disruption of trade with China can ultimately hinder global inflation control. While the sectors involved represent a small portion of total trade, who knows where the decoupling will end?

In 2018, former President Trump initiated a trade war with China, and many of the export restrictions and tariffs imposed at that time are still in effect. It is easier to implement such measures than to dismantle them.

This decoupling and its associated effects also impact other countries. Chinese export restrictions on critical raw materials also apply to Europe and Japan. Europe, in particular, heavily depends on China in this regard. The export restrictions are causing headaches in Brussels as well. New suppliers will have to be found, and supply chains will need to be reshuffled. This doesn't make goods cheaper.

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