China’s AI Ambitions: A Global Race for Supremacy

What is AI and Why the Race for AI Supremacy?

The term Artificial Intelligence (AI) is used liberally today, placing it at the risk of losing its meaning. AI has become a fixture in media discourse, often used by policymakers aiming to sound cutting-edge and tech experts assessing our socio-political and economic landscape. Amid this noise, it is worth recalling what AI truly is. The Organization of Economic Cooperation and Development defines AI as “a machine-based system that can, for a given set of human-defined objectives, make predictions, recommendations, or decisions influencing real or virtual environments” (OECD, 2019). There are countless examples of AI’s applications in our world today, from recommendations based on a user’s search history on a food delivery app to autonomous weapons systems.

Consequently, nations globally are racing to develop the most advanced AI systems to gain an advantage over others. Viewing AI’s development as a zero-sum game, this approach risks exacerbating the already rising tensions between the world’s powers. The United States and China are vying for leadership in the global AI race, their rivalry mirroring broader competition for technological supremacy. The following article will analyze China’s integration of AI in international trade and industry from the above-mentioned strategic lens, focusing on its leadership, effects on supply chains, competition with the U.S., and future opportunities and challenges.

China’s AI Strategy and Regulatory Framework

China’s AI development, supported by a government-backed policy ecosystem, enables it to integrate advanced technologies in industries critical to international trade, such as manufacturing and finance, enhancing its export competitiveness. Beijing’s regulatory support includes tax incentives and subsidies for manufacturing firms in its high-tech industries. For instance, China’s state council issued its “Next Generation Artificial Intelligence Plan” in 2017 to become a ‘world-leading’ AI power by 2025 and the primary centre for AI innovation by 2030. This has had both direct and indirect consequences for China’s trade, bolstering growth in technology as well as other sectors.

For example, Chinese facial-recognition AI technology is a major contributor to its tech exports, enabling it to trade the technology with 83 countries (Beraja et al., 2024). This compares to the United States’ 57 partner countries in this field, highlighting China’s comparative advantage. Zhang and Deng (2023) further assert that the use of AI, especially in high-tech industries, has significantly boosted Chinese firms’ export value and productivity. Thus, AI’s integration into the Chinese industry has produced numerous positive externalities, particularly in terms of boosting export productivity.

Integration of AI in Chinese Supply Chains

Chinese businesses have recognized the advantages of integrating AI in their supply chains, optimizing supplier management, demand forecasting, and production planning, which boosts their efficiency and competitiveness. Guo (2024) describes the predictive capabilities of AI-driven demand forecasting algorithms as a “crystal ball” for firms. This has especially benefited Chinese tech giants, including Huawei and Tencent, and fueled the creation of large tech hubs in Beijing and Shenzhen. Moreover, AI’s integration in Chinese supply chains extends beyond the tech industry and into textiles and manufacturing.

In her article, Guo cites the case of Jade Textiles in Zhejiang, which has seen a 30% increase in production efficiency and a 25% reduction in production defects through AI integration. This has provided a boost to its economy not only by making Chinese firms more productive but also by attracting foreign investment. In 2021, for instance, China attracted $17 billion of foreign investment for its AI start-ups, making it one of the largest destinations for private investment funding (Shen et al., 2022). However, Chinese firms may benefit from an asymmetric structural advantage in the AI integration race due to China’s centralized governance model.

US-China Rivalry and Geopolitical Implications of the AI Race

China’s AI-fueled growth has prompted reactions from its competitors, mainly the United States, heightening tensions in their wider tech rivalry. This competition has elevated the geopolitical stakes in China-US relations, creating uncertainties for businesses and investors globally. The United States has attempted to curtail Beijing’s AI-fueled growth by limiting its access to Western technologies such as microchips and semiconductors, which China relies on to manufacture its advanced AI chips. Crucially, while China has an advantage in AI use and programming, the United States dominates the semiconductor and chip industries, controlling 90% of global manufacturing.

Export controls on these critical technologies enable the United States to dampen China’s AI progress by leveraging China’s reliance on foreign chips. Nvidia’s A100 and H100 chips and Dutch firm ASML’s lithography machines are examples of technologies the West has restricted exports of to China (Tan, 2024). These measures have had a noticeable negative impact on Beijing’s semiconductor output, resulting in a fall of 17% in 2023. Consequently, the AI chip competition is likely to further escalate tensions between Beijing and Washington in the near future.

Looking Ahead: the Opportunities and Challenges of AI Integration

While China faces significant challenges from Western competition and chip import restrictions, it also presents promising growth opportunities in the AI sector. An AI-friendly regulatory framework is China’s primary advantage, enabling its comprehensive integration in its trade and industry. Beijing has consistently legislated AI-promoting regulations, including guiding opinions and management provisions, bridging gaps between its legal framework and AI advancements. This has informed the creation of special economic zones for AI development, such as Shenzhen and Beijing.

Shenzhen is China’s first city-level AI regulation, categorizing AI development in the city as “low-risk,” streamlining the application of AI research and development. These supportive regulations have boosted investor confidence, positioning Shenzhen to attract $108 billion in AI development funding by 2025 (Wu, 2022). However, China’s AI advantage entails significant surveillance and privacy trade-offs, posing socio-political challenges, particularly for marginalized communities. Furthermore, the race to integrate AI may exacerbate existing geopolitical tensions, especially given China’s ambitions to incorporate Taiwan and its chip-making capability into its mainland territory.

Conclusion

In conclusion, China’s strategic integration of AI into its trade and industry has provided it with a competitive edge in the global AI race. By leveraging a robust regulatory ecosystem and harnessing AI to drive efficiencies in sectors such as manufacturing, finance, and technology, China has placed itself at the vanguard of AI development. However, this advantage comes with complex socio-political challenges, particularly concerning privacy and surveillance. Additionally, the intense tech rivalry with the United States over critical technologies, including semiconductors, risks exacerbating existing geopolitical tensions.

As China advances its AI capabilities, the challenges of balancing growth, ethical governance, and international stability will require careful navigation by all stakeholders. Looking ahead, international collaboration and governance frameworks could offer pathways to mitigate rising tensions and promote ethical AI development.

Ishan Jasuja is a Fellow at the Sixteenth Council.