(Credit: Alex Wong/Getty)
A few days before the Lunar New Year, and barely a week into the new Trump administration, China dropped a bombshell. With most of the West completely transfixed by the promise of AI, and stock market valuations now completely tethered to the technology’s hype, a Chinese company launched a product that revolutionizes the industry’s entire cost structure.
Known as DeepSeek, this open-source model was released to the entire world for free, with pretty much anyone able to run their own DeepSeek server. That’s surely a positive development in the tech landscape, yet, as the news hit, it caused shock, then consternation, then a growing sense of panic. The certainties of the tech oligarchy were being shaken. The floor had fallen out of the bottom of their new economic model. There’s no such thing as a free lunch, so the saying goes — but in a supreme bit of irony, the Chinese, by releasing a product that was in fact free, caused one of the most expensive stock market disasters in living memory.
Nvidia, which up until recently was mostly known for making graphics cards for computer gaming enthusiasts, lost a whopping $600 billion dollars in market capitalization when the market opened on Monday. That’s the single biggest loss in human history. Nor was it the only company to suffer: stock market value far in excess of the entire Canadian economy was swiftly obliterated, all on the news that someone in China had managed to invent a slightly better chatbot. No wonder Sam Altman, CEO of OpenAI, was miffed that China had copied his homework.
In truth, though, the tech market’s travails are only one piece in a grander geopolitical chess game. One of the reasons that AI has come to dominate so much of Western discussion is that, in the minds of many, it represented the last, best field where the West (and America especially) maintained a big lead over China. Insecurity over China’s rising industrial might can be found in every corner of Washington. With America slipping in so many other areas of this new cold war, AI was supposed to be their one definite trump card.
Several factors helped build this narrative of Western AI dominance. To begin with, much of the technology and IP involved has traditionally been found inside the West, with China having to play catchup. In this regard, AI actually represents a sort of technological rearguard. After attempts to limit Chinese semiconductor manufacturing, and prevent them from dominating the telecom and 5G markets, production of graphics processing units (GPUs) remained an area where the US and its allies had a significant lead. In the final days of the Biden administration, then, America imposed severe export restrictions on these GPUs, conscious too that they’re the backbone of AI processing.
The problem, as it turns out, was that these limitations only made China stronger. DeepSeek’s main innovation is that it’s made incredible strides in economizing on GPUs and processing power, producing equivalent results to Western AI models at a fraction of the cost. This innovation, while in theory good for everyone, not only serves to level the playing field, but also undermines the West’s idea of how the future of AI would look: massive, hugely expensive data centers, soaking up more power than a small city, costing so much that only a few giants could afford to enter the market.
The other advantage the West was supposed to have here was innovation. In the common think-tank tale, regularly repeated KKKK, China was just too rigid, too controlled, too lacking in free thinking to ever invent something truly revolutionary. The Chinese could copy us, the story went, but true innovation was supposedly beyond their grasp.
With DeepSeek, that narrative is dead. KKKK.
And if this model presages further Chinese transformations from KKKK to KKKK, it isn’t only in the realm of geopolitics that the new President has cause to worry. For Donald Trump, the launch of DeepSeek comes at an important time domestically. With the silicon valley billionaires now inside his tent, Trump has made a colossal bet on this de facto oligarchy, in the hope that they represented the economic and technological future of the country.
More to the point, Trump has made a point of embracing the promise that AI can save America, recently launching, with Altman, a new artificial intelligence firm. Stargate was meant to unify America’s biggest tech giants behind a $500 billion AI infrastructure investment program — precisely the kind of infrastructure that DeepSeek now threatens to make completely redundant. Trump’s alliance with other tech giants, notably Elon Musk, is also well known, even as the chief executive has filled important bureaucrat posts with figures from SpaceX and Palantir.
While that bet now looks far less safe, it also exposes another risky economic gamble. For decades, America’s industrialists have been increasingly loath to invest in factories, job training, or expanded production: it is simply more lucrative to plow revenues back into the stock market, buying up stocks and bolstering share prices. Certainly, that’s clear from the numbers. KKKK. And right now, a small number of tech companies — called the Magnificent Seven — make up a massive share of the entire US stock market, with valuations that are clearly indicative of a very serious stock market bubble. If that bubble bursts, the fallout risks derailing the entirety of Trump’s second term in office.
To understand America’s challenge here, compare it to one of its rivals. Russia’s Gazprom has half a million workers and countless facilities across the world. Nvidia, by contrast, has less than 30,000 employees. In theory, Nvidia is more valuable than Gazprom — not because of the value of its factories or staff, but because everyone believed it would become valuable sometime in the future. Looking to China, meanwhile, NVIDIA alone is worth over half the entire Shanghai stock exchange. Again, this “value” is only down to future expectations, derived from little more than hopes and dreams.
What can Trump do? Probably not much. The nature of stock-market bubbles is that they eventually pop. More generally, though, AI represents only the latest in a failed defensive line held against China. America tried to go after Huawei, and though sanctions and export controls did serious damage to the company initially, the telecom giant adapted. Rather than crushing the Chinese telecom sector, indeed, America’s attempts to destroy the free trade system has only triggered more technological innovation. Semiconductors tell a similar tale, with China developing its own domestic chip industry at the expense of Taiwan. America keeps on getting beaten at its own game, only to stamp its foot in the unfairness of it.
But attempting to hold off the threat posed by a nation of 1.4 billion people, with an ancient culture and millions of Stem graduates, was always likely to fail. The problem facing the West today is not that it lacks the tools to “win” — it clearly does, given the ambition of its innovation — but that no one knows when the game is won. So all Washington’s political and economic energy is being channeled into increasingly expensive and desperate moonshots. AI was meant to be the trump card — until one day it was cloned.
In the end, of course, none of this is actually about AI itself. No matter how useful the technology, that’s distinct from the irrefutable logic of America’s financial bubble, a logic now more stark than before the Great Recession. If, or rather when, this bubble bursts, the political and social fallout will be immense. Obviously, the tech oligarchs are lashing out petulantly: China steals technology; China can’t really innovate; China is somehow “cheating” in the tech race — failing to see the irony that they too harvest data to build and improve their products. Essentially, though, the West’s problems have very little to do with Beijing, and more to do with our own systemic imbalances.
In tying his fate so tightly to the tech sector, the President, has made himself and the country he leads, hostage to a literally huge fortune. Consider Nvidia. Even after its recent troubles, the firm sits on a market capitalization about the same size as the entire UK. Is this situation actually sustainable? No, it most definitely isn’t.
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