Key Takeaways
- US export controls on advanced semiconductors have spurred China to invest heavily in domestic AI and chip design, accelerating innovations in the sector.
- China’s AI expansion is underpinned by vast state funding, a deep talent pool, and a permissive regulatory environment favouring rapid deployment.
- Cooperation between the US and China could yield shared benefits across AI governance, economic growth, and technological resilience.
- Persistent rivalry risks fragmenting innovation, inflating costs, and intensifying security threats, particularly in military applications of AI.
- For investors, diversification and alignment with neutral markets may hedge against geopolitical volatility in the AI sector.
In the escalating technological rivalry between the United States and China, American foreign policy measures, particularly export controls and sanctions on advanced semiconductors, have inadvertently spurred Beijing to accelerate its artificial intelligence (AI) ambitions. This dynamic raises critical questions for global investors: could a shift towards cooperation mitigate risks and unlock mutual benefits in AI development, or will continued confrontation lead to fragmented innovation landscapes that harm long-term economic growth?
The Catalyst of US Policies on China’s AI Surge
US restrictions on technology exports, aimed at curbing China’s access to cutting-edge chips essential for AI training, have prompted a robust response from Beijing. Since the imposition of stringent controls in 2022, China has ramped up domestic investments in semiconductor manufacturing and AI research. For instance, state-backed initiatives have poured billions into homegrown alternatives, fostering breakthroughs in chip design that challenge Western dominance. This acceleration is not merely reactive; it reflects a strategic pivot towards self-reliance, with implications for global supply chains and innovation ecosystems.
Analysts at the Brookings Institution have noted in reports dated as recent as June 2025 that such policies could backfire, pushing China to develop independent AI capabilities faster than anticipated. Historical parallels abound: during the Cold War, similar embargoes on technology transfers to the Soviet Union accelerated indigenous advancements, albeit at high costs. Today, China’s AI sector benefits from a vast talent pool and data resources, enabling rapid iteration. A 2024 study in Scientific Reports highlighted that collaborative US-China AI research yields more impactful results, suggesting that isolation may diminish overall progress.
Key Drivers of China’s Expedited AI Development
Several factors underpin this surge:
- Investment Scale: China’s government has committed over $150 billion to AI and related technologies by 2025, dwarfing many Western counterparts in sheer volume. This funding supports entities like Huawei and Baidu in creating AI models that rival those from OpenAI or Google.
- Talent Mobilisation: With millions of STEM graduates annually, China is building a formidable AI workforce. Policies incentivise repatriation of overseas talent, bolstering domestic expertise.
- Regulatory Environment: Beijing’s approach emphasises rapid deployment, contrasting with the US focus on ethical guidelines, allowing quicker scaling of applications in areas like surveillance and autonomous systems.
These elements, catalysed by US policies, position China to potentially lead in applied AI, particularly in military and industrial contexts. A CNAS report from 2023 warned of the risks in military AI competition, a concern that persists into 2025.
The Case for US-China Cooperation in AI
Amid this rivalry, calls for cooperation are gaining traction among policymakers and industry leaders. Collaborative frameworks could address shared challenges like AI safety, ethical standards, and governance, potentially averting a bifurcated global tech order. For investors, such cooperation might stabilise markets by reducing geopolitical risks that have roiled tech stocks in recent years.
A Foreign Affairs article from April 2025 argues that the US could maintain its edge by engaging allies in coordinated tech policies while exploring bilateral dialogues with China. Recent developments, such as China’s proposal for a global AI cooperation organisation in July 2025, as reported by Reuters, signal Beijing’s openness to multilateral efforts. This contrasts with US strategies that tie AI exports to political alignments, potentially isolating Washington from emerging markets.
Potential Benefits and Risks
Cooperation could yield tangible gains:
| Aspect | Benefits of Cooperation | Risks of Continued Rivalry |
|---|---|---|
| Economic | Shared R&D could lower costs and accelerate innovation, boosting global GDP by an estimated 1–2% annually per analyst models from McKinsey (2024 projections). | Supply chain disruptions, as seen in 2022–2023 chip shortages, could inflate prices and slow growth. |
| Security | Joint standards on AI in warfare might prevent escalatory misuse, drawing from Brookings forecasts for 2025–2030. | Arms race dynamics could heighten cyber threats, with sentiment from cybersecurity firms like CrowdStrike indicating rising tensions. |
| Innovation | Cross-border collaborations have historically produced breakthroughs, per Nature‘s 2024 analysis of joint papers. | Fragmentation may lead to redundant efforts, wasting resources and delaying advancements. |
However, hurdles remain. Geopolitical mistrust, exemplified by ongoing trade disputes, complicates dialogue. A TechPolicy.Press piece from September 2024 explores how overcoming these barriers could reshape AI governance, emphasising the need for pragmatic engagement.
Investor Implications and Forecasts
For institutional investors, this theme illuminates opportunities in diversified AI portfolios. Companies bridging US-China divides, such as those in neutral hubs like Singapore or Europe, may thrive. Analyst-led forecasts from firms like Goldman Sachs (as of mid-2025) suggest that a cooperative thaw could lift AI-related equities by 15–20% over the next two years, contingent on policy shifts.
Sentiment from verified sources, including Morningstar reports dated August 2025, remains cautiously optimistic on cooperation’s potential to mitigate volatility. Conversely, persistent rivalry might favour defence-oriented tech firms, with models projecting 10–15% outperformance in such scenarios.
In summary, while US policies have undeniably hastened China’s AI prowess, fostering cooperation could transform competition into a catalyst for shared prosperity. Investors should monitor diplomatic signals closely, as the trajectory of US-China relations will profoundly shape the AI landscape.
References
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- Nature. (2024). Joint research output analysis in AI collaboration. https://www.nature.com/articles/s41598-024-79863-5
- TechPolicy.Press. (2024, September). From competition to cooperation: Can US-China engagement overcome geopolitical barriers in AI governance? https://www.techpolicy.press/from-competition-to-cooperation-can-uschina-engagement-overcome-geopolitical-barriers-in-ai-governance/
- Centre for a New American Security. (2023). U.S.-China competition and military AI. https://www.cnas.org/publications/reports/u-s-china-competition-and-military-ai
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- Reuters. (2025, July 26). China proposes new global AI cooperation organisation. https://www.reuters.com/world/china/china-proposes-new-global-ai-cooperation-organisation-2025-07-26/
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