AI Sovereignty is AI Decoupling

It might be a small world after all...

The most glaring feature of the post-World War II order was the free flow of money and capital across the borders of the free world increased both production and consumption to pull more people out of poverty than during human history. When the USSR collapsed, the experiment was scaled to the entire planet. By the turn of the century, communication was so open that I once got an email from London at may desk in Memphis faster than one coming across the trading floor. So of course the world has decided to put an end to all of that.

For the US, it was an expensive success, and at the end of the Cold War, Washington should have reassessed the plan… but you know how people get when they’re drunk on a win. Since then the creation of the EU, China’s rise from sweatshop backwater to economic powerhouse and America’s nagging case of imperial exhaustion have upset the equilibrium where rivals maintained an order because it was preferable to no order at all. What should have been a restructuring is starting to look like a collapse. The world will find a new equilibrium, sure, but it will be a bitch getting there. Which raises the crucial question: just what do we think is coming next?

Last month, I got another email from London detailing the insider scoop on the Dutch government taking control of the Chinese-owned chipmaker Nexperia, and ousting its chief executive, a Chinese national. It was a bold move, and maybe inevitable. After years of tension between The Hague and Beijing over restrictions on ASML’s exports of advanced semiconductor manufacturing equipment to China, Beijing tightened restrictions on the export of rare earths elements and magnets which threatened Europe’s auto and, crucially, defense industries. Claiming “serious governance short comings”, the Dutch government moved to stop Nexperia’s parent company - Shanghai-based WindTech Technologies – from moving chip manufacturing and related intellectual property to shell companies in China. On the other end, Washington was warning The Hague that it would extend US export restrictions on chips to Nexperia unless they got rid of its Chinese CEO. The Dutch government said that Washington had nothing to do with the move - but did it anyway.

The episode is worth mentioning for what it tells us about where a new equilibrium might settle in the next economic order.

Buzzword or Sea-Change?

Founders and CEOs who became billionaires on globalization of Big Tech have now pivoted. Che-Chai Wei of TMSC is not the first to mention “the rising emergence of sovereign AI” in quarterly earnings reports. "AI Sovereignty" is not just the newest incomprehensible buzzword for the tech set – this is a sea change for the global economy.

Equilibrium between rivals require trust: not the “I love you, man” sort, but a Machiavellian faith that both parties know they are better off with the existing order in tact. The nature ad scale of AI makes this equilibrium tricky; governments clearly don’t trust the technology that they can’t live without - from chips, the models, the infrastructure – and they sure as hell don’t trust the foreign kit that makes it happen. The emerging trend is for governments to train homebuilt AI models on their own data, with their own chips under their own laws – essentially to own as much of the data ecosystem because as they can.

There are plenty of sensible reasons for the this, but it is also a major reversal of how technical innovation actually works – a cross-current of ideas from randomized, outside sources. In his book The Rational Optimist,  Matt Ridley called this “when ideas have sex.” The beauty of the post-War order and its open communication was that it scaled the phenomenon of innovation globally. So how will the economy metabolizes this reversal?

Nationalism and protectionism are thumping free, open markets everywhere. Broadly speaking, a decoupled world is going to constrict supply and make everything more expensive. The good news being that the US has the advantage of being a geographic lotto ticket that’s hard to reach. So the coming order will be a drag, but not a catastrophic one. Rare earths aren’t really that rare, they’re just really hard to process, and tend to create ecological disasters when you do. That’s another domestic equilibrium we’ll need to find, but that’s a different story.

The less visible danger is along the lines of compatible technology. Having come off a big win by flooding the world with Huawei’s telecom kit, China is setting out to win the AI infrastructure race. This isn’t so much a military thing, yet applying the technology to America’s digital id does fall under the PLA’s “cognitive warfare” doctrine. Beijing’s more overt scheme is to create a system export licenses on critical inputs that China dominates in order to control who gets to produce what, and to whom they get to sell it. Pretty shady for a bunch of communists, but there we are.

Beijing’s ability to co-opt the private economy to its ends is a big advantage, but its current economic model isn’t. To maintain its dominant market share, China’s manufacturers and exporters are being squeezed into deep discounts to maintain marketshare in the face of rising tariffs. Which explains China’s playing hardball with Big Tech critical minerals and trying to close the loop on chip production: it knows that its export-led economy is on borrowed time and needs to pivot to another model – rare earths and processed critical minerals licensing. To do that, China must secure its own chokepoints with the commodities it needs to secure dominance while it has the leverage to do so. Beijing’s near 30 year tussle with Australia’s Rio Tinto mining giant has securing is a 75% stake in Gambia’s Simandou complex: the world’s largest mining project in history sitting on a 3 billion tonne deposit of iron ore.

And the Winner is…

The US still leads the world in semiconductor, models and infrastructure, but China is catching up fast. It’s homegrown Cambricon chipmakers just recorded a 14x spike in revenue since Washington limited access to high-end US chips. It’s also worth noting Beijing’s reaction: To double down on the restrictions and prohibit Chinese firms from buying US chips altogether, further eroding US leverage.

Nvidia’s Jensen Huang shouldn’t be too blue about this, the PLA is still buying heaps of restricted Nvidia chips on the black market…because in World War III, quality will count. Huang recently made headlines by suggesting that China will win the AI race thanks to its looser regulation on tech. In an attempting to sound not quite so self-dealing, he also mentioned China’s cheaper energy and lighter bureaucracy on its energy build-out. Here the man has a cleaner point. China’s astonishing renewable energy build-out (at least partially funded by Europe’s green energy transition) gives it an advantage in a growing constraint on AI data centers, the energy to keep them running.

The Internet went universal because it was built on a standard created by a single market that dominated the rest. The AI revolution – by nature and timing – won’t benefit from universal protocol standards. It seems counter-intuitive that after a generation of the internet democratizing information and communication the way it did, that it will be AI that fractures data, models and infrastructure into incompatible systems. Or that Chinese undermining and US over-reach have indeed unraveled the “liberal-world order.”

But both might lead to an equilibrium that is more stable. More expensive, yes, less dynamic, certainly…but more stable.