Instead of an outright ban on open-source AI, the US administration is signaling a different strategy: cracking down on IP theft. Treasury Secretary Besant stated that if overseas models are found to be stealing from US companies, the government has the ability to sanction the companies behind them, effectively creating a barrier without banning the technology itself.

Leading AI labs, despite intense competition, are collaborating through the Frontier Model Forum to detect and prevent Chinese firms from creating imitation models. This rare alliance is driven by the shared existential threat that 'adversarial distillation' poses to their business models and to U.S. national security.

The push for stricter US government action against China's AI practices is not just from politicians. Leading AI companies like OpenAI and Anthropic are pressuring Washington to curb Chinese 'distillation' of their models, framing it as a threat to national security and America's lead in AI.

As enterprises replace expensive proprietary models with cheaper open-source alternatives, frontier labs like OpenAI and Anthropic face an existential threat. Their strategic response could be to lobby for regulations that effectively make open-source models illegal, creating a protective moat.

Because AI models can be easily downloaded, traditional regulation is ineffective. The logical endpoint isn't policy, but active 'algorithmic warfare' where proprietary models are used to launch offensive attacks to degrade or trick competing open-source and foreign state-sponsored models.

Attempts to ban or sanction open-source AI will inevitably fail because software is easily distributed. As models become capable of running on-device, hardware-based leverage points like data centers will become irrelevant, making any ban unenforceable.

A new battle line in AI is emerging around model distillation. US officials are framing "covert industrial distillation," like Moonshot AI's alleged activities, as unacceptable IP theft. This is distinct from legitimate distillation used to create smaller, efficient open-source models, setting the stage for future regulation and trade disputes.

Anthropic's argument that Chinese AI model distillation is 'IP theft' is a potentially fatal legal mistake. This assertion can be used against them in lawsuits from content creators like the New York Times, as Anthropic's own models are built by 'distilling' public content, effectively confessing their product is based on stolen IP.

It's unclear if AI's 'secret sauce' is like a fighter jet's hard-to-replicate manufacturing knowledge or a drug's easily copied formula. If it's the latter, Chinese 'distillation' tactics could make the closed-source business model unsustainable.