China could weaponize its low-cost, high-performance AI models by flooding the global market, repeating its 'steel dumping' playbook. This would crush the margins of US tech giants, bursting the concentrated S&P 500 bubble and potentially triggering a recession.
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While the US pursues cutting-edge AGI, China is competing aggressively on cost at the application layer. By making LLM tokens and energy dramatically cheaper (e.g., $1.10 vs. $10+ per million tokens), China is fostering mass adoption and rapid commercialization. This strategy aims to win the practical, economic side of the AI race, even with less powerful models.
From China's perspective, producing more than it needs and exporting at cutthroat prices is a strategic tool, not an economic problem. This form of industrial warfare is designed to weaken other nations' manufacturing bases, prioritizing geopolitical goals over profit.
While US firms lead in cutting-edge AI, the impressive quality of open-source models from China is compressing the market. As these free models improve, more tasks become "good enough" for open source, creating significant pricing pressure on premium, closed-source foundation models from companies like OpenAI and Google.
A nation's advantage is its "intelligent capital stock": its total GPU compute power multiplied by the quality of its AI models. This explains the US restricting GPU sales to China, which counters by excelling in open-source models to close the gap.
While the U.S. AI strategy pursues a 'winner-take-all' model leading to high profits, China's state-backed approach aims to commoditize AI. By spreading resources across many players to create a low-cost, replicable model for export, it structurally limits the potential for monopoly profits to accrue to shareholders.
An emerging geopolitical threat is China weaponizing AI by flooding the market with cheap, efficient large language models (LLMs). This strategy, mirroring their historical dumping of steel, could collapse the pricing power of Western AI giants, disrupting the US economy's primary growth engine.
The exceptionally low cost of developing and operating AI models in China is forcing a reckoning in the US tech sector. American investors and companies are now questioning the high valuations and expensive operating costs of their domestic AI, creating fear that the US AI boom is a bubble inflated by high costs rather than superior technology.
China is compensating for its deficit in cutting-edge semiconductors by pursuing an asymmetric strategy. It focuses on massive 'superclusters' of less advanced domestic chips and creating hyper-efficient, open-source AI models. This approach prioritizes widespread, low-cost adoption over chasing the absolute peak of performance like the US.
Unlike traditional SaaS where high switching costs prevent price wars, the AI market faces a unique threat. The portability of prompts and reliance on interchangeable models could enable rapid commoditization. A price war could be "terrifying" and "brutal" for the entire ecosystem, posing a significant downside risk.
The business model for powerful, free, open-source AI models from Chinese companies may not be direct profit. Instead, it could be a strategy to globally distribute an AI trained on a specific worldview, competing with American models on an ideological rather than purely commercial level.
