By Reshma Kapadia

Artificial intelligence has been at the center of the U.S.-China technology battle, fueling a so-called AI arms race and a spate of export controls from the U.S. aimed at restricting China's access to critical advanced technology. The Chinese AI start-up DeepSeek raises questions about that approach.

The U.S. has been trying to slow down China's progress by curtailing access to critical advanced technology via an expanding list of export restrictions. But China has been aggressively investing in AI -- with plans to spend $140 billion over the next five years. While analysts said more needs to be understood, DeepSeek's models, a rival to ChatGPT and others, are garnering high performance marks -- achieved apparently without the costly spending of other AI companies and despite the constraints of U.S. export controls.

China-focused analysts have been warning clients to not underestimate China as restrictions have only bolstered Beijing's support of these industries. In an X post, Gavekal Research's Louis Gave wrote, "I have argued incessantly that instead of preparing for a world in which China self immolates, policymakers and business leaders need to prepare for a world in which China catches up, and sometimes leapfrogs the West in industry after industry." Paul Triolo, partner at consultancy DGA-Albright Stonebridge Group, agreed. "This is really a significant inflection point, and something I predicted two years ago, that Chinese companies would innovate around U.S. export controls in very unexpected ways," he told Barron's.

Yet to be determined is how DeepSeek trained its advanced models, what type of hardware it will have access to, and its ability to keep innovating. However, Triolo describes the achievements so far as impressive, especially given the sweeping export controls designed to control Chinese companies' access to advanced computing hardware.

Before DeepSeek, Huawei in 2023 unveiled a new phone with an advanced chip despite strict export restrictions by the U. S. -- a move that pushed the Commerce Department to tighten and expand those restrictions. But these efforts have their limits: Former Commerce Secretary Gina Raimondo in December noted that trying to slow down China in AI was a "fool's errand."

The DeepSeek developments cast a spotlight on the U.S.-China tech battle as export restrictions may have slowed Chinese companies down some, but also forced them to become more innovative and find workarounds, Triolo says. The other issue: Export controls don't cover open-source models like that of DeepSeek, which Triolo says is nearly as capable as the most advanced proprietary models, and cost competitive.

"Structurally, this should make the U.S. more worried," Jens Nordvig, head of analytics firm Exante Data tells Barron's. For investors, Nordvig notes that the DeepSeek developments raises questions about the consensus view of AI-powered U.S. exceptionalism. Tech stocks on Monday reflected that, with the Nasdaq Composite down 2% and Nvidia down 14% in morning trading.

But it also raises policy questions, including where the Trump administration will focus its efforts in this battle. In November, the bipartisan U.S. China Economic and Security Commission, which advises Congress, last year called for a public-private Manhattan Project directed at advanced AI. Then Commissioner Jacob Helberg, who Trump has nominated for a State Department role working on economic statecraft and technology, urged Congress to take China's advancements in artificial general intelligence "extremely seriously."

On Wednesday, President Donald Trump announced plans for up to $500 billion in private-sector investment from the likes of OpenAI's Sam Altman, SoftBank Chief Executive Masayoshi Son, and Oracle's Larry Ellison over the next four to five years. Tesla CEO Elon Musk, who wasn't part of the announcement, questioned the financial backing of the partnership.

Among the first signs of where the administration may take this battle next could come from the confirmation hearing for Howard Lutnick as Commerce secretary on Wednesday. The Commerce Department had been the hub of export controls and restrictions on China under the Biden administration -- restrictions that many analysts expect will still be part of the arsenal in the U. S-China battle.

Write to Reshma Kapadia at reshma.kapadia@barrons.com

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January 27, 2025 12:09 ET (17:09 GMT)

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