The latest cold war is already being fought in the supply chain trenches

AI and the chips that power it are at the center of the equation

Artificial intelligence and the chips that fuel its evolution have given rise to a new arms race between the US and China.

While the last cold war was punctuated by the proliferation of nuclear weapons, proxy conflicts, and the ideological struggle between communism and capitalism, this one is shaping up quite differently. The new cold war will be fought on two fronts: on the ground in the supply chain trenches and by machines in cyberspace working to influence geopolitics.

In many respects the current state of global AI closely mirrors that of the atomic age, in that progress is a double-edged sword. The same uranium used to build bombs of huge destructive power could just as easily be harnessed to generate cheapish and abundant energy. Similarly AI models that can discover cures for serious illnesses can also potentially cause catastrophe. It's up to those who wield such a sword to decide.

It doesn't take much imagination to see how generative AI could be weaponized to erode trust in national elections or destabilize the stock market, all without firing a shot. If that weren't scary enough governments are exploring the use of generative AI in military applications, ranging from logistics and planning to drones capable of executing lethal strikes without human intervention.

Considering this, it's hardly surprising that the Biden administration is hell-bent on stopping China from getting a leg up in this arena.

Shelling the supply chain trenches

The first battles in this cold war are already playing out in the form of export restrictions on everything from American made AI accelerators to the chipmaking equipment, intellectual property restrictions, and selling the materials required for nations like Russia or China to build their own production facilities.

These attacks are particularly potent as AI accelerators have complex supply chains which can be exploited to deny, or at least impede the development of AI technologies.

The Biden administration has spent the last three years applying pressure to these supply chain choke points, initially to stymie the burgeoning Chinese semiconductor industry with export restrictions on critical technologies like extreme ultraviolet and even less advanced deep ultraviolet lithography machines, which are used to produce the most advanced chips in the world.

Over the past two years, the US has recognized the ongoing AI threat and begun restricting the sale of its most powerful AI accelerators. This is very much about denying Chinese military interests access to technologies that could be weaponized against the US and its allies.

However, this may not be as effective as politicians in Washington would like. When a superpower like the US starts denying access to crucial tech via legitimate channels, the odds are you're going to find ways to get your hands on it by other means. Sanctions busting is as old as sanctions, after all.

We've reported on several cases of Chinese nationals cozying up to chip companies only to turn up back in the Middle Kingdom with a treasure trove of sanctioned IP in tow. And American accelerators and CPUs keep finding their way into Chinese military systems despite decades restrictions designed to prevent just that.

Collateral damage

Of course, sanctions work both ways. In response to the measures levied by the US and its allies, the Chinese have responded by restricting the flow of minerals, like germanium and gallium, which are essential to production of modern semiconductors.

There's also the matter of Taiwan. Located off the coast of mainland China. The island nation has operated in autonomy for the better part of a century and is the single largest manufacturer of advanced semiconductors in the world. Beyond its proximity to China, a factor that's troubling enough, the nation's independence isn't recognized by Beijing for historical reasons and Chinese President Xi Jinping has made it clear his desires for reunification.

A Chinese invasion of Taiwan would be devastating to the global economy, with the US National Security Agency estimated the economic fallout at more than a trillion dollars. However, such a move by Beijing risks provoking the West and turning a cold war hot.

It's worth remembering that supply chain warfare isn't limited to semiconductor manufacturing. The US and its allies are exploiting Chinese chip supply chains because they are vulnerable. By comparison, the US and its allies enjoy a more robust semiconductor supply chain. So, it makes sense that the Chinese might put pressure on other areas, such as nickel and cobalt, which are used extensively in the production of EV batteries.

While much of the world's cobalt comes from the Democratic Republic of Congo, a substantial portion of it is controlled by Chinese firms. In fact, the Middle Kingdom controls about 77 percent of the world's cobalt refining capacity in 2022, according to a 2023 report by Washington DC think tank the Institute for Energy Research.

This fact hasn't gone unnoticed by the Pentagon which is reportedly developing an AI model to help it estimate prices and predict supply of minerals like nickel, cobalt, and other minerals.

According to the report, one of the problems the model seeks to address are pricing swings, which have made it difficult for US mine operators to compete with their Chinese contemporaries. It essentially boils down to this: a country like China floods the market with a particular mineral, prices drop, and it becomes uneconomical for US mines to compete.

Competition will thrive, if we can just keep the cold war cold

Between the end of WWII and the fall of the Soviet Union in 1991 the world experienced a period of unprecedented technological advancement, driven in no small part by competition between the major superpowers of the time.

The jet era, the space race, the transistor, the personal computer, the internet, the list goes on and on. The cold war, for all of its faults, created an environment of necessity that drove innovation. 

A cold war between the US and China could be devastating if it ever turned hot, but it also has the potential to drive innovation in a way that ultimately benefits the whole of mankind.

Whether efforts to prevent the military application of artificial intelligence and starve out the Middle Kingdom's semiconductor industry will prove successful, only time will tell, but it doesn't look good for the US. 

The Chinese have proven quite resourceful in their efforts to close the gap on domestic semiconductor manufacturing. Last year we reported that Huawei had begun shipping phones using Semiconductor Manufacturing International Co.'s (SMIC) 7nm process, in spite of US technology control efforts.

Meanwhile, Beijing is investing heavily in the development of domestic AI accelerators to fill the gap left by last fall's export restrictions. Huawei is rumored to have developed a domestic version of its Ascend accelerators that, at least in terms of raw compute, are comparable to Nvidia's last-gen chips.

This leaves the US with two options: it can either clamp down harder on Chinese supply chains or innovate faster and extend its lead by investing in homegrown technologies. The first may or may not be successful while the second will be a costly proposition to maintain. 

In either case, this rivalry could just end up being a good thing for competition, so long as cooler heads prevail. ®

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