In late May, people in Europe were blocked from US news sites such as the Los Angeles Times. Others couldn’t turn on connected lights with mobiles unless they agreed to new terms of service. While that might sound standard, Tumblr users faced 322 questions to answer on how the blogging network could use their data Other companies mistakenly divulged thousands of personal emails while contacting users on new conditions. So many mishaps and frustrations occurred a ‘GDPR Hall of Shame’ was set up to host ‘GDPR horror’ stories.
That four-letter acronym stands for the General Data Protection Regulation, the name for the EU laws to protect data privacy that took force on May 25 amid such confusion that even the European Commission failed to comply (and then said it didn’t need to). Under the laws, businesses must release data on request from the ‘data subject,’ while people can sell their data to rival businesses and ask to have it erased.
The laws are of note because, as the world’s strongest privacy protections, they set a global benchmark for privacy. That the definition of ‘data subjects’ includes people who live outside or are non-residents of the EU makes this more likely because any company doing business in the EU must comply.
By setting a world standard, the EU laws carry global political implications. A key one is they pressure the US to protect privacy far more than otherwise in an era when data-dependent artificial intelligence (or AI) is an essential technology. The US could thus be handicapped in two ways in its quest to hold AI (and overall tech) supremacy over China, where the competition on AI will be decided on a mixture of computer grunt, savvy algorithms and access to mass data. The first is that US algorithms might lack the volume of unfiltered data needed to ‘self learn’, the most advanced form of AI. The other is that excessive privacy could hinder the business models of the US companies that fund much AI research in the US – companies such as Alphabet and Facebook that use personal cyber information to optimise ad-serving algorithms. (Business funds about 72% of science R&D in the US.) Privacy could put much at stake because the country that wins the AI and broader technological battle could lurch ahead in the zero-sum game for global supremacy.
It’s debatable how crucial privacy will be in deciding tech supremacy – or, to put that another way, how decisive quantity might prove to be in determining the usefulness of data. The tech fight between China and the US will include quantum computing, fifth-generation wireless systems, the internet of things and space dominance where privacy laws have less influence, and perhaps the US is too far ahead on technology to catch anyway. Other factors besides technology will decide which of China and the US hold the most global sway. Perhaps the US won’t enact tougher privacy laws because US citizens might be concerned about handing China an advantage, or the Chinese will demand more privacy protections. The tech fight between China and the US will have broader economic implications because it is likely to hamper global trade and capital flows as each country attempts to stymie the other by localising tech supply chains.
Such protectionist outcomes only highlight the role AI could play in determining which country holds global supremacy – and Russian President Vladimir Putin, for one, forecasts that whichever country leads on AI “will become the ruler of the world” (even if the only clear leaders are China and the US because of their economic size). The privacy issues surrounding digital data highlight that the contest is essentially a brawl between two political systems. While a liberal-democratic system holds enduring advantages in this tussle that means the US is likely to prevail, China’s autocratic system gives it a second key advantage in AI. China’s first advantage is that can amass data from 1.4 billion subjects who are already mostly online.
China’s tech drive
In 2012, the House Intelligence Committee of US Congress judged Chinese telecoms Huawei and ZTE as security threats because they would act for Beijing if required. In April this year, US tensions over China’s tech abilities were exposed when Washington banned ZTE from buying US components for breaching US embargoes against North Korea and Iran. To highlight Chinese and US tensions on tech, at the same time, the House of Representatives was considering a bipartisan bill to remove Huawei and ZTE from the US supply chain.
If history is to date the acceleration of the Chinese-US tech race it could home in on 2015 when Beijing launched ‘Made in China 2025,’ a plan to transform the country into an advanced manufacturer within 10 years. The plan identified 10 sectors of focus such as AI, biotech and robotics. China’s tech focus further intensified in 2017 when Beijing revealed a plan to be “leading the world in AI by 2030” and proclaimed an ambition to become a “cyber superpower” to rival the US.
Beijing’s means to achieve these goals are massive government investment and huge subsidies in the form of cheap loans, capital injections, rent concessions and tax breaks. Other tools are import protection, self-sufficiency targets, and the banning of certain foreign companies to enable Chinese equivalents to flourish (such as the barring of Facebook and Twitter to help WeChat and Weibo). Channels to import knowledge include the forced transfer of technology from western partners, forbidding foreign companies in China from transferring data abroad, and government-endorsed takeovers of foreign rivals such as Midea’s purchase of German robotics company Kuka in 2016. Other knowledge injections are enabled through the lax enforcement of intellectual property rights and, the US alleges, government-sanctioned spying on western competitors. Such are the advantages of an autocratic political system under one-party rule.  
Under this command economy, China has become the world’s biggest spender on scientific research after the US, having surpassed the EU in 2015. China’s average annual growth on R&D spending of 18% p.a. from 2000 to 2015 has boosted China’s global share of R&D activities to 21%. Over the same time, the US’s global share of such spending dropped from 37% to 26%. The National Science Board, the US federal agency that compiles these numbers, this year forecast China to pass the US in R&D investment by the end of 2018, says Chinese scientists produce more research papers than those in the US, and estimates China is close to turning out as many science and engineering graduates as the US.
Other accomplishments of note include that in 2017 China overtook the US in being home to most of the world’s 500 most powerful computers – by year’s end, China had 202 of them compared to only 143 in the US. To achieve even more, Beijing is encouraging foreign scientists to work in China and foreign-trained Chinese talent to return home. Chinese policymakers show no signs of wanting to clip the market dominance of e-commerce-based Alibaba, internet-based Baidu and games- and social-media-oriented Tencent (that all invest in AI research) in the way some EU and US policymakers talk of limiting the power of the US tech giants, which could hamper US AI advances.
China’s AI strides
China’s expanding global tech clout is evident, even if ZTE vulnerability to the loss of US components shows how far the country is behind the US. China’s influence has grown over international bodies such as the International Telecommunications Unions and the 3rd Generation Partnership Project that set global standards for telecommunications, wireless networks, the internet and AI. The country is intent on having a ‘first mover’ advantage over the US on super ‘low frequency’ 5G so it can set global standards. About 26% of global science venture flows head to China (about half the percentage that goes to the US). By some counts, China, with 26, is home to more of the top-50 ‘unicorns’ (privately owned tech startups with a valuation of more than US$1 billion) than the US, with just 16. Alibaba (through Ant Financial) and Tencent are gaining control of payments infrastructure in the emerging world, especially Africa. Huawei and ZTE have 41% market share of the global mobile infrastructure market.
China’s growing AI prowess is just as noticeable. China is using AI to pioneer facial recognition, number-plate tracking and other surveillance technologies to develop ‘social credit’ – essentially party loyalty – scores on each Chinese citizen that feed into predictive algorithms. China’s surveillance specialist SenseTime in April became the world’s most valuable AI startup and its AI could help Alibaba create cashless grocery stores. With a mentality that AI will brighten the future (rather than herald a dystopian jobless world as many in the west fear), China is achieving AI milestones in voice recognition, autonomous driving and manufacturing robotics. The country is amassing databases that no other country can for algorithm-based analysis, while ‘localising’ and directing them to where they might be most beneficial.
The US’s systemic advantage
In 1944, then US president Franklin Roosevelt commissioned a report, which came to be called Science, the endless frontier,[27] that galvanised how public and private bodies would cooperate on science in the decades that followed. Many credit this cooperation for the “breathtaking advances”, from high-energy particle accelerators to atomic clocks, that gave the US leadership in technology over the past half century. The same people lament the US system no longer works as it did in 1964 when the US government provided 67% of science R&D.
But US tech leadership since the 1940s would probably have happened anyway thanks to the country’s political system, free-market economic framework and innovative and entrepreneurial culture. The US is a pro-business liberal democracy, which time has shown to be the best wealth-creating form of governance – almost all the 25 richest countries (on a per capita basis) are liberal democracies.
The chances are liberal democracies will stay the world’s richest countries. The liberal-democratic system, for all its flaws (and there are many), best provides an economy with the foundations to prosper. Rules and checks and balances that limit the power of politicians and encourage political stability are in place, as is a methodical way to change leaders. An independent legal system secures property rights, which provides an incentive to accumulate wealth, and instills a sense of justice that glues people into a society. An unfettered media heightens knowledge and acts as a counterforce to government power. Strong and impartial institutions help create an environment where anti-competitive practices are kept in check so businesses can thrive. Authoritarian regimes boast none of these attributes.
Privacy’s elevation towards a civil right in liberal democracies will no doubt slow some AI advancement in these countries. But even in the era of US President Donald Trump, the US’s best attribute as the country engages China in a battle over AI is still likely to be a political system that allows business to flourish while protecting the privacy of its citizens, even if GDPR-like stuff ups occur as this is done.
Gross domestic expenditures on R&D by selected region or country: 2000-2015

Published by Michael Collins, Investment Specialist, Magellan Group