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US versus China in race to AI leadership

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      By Gary Greenberg, Portfolio Manager, Hermes Investment Management, Calvert Subadvisor

      London - Behind the U.S.-China trade war dominating headlines and upsetting markets, lies, we believe, a far more consequential rivalry: the race to world leadership in artificial intelligence (AI).

      Whoever dominates AI will have significant control over the vast, global network of cloud intelligence and big data that affects commerce, social media, health care, business, government and the military. According to a 2018 study by McKinsey, AI could potentially add about $13 trillion to world economic output by 2030, boosting global GDP by 1.2% per year.1 China is developing the expertise, workforce and capital needed to potentially take a leadership position in AI.

      China advances on many fronts

      Until 2017, most developed countries largely regarded China as a troublesome emerging country, but not a particular threat. Under President Xi Jinping, China's concerted efforts to industrialize and advance its AI position have created concern, particularly among the "Five Eyes" consortium of the U.S., U.K., Canada, Australia and New Zealand. China's increasing leadership in intellectual capital, value-added technology and venture capital are moving it well along the path of AI ascendancy.

      At the cutting edge

      To the surprise of many, the rapid transformation of Chinese output from plastic flowers to advanced technology is now a reality. China passed its competitors in high value-added exports in 2010 and has grown its lead since.

      Calvert blog 6-5-19a

      Full STEM ahead

      To compete successfully in the fierce high-tech export market, China has made a concerted effort to strengthen its scientific and technological capabilities. As a result, its count of STEM (science, technology, engineering and mathematics) graduates now dwarfs those of its developed-market competitors.

      Calvert Blog 6/5/19b

      Over the past decade, this growth of STEM education has started to pay dividends. From 2002 to 2007, China's share of "top 1% cited articles" — those most cited by scientists on a global basis — was 4%. However, from 2008 to 2013, it leapfrogged every country except the U.S. to achieve a 10.8% share. Despite these efforts, the U.S. still attracts more top AI talent, acquiring 5,518 individuals in 2017 versus 977 for China.2

      Venture capital flowing to China

      In addition to the progress it has made in the STEM disciplines, China has become a top destination for venture capitalists. It now attracts more startup capital than Europe - the world's largest regional economy - and is second only to the U.S. In the cutting-edge field of AI, in 2017, Chinese startups attracted 48% of global AI equity investment, while U.S. startups attracted 38%.

      Calvert Blog 6/5/19c

      China - leader and laggard

      China appears to be leading the U.S. in several key areas, such as 5G technology, fintech, and speech and facial recognition. However, China lags the U.S. in many other core AI spaces, such as hardware and algorithm development, international technical standards and in delivering software frameworks and platforms for machine learning.

      The best future scenario is that AI competition between the U.S. and China will remain conflict-free and productive, resulting in a balance of power and trade that accommodates each country's interests. In the current climate, however, and in view of China's stated objectives of technological, economic and political dominance, this seems idealistic. What is clear is that AI will play an ever-greater role in advancing countries, economies and national welfare in the years ahead.

      Bottom line: The U.S. and China race for AI leadership has significant long-term implications for capital markets, economies, military outcomes and national welfare.