Is DeepSeek a proof of concept?

On Monday, the Chinese artificial intelligence (AI) application, DeepSeek, surpassed ChatGPT in downloads and was ranked number one in iPhone app stores in Australia, Canada, China, Singapore, the United States, and the United Kingdom. It dealt a heavy blow to the stocks of US chip makers and other companies related to AI development. DeepSeek claims to have achieved a chatbot model that rivals AI leaders, such as OpenAI and Meta, with a fraction of the financing and without full access to advanced semiconductor chips from the United States.

DeepSeek represents China’s efforts to build up domestic scientific and technological capabilities and to innovate beyond that. Its advanced stage further exacerbates anxieties that China can outpace the United States in cutting edge technologies and surprised many analysts who believed China was far behind the United States on AI. The export controls on advanced semiconductor chips to China were meant to slow down China’s ability to indigenize the production of advanced technologies, and DeepSeek raises the question of whether this is enough. The US-China tech competition lies at the intersection of markets and national security, and understanding how DeepSeek emerged from China’s high-tech innovation landscape can better equip US policymakers to confront China’s ambitions for global technology leadership.

Homegrown: China’s innovation ecosystem

In the past decade, the Chinese Communist Party (CCP) has implemented a series of action plans and policies to foster domestic capabilities, reduce dependency on foreign technology, and promote Chinese technology abroad through investment and the setting of international standards. In 2023, President Xi Jinping summarized the culmination of these economic policies in a call for “new quality productive forces.” In 2024, the Chinese Ministry of Industry and Information Technology issued a list in of “future industries” to be targeted. These slogans speak to the mission shift from building up domestic capacity and resilience to accelerating innovation.

Since the implementation of the industrial action plan “Made in China 2025” in 2015, China has been steadily ramping up its expenditure in research and development (R&D). From 2016 to 2024, R&D expenditure expanded by 126 percent.

According to statistics released last week by the National Bureau of Statistics, China’s R&D expenditure in 2024 reached $496 billion. However, China still lags other countries in terms of R&D intensity—the amount of R&D expenditure as a percentage of gross domestic product (GDP).

Compared to other countries in this chart, R&D expenditure in China remains largely state-led. Rhodium Group estimated that around 60 percent of R&D spending in China in 2020 came from government grants, government off-budget financing, or R&D tax incentives. For reference, in the United States, the federal government only funded 18 percent of R&D in 2022. It’s a common perception that China’s style of government-led and regulated innovation ecosystem is incapable of competing with a technology industry led by the private sector. However, companies like DeepSeek, Huawei, or BYD appear to be challenging this idea.

China has often been accused of directly copying US technology, but DeepSeek may be exempt from this trend. While DeepSeek was trained on NVIDIA H800 chips, the app might be running inference on new Chinese Ascend 910C chips made by Huawei. Additionally, DeepSeek primarily employs researchers and developers from top Chinese universities. This is a change from historical patterns in China’s R&D industry, which depended upon Chinese scientists who received education and training abroad, mostly in the United States. DeepSeek also differs from Huawei and BYD in that it has not received extensive, direct benefits from the government. Instead, it seems to have benefited from the overall cultivation of an innovation ecosystem and a national support system for advanced technologies.

China’s science and technology developments are largely state-funded, which reflects how high-tech innovation is at the core of China’s national security, economic security, and long-term global ambitions. DeepSeek was able to capitalize on the increased flow of funding for AI developers, the efforts over the years to build up Chinese university STEM programs, and the speed of commercialization of new technologies.

While some AI leaders have doubted the veracity of the funding or the number of NVIDIA chips used, DeepSeek has generated shockwaves in the stock market that point to larger contentions in US-China tech competition. Chinese firms are already competing with the United States in other technologies. In 2015, the government named electric vehicles, 5G, and AI as targeted technologies for development, hoping that Chinese firms would be able to leapfrog to the front of these fields. Now, in 2025, whether it’s EVs or 5G, competition with China is the reality.

The United States, China, and global tech competition

Some AI watchers have referred to DeepSeek as a “Sputnik” moment, although it’s too early to tell if DeepSeek is a genuine gamechanger in the AI industry or if China can emerge as a real innovation leader. As far as chatbot apps, DeepSeek seems able to keep up with OpenAI’s ChatGPT at a fraction of the cost. But DeepSeek’s low budget could hamper its ability to scale up or pursue the type of highly advanced AI software that US start-ups are working on. Perhaps more importantly, such as when the Soviet Union sent a satellite into space before NASA, the US reaction reflects larger concerns surrounding China’s role in the global order and its growing influence.

Unlike the race for space, the race for cyberspace is going to play out in the markets, and it’s important for US policymakers to better contextualize China’s innovation ecosystem within the CCP’s ambitions and strategy for global tech leadership. The CCP strives for Chinese firms to be at the forefront of the technological innovations that will drive future productivity—green technology, 5G, AI. And Chinese firms are already promoting their technologies through the Belt and Road Initiative and investments in markets that are often overlooked by private Western investors.

While the United States and the European Union have placed trade barriers and protections against Chinese EVs and telecommunications companies, DeepSeek may have proved that it isn’t enough to simply reduce China’s access to materials or markets. It is uncertain to what extent DeepSeek is going to be able to maintain this primacy within the AI industry, which is evolving rapidly. However, it should cause the United States to pay closer attention to how China’s science and technology policies are generating results, which a decade ago would have seemed unachievable. DeepSeek indicates that China’s science and technology policies may be working better than we have given them credit for. For US policymakers, it should be a wakeup call that there has to be a better understanding of the changes in China’s innovation environment and how this fuels their national strategies.

Jessie Yin is an Assistant Director with the GeoEconomics Center.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.