Revenant Research has identified three major themes for AI in 2025:
AI Sovereignty In The Second Cold War
AI’s Reckoning On Law and Order
AI’s Coming Cambrian Explosion For Enterprise Automation
This is Part One.
Introduction
The US and China are in a Cold War, centering on a historical trade route that is now a geopolitical flashpoint at risk of igniting a hot war. This risk has produced a strategic initiative to reshape the supply chain that builds critical AI infrastructure. The goal: AI Sovereignty.
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Historical Significance of Taiwan and the Taiwan Strait
The Taiwan Strait has evolved from a vital maritime corridor in early trade, facilitating the exchange of goods and ideas between the East and West, to a contemporary geopolitical flashpoint amid escalating US-China tensions. Historically, Taiwan's strategic location attracted European powers, notably the Dutch East India Company in the 17th century, solidifying its role in global trade networks. In the modern context, the strait is not only a critical passage for maritime commerce but also a focal point of contention in Sino-American relations, with the United States pledging to defend Taiwan against China's claims of sovereignty.
The 1954 Taiwan Strait Crisis exemplifies the historical implications of Taiwan's strategic position. Following the Chinese Civil War, tensions escalated between the People's Republic of China (PRC) and the Republic of China (ROC) on Taiwan. In September 1954, the PRC initiated military action by shelling the offshore islands of Quemoy and Matsu, challenging the United States' resolve under the recently signed Mutual Defense Treaty. This aggressive maneuver prompted the United States to deploy naval forces to the strait, transforming a regional conflict into an international crisis characterized by naval confrontations and air sorties.
The crisis ultimately subsided, but it solidified the US commitment to Taiwan and established a precedent for American intervention in the region, a pattern that has persisted in subsequent decades. This episode underscores the Taiwan Strait's enduring strategic significance and the intricate dynamics of Sino-American relations that continue to shape contemporary geopolitical maneuvering.
In recent decades, Taiwan has emerged as a linchpin in the global semiconductor industry, a development that has heightened the stakes in the already tense geopolitical landscape. The island is home to Taiwan Semiconductor Manufacturing Company (TSMC), the world's largest contract chip manufacturer, which produced approximately 54% of the global semiconductor market share in 2021. Founded in 1987 by Morris Chang, TSMC has played a pivotal role in the evolution of the semiconductor sector, transitioning from a niche player to a dominant force in a mere few decades. As of January 2025, TSMC's market capitalization is approximately $1.081 trillion USD.
The historical trajectory of Taiwan's semiconductor industry, fueled by government support and investment in research and development, has made it an indispensable player in the global economy. This strategic importance has not gone unnoticed by both the United States and China, as control over semiconductor production is increasingly viewed as a matter of national security. Consequently, Taiwan's role in the semiconductor industry has transformed the Taiwan Strait into a geopolitical flashpoint, where the stakes are not merely territorial but also technological, thereby intensifying the urgency for international stakeholders to navigate the complexities of this critical nexus.
AI and the Second Cold War
Amid this intricate backdrop, the advanced nodes in semiconductor manufacturing emerge as a key driver behind the burgeoning artificial intelligence (AI) sector, further complicating the geopolitical landscape between the United States and China. As AI technologies proliferate, the demand for sophisticated chips capable of supporting complex algorithms has surged.
In semiconductor manufacturing, a "node" refers to a specific generation of process technology characterized by the smallest feature size that can be reliably produced on a chip. This feature size, often measured in nanometers (nm), denotes the half-pitch of contactable features, such as the gate length of transistors, on a silicon wafer. As the industry progresses, nodes have become increasingly smaller, allowing more transistors to be packed into the same chip area, which enhances performance, reduces power consumption, and lowers costs.
The advent of sub-5nm technology marks a significant leap in this evolution, particularly for Graphics Processing Units (GPUs), Application-Specific Integrated Circuits (ASICs), and other chips designed for AI data centers. These advanced nodes enable higher computational power and efficiency, which are critical for processing the vast amounts of data required in AI applications. The reduction in size also allows for greater integration of functionalities, supporting the development of more sophisticated AI algorithms and models.
The United States, recognizing the strategic imperative of maintaining technological superiority, has sought to fortify its semiconductor supply chain, particularly through partnerships with TSMC. Conversely, China, striving for self-sufficiency in semiconductor production, has invested heavily in its domestic capabilities, aiming to reduce reliance on foreign technology. This intersection of semiconductor manufacturing and AI development underscores the Taiwan Strait's role as a critical battleground in the broader geopolitical struggle, with implications that extend far beyond regional boundaries, shaping the contours of global power dynamics in the 21st century.
The Second Cold War is not about tariffs on toasters. It’s about semiconductors, full stop.
Really, it’s about decoupling a massively complex and fragile supply chain to build an AI future that reflects the values of two diametrically opposed value systems.
I believe the CCP views the internet and AI as an accelerant to the perceived cultural threats to it’s One China policy. As a result, China is digitally isolating itself from the world.
Historical Note:
China's history of social revolutions and policies has been deeply intertwined with its efforts to maintain national unity and the "One China" policy, often in the face of perceived cultural threats. The most notable of these revolutions was the Cultural Revolution, which sought to renew the spirit of the Chinese Revolution by eliminating "bourgeois" elements that were seen as threats to socialist ideology. This period was marked by significant upheaval, resulting in widespread persecution, destruction of cultural heritage, and a profound impact on Chinese society and governance.
Most historians agree that between 500,000 and 2 million people died as a result of the political violence. It is estimated that around 1.5 million people were imprisoned during this period. The intense pressure and public humiliation led to a significant number of suicides. For example, in Beijing alone, it is estimated that about 1,700 people committed suicide in 1966.
The Cultural Revolution highlighted the fear of internal threats that could undermine the Communist Party's control and the unity of the nation. In the decades following, China's leadership has continued to implement policies aimed at strengthening national identity and countering cultural influences deemed detrimental to the state's cohesion. This includes promoting the "One China" policy, which asserts the indivisibility of China and seeks to prevent separatist movements, particularly in regions like Taiwan, Tibet, and Xinjiang.
The fear of cultural threats persists as a driving force behind China's domestic and foreign policies, influencing its strict control over tech companies, media, education, and religious practices to ensure alignment with state-sanctioned narratives and to safeguard the ideological foundation of the nation.
China already has its own digital ecosystem of apps, social media and news, and payment services tightly integrated and completely walled off from the external world. It’s doubling down on this effort by creating its own AI tech stack to power it.
And so what is emerging from this geopolitical flashpoint is the realization on both sides: AI Sovereignty will be the foundation for power projection for the last three quarters of the 21st century.
AI Sovereignty
Revenant Research defines AI Sovereignty as the capacity of a nation-state, or alliance of nation-states, to independently develop, control, and govern its artificial intelligence applications and infrastructure. This notion encapsulates not only the technical aspects of AI development but also the broader implications for national security, economic competitiveness, and cultural identity. In an era where AI technologies are increasingly intertwined with various facets of law, commerce, and culture, achieving AI sovereignty becomes paramount for nations seeking to assert their autonomy and influence on the global stage.
Three key drivers of AI Sovereignty can be identified, each rooted in the historical context of geopolitical dynamics and technological evolution.
Key Drivers of AI Sovereignty
1. Semiconductor Manufacturing and the AI Supply Chain
Semiconductor manufacturing is central to AI sovereignty. As illustrated by Taiwan’s semiconductor industry, producing advanced chips underpins AI technologies. Securing a reliable supply of semiconductors not only bolsters technological capabilities but also elevates a nation’s standing in global power dynamics. The competition between the US and China to control semiconductor production reflects the direct relationship between chip supply, AI innovation, and strategic influence.
2. National Security Considerations
Geopolitical tensions, such as those surrounding the Taiwan Strait, underscore the defense implications of AI. Governments increasingly view AI as a strategic asset, making the pursuit of sovereignty in this domain vital for national security. China’s drive to reduce reliance on foreign systems demonstrates a broader trend of nations seeking self-sufficiency to safeguard their interests and mitigate external threats.
3. Cultural and Ideological Factors
China’s historical experiences with social revolutions inform its focus on shaping AI narratives to preserve national identity. The Chinese Communist Party regards AI as both a technological tool and a means of reinforcing ideological coherence. By controlling AI development and deployment, China aims to align technological progress with national values and objectives, underscoring the cultural dimension of AI sovereignty.
The Evolution of AI Sovereignty
Shifting US Policy and Export Controls (2018–2022)
2018: The United States imposed tariffs on Chinese imports, citing national security concerns and perceived unfair trade practices, impacting the semiconductor sector.
2019: Huawei Technologies Co. was added to the Entity List, prohibiting U.S. firms from supplying technology to Huawei without approval, spotlighting the vulnerabilities of Chinese firms relying on foreign components.
2020: Further restrictions targeted semiconductor manufacturing equipment and technology. Concurrently, Congress introduced the Creating Helpful Incentives to Produce Semiconductors (CHIPS) for America Act, aiming to strengthen domestic manufacturing.
2021: The Biden administration tightened export controls on advanced semiconductor technologies and coordinated with allies, such as Japan and the Netherlands (home to ASML, the monopoly manufacturer of EUV lithography machines, which are essential for creating intricate patterns on silicon wafers to produce advanced semiconductor chips with sub 7nm-scale transistors), to restrict China’s access to critical equipment.
2022: The US Chips and Science Act provided substantial funding for domestic semiconductor R&D and manufacturing, reinforcing US self-sufficiency and restricting Chinese access to advanced technologies. Provisions also limited US firms’ investments in certain Chinese semiconductor companies.
China’s Response and Self-Sufficiency Efforts
Made in China 2025: Launched to upgrade China’s manufacturing sector and reduce dependence on foreign technology. Inspired by Germany’s “Industry 4.0,” the initiative targets a 70% share of Chinese-made components in key sectors (e.g., AI, robotics, aerospace) by 2025.
Post-2023 Controls and Domestic Alternatives: With the U.S. refining export controls to include AI and quantum computing, China accelerated homegrown solutions. Government funding, including state-backed “Big Funds.” The National Integrated Circuit Industry Investment Fund, established in China in 2014, has undergone three funding phases, with the latest (2024-2029) raising 344 billion yuan (US$47.5 billion). Managed by Sino IC Capital, it invests in chip manufacturing, equipment, materials, design, and packaging. The fund has an extensive portfolio, holding stakes in 2,793 entities within three layers of ownership: 74 direct holdings, 762 indirect holdings with one intermediate entity, and 1,957 indirect holdings with two intermediate entities. It maintains minority shareholdings in over 70 companies, many of which are investment funds focused on semiconductor R&D and manufacturing. Notable investments include SMIC and Hua Hong Semiconductor.
Talent and Collaboration: China encourages partnerships between universities and semiconductor firms to spur innovation, while attracting overseas talent through competitive programs.
Supply Chain Integration: Investments in domestic photolithography equipment and other critical inputs aim to reduce reliance on foreign suppliers.
Industry Consolidation: Policies fostering mergers and acquisitions create larger, more competitive Chinese semiconductor companies capable of advancing critical technologies at scale.
Through these measures, China seeks to bolster its semiconductor and AI industries, countering foreign restrictions and striving for leadership in technologies vital to national security and economic growth.
The Future of AI Sovereignty: The AI Iron Wall
Ultimately I believe there is an inevitable path to AI Sovereignty equilibrium between the US and China- two separate but equally powerful ecosystems- a so called AI Iron Wall. However, AI Sovereignty is not a goal in and of itself. AI Sovereignty will be the foundation of power projection- the operating system powering a platform of economic growth, military superiority, and cultural influence. From this platform will emerge a series of laws, treaties, and norms that will protect AI Sovereignty, establish strategic collaboration and trade between the two ecosystems, and form a new basis of deterrence.
The potential for miscalculation on the path to decoupling this supply chain and achieving AI Sovereignty remains the primary concern. Therefore, the process of achieveing AI equilibrium matters more than who “wins.”
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For custome research and consulting email me at nathan@revenantai.com.