DeepSeek disruption to AI Chatbots/LLMs, like ChatGPT4 and to suppliers of AI semiconductors like Nvidia, is significant. It can also change forecasts for ever rising electricity demand from data centres. But by corollary it may increase the use of AI because it will be much cheaper.
There is nothing unusual in such disruption. The cost curves of emerging technologies not only slope downwards (exponentially), But they also shift downwards exogenously. This what the DeepSeek story is about. But it is happening at an interesting moment when:
- The humungous estimates of capital being ploughed into AI were rising faster than the bubble valuations of the investors' own equity;
- A super-tough-on-China US administration takes office; and
- Investing in China tech was considered imprudent, unpatriotic or illegal by many investors .
With such juxtapositioning DeepSeek promises to disrupt more than just the AI scene.
The story is this. DeepSeek has made an AI Chatbot App - basically an algorithm model - which performs as well or better than existing ones (Bing ChatGPT4, Gemini et al). I have tested it on building ad hoc economic models to forecast the effect of tariffs on the economies of China and Canada. I did the same thing with ChatGPT4, Gemini and CoPilot. DeepSeek is better and very fast (less than 45 seconds). And it's free from the Apple Store. A copy of its output on the impact of 10% and 20% tariffs on China's economy will be found at the end of this Update. Anyway I was impressed, although it doesn't think outside the box to cover non-economic responses to US tariffs like China kicking Tesla out of China.
The disruption also stems from the fact that the data used to train the DeepSeek model allegedly cost USD 5mn. Until now the minimum cost of the data (called tokens) to train an AI model was USD 100mn. For the latest models being developed by Meta, Google and Trump's coterie of tech entrepreneurs the cost is USD 1bn and up.
DeepSeek is also reputedly a much more economic user of energy. So data centres could use less power and the planet would be saved after all. Well wait a second! If DeepSeek is cheaper to use, then more AI will be used by more users which may end up needing more energy. So I would hold onto your investments in civil Nuclear SMRs!
Finally DeepSeek runs on chips which are not at the top of sanctions list or even made by Nvidia. The efficiency of the model is in the algorithms which have been designed to run on chips that are not legacy but are not on the technological frontier like Nvidia's either.
DeepSeek is owned by HighFlyer - a strange Chinese hedge fund that seems to be almost non-commercial or non-profit and publishes its algorithms and code for all to develop on the net! Very odd.
How can you run a hedge fund while giving away for free your ability to make money?
The business model and funding of HighFlyer is not clear to me. But what is crystal clear is this: the potential strategic gain to China is evident:
- disrupting US leadership of the AI sector;
- calling into question the efficacy of the sanctions intended to keep China in second place in global technology
- Both happening at the precise moment of President Trump coming into office!
The geopolitical question is this. Is China, having been forced by sanctions to be technologically self sufficient and run on its own (we all assumed inferior) semiconductors, about to become the global leader in AI passing out the US? Stories of the third placed runner at the halfway mark winning the race happens a lot in technology. But in geopolitics gauging the rise and fall of nations is normally measured in decades. Perhaps no more!
No doubt the "disrupted" victims of the Coming Of DeepSeek were a bunch of overhyped shorts. Less talked about are the longs emerging among Chinese tech companies and potential global users of AI which will beneficiaries of cheaper AI.
Of course, beyond the technological prowess and disruptive economics of DeepSeek lurks another issue that will rear its head. What happens to my data?????????
Annexe: the DeepSeek answer to the question: Please build an economic model and describe the effects on China's economy of a 10% and 20% tariff on all Chinese exports to the US.
Answer (took 40 seconds)
### Economic Model: Impact of US Tariffs on Chinese Exports To analyze the impact of US tariffs on Chinese exports, we can use a **partial equilibrium model** focusing on the trade relationship between the US and China.
The model will consider the following key variables:
1. **Tariff Rates**: 10% and 20% tariffs on all Chinese exports to the US.
2. **Price Elasticity of Demand**: How sensitive US consumers are to price changes in Chinese goods.
3. **Exchange Rate**: Potential adjustments in the exchange rate between the US dollar (USD) and the Chinese yuan (CNY).
4. **Trade Volume**: The volume of Chinese exports to the US.
5. **Chinese GDP**: The impact on China's overall economic output.
6. **US Consumer Prices**: The effect on prices for US consumers.
7. **Trade Diversion**: Potential shifts in trade patterns as Chinese exports are redirected to other markets. --- ###
Assumptions: -
** Price Elasticity of Demand**: Assume that US demand for Chinese goods is relatively elastic, meaning that a price increase due to tariffs will lead to a significant reduction in the quantity demanded.
-**Exchange Rate**: Assume that the Chinese yuan may depreciate to offset some of the tariff impacts, making Chinese goods cheaper in international markets.
- ** Trade Volume**: Assume that Chinese exports to the US account for a significant portion of China's total exports (e.g., 20%).
- * *Substitution Effect**: Assume that US consumers and firms can partially substitute Chinese goods with goods from other countries or domestic production.
--- ### Model Results: #### 1.
1**Impact on Chinese Exports to the US**: - **10% Tariff**: Chinese exports to the US would decline by approximately 8-12%, depending on the elasticity of demand. - **20% Tariff**: Chinese exports to the US would decline by approximately 15-25%. ####
2. **Impact on Chinese GDP**: - **10% Tariff**: Chinese GDP could decrease by 0.3-0.5%, as reduced exports to the US would lower aggregate demand and industrial output. - **20% Tariff**: Chinese GDP could decrease by 0.6-1.0%, with more significant impacts on export-oriented industries.
3. **Impact on US Consumer Prices**: - **10% Tariff**: Prices of Chinese goods in the US would rise by approximately 8-10%, leading to higher costs for US consumers and businesses. - **20% Tariff**: Prices of Chinese goods in the US would rise by approximately 15-20%, further increasing costs.
4. **Exchange Rate Adjustments**: - The Chinese yuan may depreciate by 2-4% (10% tariff) or 4-6% (20% tariff) to maintain competitiveness in global markets, partially offsetting the tariff impact.
5. **Trade Diversion**: - Chinese exporters may redirect some exports to other markets (e.g., EU, ASEAN, Africa) to mitigate losses from reduced US demand. - US importers may shift to alternative suppliers (e.g., Vietnam, Mexico, India) for goods previously sourced from China.
6. **Sectoral Impacts**: - Labor-intensive industries (e.g., textiles, electronics) in China would be most affected due to their reliance on US markets. - High-tech industries may face additional challenges due to potential US restrictions on technology transfers.
7. **Long-Term Adjustments**: - China may accelerate efforts to diversify its export markets and boost domestic consumption to reduce reliance on US demand. - Supply chains may reorganize, with some production shifting out of China to avoid tariffs.
Summary of Results: -
**10% Tariff**: Moderate decline in Chinese exports to the US, slight reduction in Chinese GDP, and higher prices for US consumers. China may partially offset losses through yuan depreciation and trade diversion. -
** 20% Tariff**: Significant decline in Chinese exports to the US, larger reduction in Chinese GDP, and substantial price increases for US consumers. China would face greater pressure to diversify its economy and trade relationships. ---
Policy Implications: -
* *For China**: Accelerate economic reforms, promote domestic consumption, and strengthen trade ties with non-US markets.
** For the US**: Higher tariffs may protect some domestic industries but could lead to increased costs for consumers and businesses, potentially slowing economic growth.
This model provides a simplified analysis, and actual outcomes may vary depending on additional factors such as global economic conditions, policy responses, and geopolitical developments.
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