Investing in technology got a lot harder in the past two weeks. Tech investors, particularly in AI, have traditionally assumed the best products would scale: pick the winner, and you will win big. That assumption will sometimes still prove valid, but it now seems fundamentally outdated. Technology markets are fragmenting for reasons that are not changing soon. That is making investors’ lives difficult.
The proximate cause for the drop in US tech stocks was DeepSeek’s launch of AI products that seemed to perform tasks that the company’s American competitors do at much greater cost. A Chinese company whose actual workings are opaque even by Chinese standards, DeepSeek surprised markets. The specific instance was indeed unanticipated, but the broader phenomenon, as SIGnal readers know, should not have been. The US has been tightening the screws on Chinese technology for years. The first Trump administration took technology containment to a new level and the Biden administration went further still. Neither administration explained what a realistic endgame was. But it was obvious that China and Chinese companies were not simply going to yield and give up. Every US sanction and prohibition has been met with Chinese innovation. The resulting products might not match their US analogues byte-for-byte, but they don’t have to. They just have to be good enough to enter the markets. Then they can win on price.
DeepSeek’s ability to do that burst the AI bubble, which was inflated by confidence in the US tech sector’s ability — supported by government spending and other encouragements — to prevail on the global scale. That confidence is now weakening, not just because a Chinese tech company can compete with America’s best but because the “global scale” has been shown to be a fiction. Neither of the world’s two largest economies is going to either give up on protecting and subsidizing its tech companies or open its digital markets to the other.
More profoundly, though, the extraordinarily tight relationship between the second Trump administration and US tech majors, symbolized by the prominent display of the leaders of X/SpaceX/Starlink, Meta/Facebook, and Google/Alphabet at the new president’s inauguration, signaled that the distinction between Silicon Valley and Washington is disappearing. The paradox is that this will make the US less dominant internationally, even if the opposite was the goal. The power of the Valley was rooted in its capacity for transcending American nationalism. Now that it has full White House backing, the Valley is losing that capacity.
Apart from China, one example of this phenomenon is the Eurostack. The term has an interesting past as it is derivative of the “India stack,” or the subcontinent’s attempt under Narendra Modi to develop domestic digital infrastructure based on control of data, payment systems, and citizen/consumer identity. This is commonly referred to by the acronym DPI (data, payments, identity). When a state can shape and integrate all three of these as the basis for a national digital infrastructure, it can control the nature of its own digital development. Historians of imperialism will savor the irony of the European Union, whose leading members all have imperial pasts of varying extent, looking to the land of the Raj and the Princely States for a model of how to gain control over its digital future. Europe has not often turned to India for geopolitical policy solutions. But that is what it is doing today.
There are counter-currents. For countries like Australia or Taiwan, which find themselves on the frontline of resistance to Chinese digital dominance, joining the US tech sphere of influence makes an immediate sense. The EU is much less sure, and the Trump administration’s indifference to European opinion can only increase its doubts. The US has inadvertently become a driver of digital non-alignment. Assuming India sticks to current policy — and there is every reason to think it will, even if Modi’s own power slips — then the world’s most populous nation and the world’s three largest economies are all pulling in the same direction, which is away from each other.
What of the rest? Consider the UAE. At the end of last year, the UAE’s position, arrived at after long debate and involving considerable discomfort, was to align digitally with what we might have to start calling the America Stack. The symbol of this was the deal last spring between G42, the UAE’s AI-investment flagship, and Microsoft. G42 is run by the UAE’s national security adviser and financed by the state’s sovereign wealth fund, Mubadala. Once the Trump administration’s tech direction became clear, however, G42 pivoted and announced (January 28) that it had become agnostic as to technology.
The demise of global scaling has been gradual over the past decade-plus, but as Ernest Hemingway said of bankruptcy, it can happen “gradually, then suddenly.” Investors now have to pick their way among the India Stack, the China Stack, the America Stack, and (if it happens) the Eurostack. It is unlikely that any invested company will be able to participate, much less thrive, in all four.