Is China Stealing American AI? Why ‘Distillation’ Has Washington Up in Arms

U.S. intelligence agencies have accused six Chinese AI companies of systematically stealing American AI models to train their own systems, according to reports. The agencies cited "aggressive, malicious, and targeted distillation activities at an industrial scale." The term "distillation" refers to a method where a new AI model uses the expertise of an existing one.

This technique allows a model to learn from an expert, such as a human providing questions and answers, or by being guided by model responses until it can produce accurate results. The process of using an existing model to fine-tune a new one is called distillation.

Some experts believe that distillation has narrowed the gap between U.S. and Chinese AI models from 12 to 18 months down to roughly six to nine months. However, China denies these allegations, stating that their breakthrough model performance relies on fundamental innovations and not on distillation or copying. Some U.S. researchers argue that while distillation may have helped Chinese companies earlier in the AI race, it is not the main reason for their recent advances.

Distillation is generally considered acceptable when a company such as Apple distills its own model for use on smartphones or when distilling open-weight models. However, distilling closed models such as those from Anthropic is a more complex issue. While some legal experts argue that distillation probably does not amount to theft, as the output of AI models is unlikely to be considered intellectual property akin to a book or movie, others contend that the U.S. claims against Chinese methods are valid.

The U.S. government is taking steps to address the issue, with Treasury Secretary Scott Bessent suggesting that Chinese AI companies conducting illicit distillation could face sanctions and Entity List designations. The U.S. security agencies are also urging companies and the government to collaborate better to defend themselves against large-scale distillation.

However, specific sanctions on China have not been discussed. U.S. companies are prohibited from using Chinese models in their terms of service, and some argue that American companies could sue their Chinese rivals for breaching these agreements.