Is AI the new China Shock?
When China joined the WTO in 2001, that one move set off the largest capital spending boom the world had ever seen. Twenty-five years later, here we are.
The artificial intelligence buildout is now comparable in scale to China's post-World Trade Organization accession investment boom, with potentially far-reaching macroeconomic consequences. U.S. hyperscalers alone, including Microsoft, Amazon, Alphabet, Meta, and Oracle, are projected to invest roughly $800 billion in capital expenditures by 2026, an 83% increase year-over-year.
Global AI spending is expected to surpass $2 trillion this year, with hard AI capital investment, such as chips, data centers, power, cooling, and networking, estimated to reach $10 trillion to $15 trillion globally over the next decade. If broader AI spending, including software, services, and AI-enabled products, is included, the 10-year total could approach $30 trillion.
While China's investment surge produced a physical investment, manufacturing, trade, and labor shock, AI brings a compute, power, software, and cognitive labor shock. However, the scale of the AI investment boom is comparable to China's, and its macroeconomic consequences could extend beyond the technology sector. AI is already at a China-scale on a hard-capex basis, and its broader impact could surpass China's entire 2000-2010 investment surge.
China produced a physical investment that reshaped global trade, commodities, inflation, labor markets, and politics. AI is also reshaping global trade and labor markets by lowering the cost of cognitive work, which could lead to deflationary pressures similar to those experienced in China's manufacturing sector. The International Energy Agency projects that global data center electricity use will more than double by 2030, equivalent to Japan's current power consumption.
However, there are significant differences between the two investment booms. China's fixed asset investment reached roughly 50% of GDP at its peak, fueled by state-subsidized capital, while AI investment, while enormous in absolute terms, is still only around 2% of global GDP and driven by market forces. This may enable AI to diffuse faster, as it does not depend on the physical relocation of millions of people.
Additionally, China's shock involved the urbanization of roughly 15% of the world's population, while AI's shock is global from day one.
The political economy risks of AI may be even more acute, as it could accelerate inequality and contribute to political polarization in democracies. If AI primarily substitutes for cognitive labor rather than complements it, the distributional consequences could be severe. Early labor market data in the U.S. already shows that job categories with high AI exposure are deteriorating faster than low-exposure categories, with a quarter of a percentage point per month decline.
Written by urgent.news from Fortune's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
