The Problem with the A.I. Sheikh-Up

And more from this week...

My goodness, too much to talk about this week. I was going to start with the fading prospects of the Republican tax bill, ably predicted here months ago, in “The Tax Trainwreck Everyone Sees Coming.” But this morning the train actually went off the tracks, with the “Big Beautiful Bill” losing five GOP votes and failing in the House Budget Committee. We’ll have to dive further into that for Monday.

In the meantime, we’ve got trade, we’ve got China, we’ve got AI… we’ve even got AI trade with China. So let’s mix up the format a bit and just run through it all, still starting with your one thing to read, from yesterday’s New York Times, “Outsourcer in Chief: Is Trump Trading Away America’s Tech Future?”

In his tour through the Middle East this past week, President Trump announced major agreements with Saudi Arabia and the United Arab Emirates that will see billions of dollars in American AI chips sold to the Gulf states for installation in what will be some of the world’s biggest data centers, happily collocated alongside gigawatts of cheap Gulf power constructed quickly and without all those pesky American environmental obstacles. The chip companies love it. The AI companies love it. The sheikhs love it. But is it good for the United States?

That question is being hotly debated in the Trump administration. On one side are those who see diffusion of American technology into the infrastructure and “stacks” of prospective partners as a vital tool for solidifying both technological leadership and alliances. These countries have the resources to become AI powerhouses; better that they partner with American companies, adopt American standards, and tie themselves closer to American interests. On the other side are those who see AI leadership as one of the key technological advantages the United States still holds, its deployment domestically as a key vector for reindustrialization, and its diffusion to nations that want to work with both the United States and China as a treacherous pathway for tech transfer into the Chinese ecosystem.

In some respects both sides of the debate within the Trump administration are correct. That’s not the sort of thing I usually say… eh, well, you know, both sides have good points. You’re here for strong opinions delivered with high confidence, I know. Don’t worry, we’ll get there. Indeed, to be clear, I think that under current conditions, the opponents of these Gulf deals are correct. But the situation highlights two other issues, both of which are within the Trump administration’s power to address, and if they could do so, then deals like these could properly proceed. Or, put the other way, insofar as the administration wants deals like these, it needs to get serious about two other issues first.

Issue one is China. A particular flashpoint in the Gulf deals is G42, an Emirati firm chaired by Tahnoun bin Zayed Al Nahyan, the UAE’s national security adviser, and led by CEO Peng Xiao, an American ex-patriot who renounced his U.S. citizenship for an Emirati one. G42 has worked closely with Chinese agencies and firms, which brings us to something else you should read, from 2023:

Inside U.S. Efforts to Untangle an A.I. Giant’s Ties to China | Mark Mazzetti and Edward Wong, New York Times

The key sentence is this one: “On sensitive emerging technologies, the Emirates must choose between the United States and China, American officials have told their Emirati counterparts.” This is what Biden administration officials were saying in 2023. Presumably, Trump administration officials are saying the same now. But do they mean it? And do they have any credible way to implement it?

This past weekend, Secretary of the Treasury Scott Bessent emerged from trade negotiations with the Chinese in Geneva to declare “the consensus from both delegations this weekend is neither side wants a decoupling.” Today, the Financial Times report that Nvidia plans to establish a research center in Shanghai—is that going to be allowed? Recall, we still have President Trump on the record suggesting he would love to see Chinese EV makers like BYD set up shop in the United States. Having once made the point back in early 2024, he reiterated it this week in a Michigan speech, saying, “we want China to build [cars] in here.” Which brings us to something else from this week you should read:

Keep Chinese Cars Off American Roads | Jordan McGillis, City Journal

McGillis highlights the security threats associated with Chinese vehicles, but as the other examples underscore, the need for a coherent and consistent stance is much broader, and applies not only to the United States itself, but also to American allies. The U.S. can’t hope to control China’s role in critical supply chains if Mexico provides the Chinese a way in, but neither can the U.S. ask Mexico to exclude China while declaring no interest in decoupling itself. The U.S. can’t insist the UAE push China out of its AI infrastructure while allowing Nvidia to expand in Shanghai. The U.S. can’t tell Japan to block inbound Chinese investment while welcoming BYD to Michigan.

I say “can’t” partly as a political matter—how would U.S. negotiators show up and make such demands while their own country is adopting such contrary policies?!—but more importantly as a practical matter. The goal should be to construct a U.S.-led economic bloc of market democracies that separates itself from the Chinese sphere in supply chains, investment, and technology. A halfway approach is the worst of all worlds, imposing most of the costs and inefficiencies of trying to establish barriers, while still leaving most of the vulnerabilities and distortions that arise inevitably from entanglement with the Chinese Communist Party.

If the United States and its allies had a clear, joint standard for exclusion of China from sensitive sectors like AI, the question of the AI chips would be much simpler. Within the alliance, adoption of leading-edge U.S. chips would be beneficial to all involved. If the Gulf states were in, they would be a sensible location for U.S.-powered data centers too. If they were out, they would be out. Without strategic clarity, however, the United States cannot advance its interests effectively.

The second problem is one of scale. Even stipulating that Gulf states are appropriate partners for American technology, we should question any policy “that could mean the most powerful A.I. training facility in 2029 would be in the United Arab Emirates, rather than the United States,” per one administration official cited by the New York Times. There is no technological reason this should happen. Rather, the UAE’s advantages are in labor, energy, and regulation. American tech companies are enthusiastic about the deal because they think they can build faster and get cheaper power abroad. That’s an unacceptable state of affairs, and seems eerily reminiscent of the dynamic by which the United States deindustrialized in the first place.

Before giving the green light to other regions, the Trump administration needs to undertake an all-out push to ensure that the U.S. can build as fast as anyone. As I outlined shortly before the inauguration in Foreign Affairs, a reindustrialization strategy focused on national security, abundant energy, and scaling new technology is an ideal agenda to “Make America Great Again”:

National security provides the best starting point from which to build the case for a Trump economic agenda and with which to order its priorities. Security, after all, demands not only hard military power but also technological leadership and economic resilience. In principle, it is the one area in which no disagreement exists about the need for an active state role in strengthening the industrial base. In practice, however, there are disputes about the correct role for government, because national security necessarily includes the entire range of technologies and supply chains vital to economic renewal.

For instance, leading-edge artificial intelligence capabilities are a top national security priority. That, in turn, requires leading-edge chip production, the infrastructure to support enormous data centers, and the energy abundance to power them. Next-generation defense technology, including in space, is also an obvious priority. So is basic competence in shipbuilding and thus forging the metals from which ships are made. Unfortunately, when it comes to metals, critical minerals have become a serious vulnerability for the United States—one that China has already begun to exploit. Thankfully, the United States has deposits of nearly all necessary resources. What is needed is the will to extract and process them.

Nuclear power is a great example of an industry that U.S. economic policy should be working aggressively to advance. But, as you’ll learn in your next item:

House Republicans Are About to Wreck Trump’s Nuclear-Powered Dream | Thomas Hochman and Pavan Venkatakrishnan, Washington Post

Selling advanced chips to the Gulf could be fine, perhaps even savvy, if it came as part of a coherent economic strategy that had addressed the China challenge and was steaming ahead with permitting reform, workforce development, and a nuclear renaissance. Without those elements, though, it looks short-sighted and oriented toward corporate interests rather than U.S. economic power. Please let’s not give away strategically vital industry leadership again, sending our multinational corporations to partner with foreign governments that invest and subsidize and train where we won’t.

WHAT ELSE SHOULD YOU BE READING?

A couple of other good pieces on technology for you:

How People Are Really Using Gen AI in 2025 | Marc Zao-Sanders, Harvard Business Review

Meta Battles an ‘Epidemic of Scams’ as Criminals Flood Instagram and Facebook | Jeff Horwitz, Wall Street Journal

And the story of how the US-UK trade deal is pressuring China and the EU:

US, UK Deal Bolsters Cooperation Against China | Doug Palmer, Politico

China Criticises UK Trade Deal with US | Joe Leahy and Ryan McMorrow, Financial Times

US-China Trade Clash Risks Making Europe Dumping Ground | Bloomberg

Europe Warned to Change Fast or Become a ‘Shock Absorber’ of US-China Trade War | Finbarr Birmingham, South China Morning Post

Finally, I just really enjoyed the obliviousness of the WTO Director-General lamenting that the US-UK deal, not decades of absurd abuse by China and others, is the thing that’s really putting WTO principles at risk:

WTO Chief Warns US Bilateral Tariff Deals Could Put Trade Principle At Risk | Leo Lewis, Financial Times

AND AT COMMONPLACE

They’ve done a great job developing the best commentary on both the trade and tax issues that have been front and center all week.

Of Trade and Capital: A Tale of Two Strategies | Michael McNair

Beyond tariffs, capital flow tools are critical to reshaping America’s economy.

Why Keynes Opposed Free Capital Flows—and Why We Should Too | Michael Pettis

Dogmatic beliefs about open capital markets must give way to policies that support the national interest.

Republicans Need Not Fear | Henry Olsen

President Trump’s plan for raising taxes on the wealthy dramatically differs from George H.W. Bush’s tax flip-flop.

An 'Ireland First' Tax Code? | Brad Setser

British deindustrialization provides a cautionary tale for America.

Last but not least, Patrick McGee, San Francisco correspondent for the Financial Times and author of Apple in China, joined me on the American Compass Podcast to discuss how Apple’s experience of “chinafication” and what its story teaches us about the failures of globalization broadly.

Visit commonplace.org, follow us on X @commonplc, and subscribe for regular articles directly in your inbox.

Enjoy the weekend!