The Rest Is Software

US President Donald Trump’s visit to the Persian Gulf brought the region back into the American camp on artificial intelligence. The White House’s cancellation of the Biden administration’s AI-diffusion regulation was well timed: the message of both the trip and the cancellation was that this administration will not draw distinctions, as its predecessor did, in advancing what Commerce Secretary Howard Lutnick called “Trump’s vision for US AI dominance.” The US is, in a sense, trying to de-regulate AI politically. Washington’s move to block AI regulation by US states is also part of this. In SIG’s view, whether such de-regulation will achieve the goal of AI dominance is a different question.

As with crypto, the current administration’s US’s bias with AI is to let the chips fall where they may, so to speak, while also aggressively using the power of the state — as investor, as enforcer, as customer — to secure American advantages. Trump’s experiences of being deplatformed by Big Tech must have shaped his views: bitterness over the suppression of conservative speech, alongside the supposed promotion of anti-conservative speech, has been a dominant note since his second inauguration. In this scenario, technology and tech innovation were shown not to be autonomous forces, proceeding according to their own logic, perhaps capable of being channeled but not of being controlled. Rather they were the effects of companies run by individuals who could be influenced. That was well within the comfort zone of a lifelong businessman. (See the tariff retaliation against Apple for relocating its China production in India rather than the US.) It is a pro-market perspective in a way, but with the market understood as a place for ruthless competition among a small number of unconstrained players rather than as a mechanism for maximizing the efficient distribution of capital and labor.

Similarly, the role of the state in this perspective is to personify the nation in unconstrained and ruthless competition among states for, in U.S. Commerce Secretary Lutnick’s term, “dominance.” President Trump’s appetite for military confrontation in his first term was low, and that seems to be carrying into his second term. His appetite for economic confrontation was relatively high in term one and has gone to a new level in term two. The tools of the state are the weapons he has for such confrontation. They are directed toward securing dominance. Trump is personifying the powerful idea of economic nationalism.

The difficulty, with regard to “US AI dominance,” is that the AI sector is not like other industrial or commercial sectors. The preferred means for dominating AI has been the control of hardware, as in export controls on leading-edge chips or chip-design lithography equipment. Biden’s AI-diffusion regulations, like his CHIPS Act and much else, were about the geopolitics of hardware distribution. President Trump has opened that floodgate. But once the hardware starts flowing and the data centers are built the rest is software, the diffusion of which is extremely hard to control. Software can be stolen or replicated; more important, it can be developed independently, as DeepSeek has shown. The supply of chips and what is necessary to manufacture them can be choked off, up to a point. The supply of engineers and software-engineering skills really cannot. It will be diffused regardless of what the US or China want.

Among other things, this means US AI dominance depends on the strength and autonomy of US universities, the freedom to innovate in the US tech sector independent of political agendas, the smooth functioning of open global markets, sensible market pricing of resource inputs, the reduction of obstacles to the cross-border movement of labor … all of which run contrary to current US policy.

The Gulf states are investing in US AI infrastructure on the way to building their own systems, which will have the capacity to become independent of US systems (see SIGnal, “The America Stack,” Feb. 5, 2025). The emiratis are not happily volunteering to be hostages to US AI dominance. They are seizing the opportunity to gain access to the best technology that will enable them to maximize their own sovereignty while positioning themselves to be a sort of port for the storage, manipulation, and distribution of data, just as Dubai’s port operates with coffee, tea, and so much else.

The pattern is similar elsewhere, although no one can direct capital with quite the speed, and in quite the volume, that the Gulf states bring to bear. Malaysia hesitated for a moment at new deals for Chinese technology when Washington threatened retaliation against states using Huawei’s latest AI chips, but in the end, the shape of AI is not going to be determined by hardware. The massive computing power required to participate in the search for the grail of Artificial General Intelligence (AGI) is indeed a hardware question, but for sub-AGI artificial intelligence, which might well prove to be most if not all of AI, hardware is only one factor. The rest is software. And US dominance of it is unlikely to be secured using the current means.

The Defense Industry's New Math

Global military spending in 2024 hit a record that will be broken in 2025. Much of the growth comes from the US (which just announced a goal of a $1 trillion defense budget) and its adversaries, but an important part is from US allies that feel they can no longer rely on US security guarantees. For that reason, they seek to build their own defense industrial bases rather than simply buy more American military products. There are opportunities for investors in this global proliferation of military production financed by government budgets, although the peculiarities of military industries make it more important than usual to have the right expertise. Defense-sector exchange-traded funds (ETFs) have, not surprisingly, boomed: the VanEck Defense UCITS Took in $1 billion in March 2025 alone.

In 2024 global military spending hit $2,718 billion, a 9.4% increase over 2023 and the steepest year-on-year rise since the end of the Cold War. The main drivers were the conflicts in Ukraine and Gaza. Israel’s spending increased 65%, to $46.5 billion, which represented 8.78% of GDP, the second highest ratio after Ukraine — which spent nearly 35% of GDP on its military. Russia spent $149 billion, up 28% from 2023 and representing 7.1% of GDP and 19% of total government spending. German spending surged to $88.5 billion, the fourth largest total in the world after the US, China, and Russia, and just ahead of India at $86.1 billion.

All of these numbers are likely to grow in 2025 and into 2026, except perhaps in Ukraine, which might not be able to get above 35% of GDP. But the Ukraine example illustrates a different and more interesting dynamic. According to one report by a former Ukrainian official, Ukraine’s domestic defense sector has grown from $1 billion to $35 billion in just three years. It now produces about a third of Ukraine’s weapons and ammunition, and nearly all of its drones. That is not nearly enough to protect itself against the Russian army, but it is enough to ease some of the country’s dependence on the US

Similarly, Germany in particular, but also France and the European Union, have entered a new era in terms of domestic military production. Germany’s head of state, Friedrich Merz, won a parliamentary vote in March to not apply Germany’s “debt brake” policy to the defense sector. Merz also appealed to the EU to exempt defense production from its own spending rules. (EU member states have their own military budgets but the EU has rules on public debt.) Sixteen of the Union’s 27 members are seeking exemptions from the EU rules so they can increase their defense spending.

What is driving all this spending is principally the desire to, as Merz puts it, “achieve independence from the USA,” which under President Trump he sees as “largely indifferent to the fate of Europe.” EU Commission President Ursula von der Leyen, herself a former German defense minister, declared, “We are in an era of rearmament,” one that requires Europeans to construct their own defense as part of what France’s President Macron refers to as “strategic autonomy” from the US. The EU hopes that new bloc-wide procurement policies will strengthen European defense production at the cost of American materiel.

There is irony in the fact that European NATO members in recent years have spent more, not less, on weaponry produced in the US: from 52% of spending in 2015-19 to 64% in 2020-24. But that very dependence is why traditional US allies are so focused on independence from the US now that the US has abandoned its traditional approach to alliances. It is not just Europe. South Korea has been trying to replace US purchases with its own production for several years, including so that it might export weapons. Japan also seeks to increase domestic military industries. Israel is striving for self-sufficiency in bomb production. Even Australia has been trying to be more militarily independent, although in practice Australian defense production, current and projected, is commonly done jointly with US defense primes.

The proliferation of defense production in a globalized world can lead to curiosities, such as the battle between a Chinese state-controlled defense company and an Australian to buy a troubled Brazilian manufacturer. That in turn points to both the internationalization of military production and the question of what gets done with the products. US military industries and the US military itself have always advanced together. Foreign military sales were integrated into a much larger public-private strategy that was rooted in political alliances. The point was not to sell to enemies. The proliferation of military-industrial production in the past three years suggests a future in which weapons will be available from many sellers, including NATO members, with little or no reference to US policy guidance.

In short, the desire for autonomy from the US is driving a global surge in weapons production that will in turn lead to weapons proliferation on an unprecedented scale. Unless there is a significant increase in war, there will be an increase in excess production. Excess production will need to be off-loaded somewhere. This is the peculiarity of defense production. If you are not simply stockpiling — which is a dead weight on the economy — then you are proliferating. Weaponry ETFs in this scenario would have to be a short-term play. The longer-term returns will be in companies that aim not just at domestic production but at export.

Can AI Make a Country Great Again?

Much recent commentary on artificial intelligence (AI) has focused on the prospect of a company or a country winning a race for artificial general intelligence (AGI) or more-than-human “superintelligence.” However, that goal, which seems rather more religious than technological, is both elusive and, should it ever be achieved, fragile (see SIGnal, “Mutual Assured Malfunction,” March 13, 2025). Investors are focusing instead on “little tech” and firm-level or industry-level AI that uses specific data sets to engineer specific productivity gains. In SIG’s view, this more modest course seems both economically more promising and politically much more sustainable. But it definitely does have risks of its own.

The appeal of “little tech” AI is partly that it leaves to one side the many serious questions about data privacy and other more existential matters that are posed by AGI. Smaller AI systems can run on the contained, often proprietary data sets involved in industrial processes, especially in manufacturing. The goal is not to replicate the human brain but to make industrial processes more efficient, raising productivity. It is a type of automation, using new technology yet still familiar enough from the history of industrial production.

With little-tech AI, startups can focus on specific problems whose solutions will provide a payoff in the relatively short term. In other words, AI would be monetizable. This has an obvious appeal not just to startup investors but also to industrial incumbents whose processes would be improved and whose productivity would be raised in competition with their rivals. Startups are not alone in this sphere. The German giant Siemens, for example, has put industrial AI at the core of its offering.

Politically, this approach to AI is much more appealing to most governments, only a few of which (the US, China) can have much hope of achieving global dominance by winning a race for AGI, at which point they might well regret getting what they wished for. Leaving aside the large question of AI data-center electricity demands, it offers the attractive prospect of raising productivity while reducing carbon use — because your factory in Texas, enhanced by AI, will no longer have to source so many of its components from East Asia, with all the carbon-using transport that entails. The little-AI approach also means states would not have to expose their citizens’ data to foreign tech multinationals, possibly based in hostile or overweening states, in order to participate in the later 21st century. That would be a gain for state sovereignty; and given that so many of the tensions around globalization have had to do with the way it threatens sovereignty and the democratic (or otherwise) accountability of governments to citizens, the little-AI approach could conceivably enhance global stability and the prospects for peace. Little AI, by improving productivity within a given national domestic workforce, could help states that are facing demographic stagnation — which is pretty much all industrialized states and many less-industrialized ones — to nonetheless grow on the basis of domestic labor (see SIGnal, “AI Family Values,” May 3, 2024). As Marc Andreessen and Ben Horowitz wrote in July 2024, “little tech” could make it possible “to reconstruct the American manufacturing sector around automation and AI, reshoring entire industries and creating millions of new middle class jobs” while also having green benefits. Technology could, in effect, provide the “labor” that would solve the biggest challenge facing President Trump’s vision of a more self-sufficient US: the lack of workers operating at a sufficient level of productivity (see SIGnal, “Trade Wars and US Labor,” April 11 2025).

Less carbon use, stabilization of the international sovereign-state system, a growing middle class, a renewal of rich-world domestic manufacturing but with higher wages and less grim manual work…What could possibly go wrong?

AI-enhanced production aimed at reshoring manufacturing to high-wage economies would square the circle of productivity growth and de-globalization. It would revive the pre-1975 global industrial status quo with the crucial addition of China (but not so much India or Southeast Asia). If you have the good fortune to live and work in a benefitting state, this would be a positive outcome. It could, however, also fuel techno-nationalism in the rich world (plus China) and make growth outside the AI-enhanced nations highly problematic. One key issue raised by the US-China struggle — a protected US market deprives non-American producers of consumers, while a protected Chinese economy, likewise deprived, dumps its production for the pre-tariffs US market onto the rest of the world’s economies — would be gravely worsened as the world’s two largest economies reduce their dependence on the rest of the world for both supply and demand.

AI-enhanced de-globalization could, in short, reverse the global redistribution of labor productivity that led to the greatest poverty reduction in human history. In theory, the gains from little AI could be more equally distributed. After all, the AI enhancements that would lift an underemployed person in Oklahoma or eastern Germany into the middle class of his or her domestic economy could do the same for a person in Nigeria or Thailand. But that outcome is not the goal for the people, states, and companies that are driving the growth in AI monetization. Their goal is nearly the opposite. For investors, the greatest gains will come from identifying companies and sectors best positioned to gain from AI-enhanced de-globalization.

A View From Europe

By Dee Smith

I recently returned from 6 weeks in Europe — Austria, Italy, Switzerland, and the United Kingdom. My trip coincided with the build-up to President Trump’s tariff announcement on “Liberation Day” and the reactions that followed it. The most interesting element of the trip was the evolution, or devolution, in views of the United States.

At the end of February, the attitude I first encountered was a mix of perplexity about the changes in the US and sadness that they were occurring. Even people who were disposed to dislike the US discovered that they had nonetheless kept within themselves a kind of hope based on belief in America and its distinctive experiment in democracy and freedom. Even with all its flaws the US seemed, so they said, to represent a possibility that humans might be better than we fear we are. One remark I heard summarized the attitude: “It seems that the lights have gone off in the shining city on the hill.” It was a sense of tragedy, almost of grief. Now, some said, they see that the U.S. is “just another country.”

But as the tariffs were imposed, this recessional mood changed. The attitude of heartache began palpably to transform into fear, and into anger. It was not as if the winds of change had not been blowing, and they knew that. There had, for example, been warning signs over the years that the US was pulling back militarily from Europe. And the Europeans were certainly aware of the fractures in US political structures, as in their own.

However, the tariffs were something different. The universality of them, the suddenness, and the way they were applied — with a chart apparently developed with the help of ChatGPT based on an arbitrary calculation — was disorienting, then frightening, and finally angering.

When the White House suddenly, and apparently temporarily, backed away from the tariffs soon after they were announced, it simply added confusion to the fear and anger around the entire issue and in many minds further undermined the stability of the US governance and financial system. “I really don’t know what to think” was a comment I heard more than once, sometimes followed by “but I’m angry.”

Although they may not have known what to think, they did know how they felt. People have cancelled trips to the US and taken other personally expensive measures, so off-putting have they found the developments.

There was still, amid the feelings of loss and anger, the wish that the old US would come back to something like what it was and an ember of hope that it might. But the dominant note was fear, driven by US actions but not only about them. People fear the Ukraine war continuing while they also fear it being settled: they fear Russia’s intentions once it is loosed from the constraints of fighting in Ukraine. They fear war in other hot spots: Iran, Taiwan, the Koreas. They fear the non-sustainability of their economic situation. They fear having to dial back their social support systems to increase their military budgets. They fear they will be outcompeted by other areas of the world. They fear for their supply chains. They fear more and larger waves of immigration from the Middle East and Africa, particularly if war escalates in the Middle East. They fear for the social and political stability of their countries. They fear unfair competition from China, and they fear what kinds of collusion China and Russia may be up to. And, as a constant, chronic theme, many fear the impact of climate change.

Europe is, like the rest of the world, in the midst of extraordinarily large transformations with unknown trajectories. The changes seem to have come on very suddenly, although of course they have not: there have been harbingers for years. The causes of the changes also elude many. That of course is for history to judge, but I did not find a single person who disagreed with the idea that fundamentally, beneath it all, lie broken promises. I have written about this previously, and will not go into any detail here, but people see that, although they played by the rules, the implied promises they believe were made by the political and economic system — that their children’s lives would be better than theirs, for example — have been irreparably broken.

Most surprising to me, I heard more than a few people in Europe, including investors and businesspeople, say quite seriously that they thought we were at the point of a very big change. And a number said the period between the end of the old and the beginning of the (unknown) new will be very tumultuous and dangerous.

Europe was the birthplace of the Enlightenment, and it was on Enlightenment ideas and ideals that not only the American system but also every system in Europe, and now far beyond, were based. Holding that the world is fundamentally comprehensible, the Enlightenment posited that humans make decisions rationally, in their own best interests, and thus that society can be rationally organized in a purposeful and predictable way. Not just democracy and capitalism, but socialism, Marxism, and communism are all based on different views of how to apply European Enlightenment ideas about organizing society rationally, purposefully, and predictably. Unfortunately, this rationalism simply does not seem to be an accurate take: we make our decisions emotionally.

So I found I was asking myself many times on this trip: if this whole superstructure of concepts does not in the end work — if it cannot work because of the nature of the drivers of human behavior — well . . . then what? That is the largely unspoken fear lying underneath all the other fears, perhaps not just in Europe.