China can now mass-produce 7 nanometer chips without Western lithography, making it a formidable fast follower but not a frontier peer. That single fact anchors everything else in the semiconductor contest, from export controls to the global spread of Chinese AI models.

*This report deliberately excludes Taiwan. It covers only fabrication capacity on the Chinese mainland, where the policy questions for Washington and investors actually sit.

What the Mainland Can Actually Make

SMIC, the national champion foundry, mass-produces at 7 nanometers using deep ultraviolet (DUV) machines pushed far beyond their design intent. The workaround is expensive. Reaching 7 nanometers with DUV requires roughly 34 lithography steps where extreme ultraviolet (EUV) tools need nine. Costs run an estimated 40 to 50 percent above comparable foundry processes, and yields remain well below industry norms.

Capacity is nonetheless scaling fast. SMIC’s output at 7 nanometers and below reached an estimated 45,000 wafer starts per month in late 2025. That figure is projected to hit 60,000 this year and 80,000 in 2027, with 7 nanometer capacity alone set to double in 2026. Beijing wants combined 7 and 5 nanometer output to grow fivefold within two years, with Hua Hong joining SMIC at the advanced edge.

A 5 nanometer process exists, but only barely. Pilot runs are underway for Huawei’s next Ascend accelerators. Independent estimates put yields near 20 percent, though some Chinese sources claim figures two or three times higher.

Below the leading edge the picture is far stronger. China commands enormous and growing capacity at 28 nanometers and above, where most automotive, industrial, and consumer silicon lives. Memory is following the same trajectory, with YMTC and CXMT scaling output and CXMT beginning high-bandwidth memory development.

The practical ceiling is this: domestic AI chips fabbed in 2026 roughly match Nvidia’s 2022 generation. That is sufficient for mass domestic inference and a captive market. It is not sufficient for frontier training at competitive cost.

The Vertical Bet

China’s industrial policy has gone fully vertical, funding every layer from photoresist to processor. Big Fund III, a $47.5 billion state vehicle that began deploying in 2025, prioritizes the weakest links: lithography, fab equipment, and design software.

The 15th Five-Year Plan, covering 2026 to 2030, formalizes five priorities:

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The United States and China are racing to embed agentic AI into drones and swarms, automating the kill chain for decisive military advantage.

The next great-power war may be decided by software that picks its own targets. The United States and China have grasped this and are racing to build it. Both are pushing autonomy into drones, swarms and strike systems at speed.

Each treats the capability as the edge that could decide a future conflict. Their rivalry has moved from hardware toward the algorithms that command it. The stakes reach from the Taiwan Strait to global arms markets.

Agentic AI is the engine of this shift, software that senses, decides and acts with little human input. Its sharpest military form is sensor-to-shooter automation.

An agent pairs reconnaissance data with the best available weapon in seconds. A drone that spots an armored vehicle can task a loitering munition to strike it.

No human needs to approve every step in that loop. Speed becomes the prize, and human deliberation becomes the bottleneck. This brief maps how Washington and Beijing apply such systems outside cyberspace.

The Sensor-to-Shooter Loop, Compressed into Seconds

The agentic kill chain collapses four steps that once needed several humans. The machine senses, decides and pairs the strike, while the operator supervises rather than triggers.

America Bets on Software and Swarms

Washington’s signature effort began as the Replicator initiative in 2023. Its goal was to field thousands of cheap autonomous systems by August 2025. Deputy Secretary Kathleen Hicks framed it as a counter to Chinese mass.

The plan slipped badly and drew congressional criticism over cost and progress. By the deadline the Pentagon had fielded hundreds of systems, not thousands. In late 2025 it folded the program into the Defense Autonomous Warfare Group. Officials now favor larger, longer-ranged attack drones and better swarm software.

The deeper American wager is on software that ties everything together. Anduril offers the clearest example with its Lattice platform. Lattice fuses drones, sensors and radar into one shared command picture.

It builds a live three-dimensional model of the battlefield in real time. Operators command desired effects while the software handles the targeting work. The firm calls the result an operating system for war.

Anduril’s product range shows how broad this push has become. It sells loitering munitions, interceptor drones, surveillance towers and undersea vehicles. In 2026 the Army awarded it a ten-year deal worth up to twenty billion dollars.

OpenAI partnered with the company to sharpen counter-drone detection. Anduril is also developing an autonomous fighter for the Air Force. American doctrine still keeps a human in or on the loop. Yet each new system nudges more decisions toward the machine.

Manned-unmanned teaming is the next American frontier. The idea pairs crewed jets and ships with autonomous wingmen and vessels. Anduril’s Ghost Shark gives the fleet a long-range undersea drone.

Its Bolt-M lets a single marine launch a backpack-sized strike drone. Shield AI, valued at 12.7 billion dollars in 2026, supplies swarm software. Allied buyers in Britain and Australia already field Anduril systems too.

The strategic logic is explicit in Washington. Officials argue that future wars will favor whoever fields autonomy fastest. The Indo-Pacific, and a possible fight over Taiwan, drives the urgency. Speed of production has become as important as the weapons themselves. The Pentagon’s planned spending signals a far larger bet on autonomy ahead.

China Pursues Intelligentized War

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The Gulf has decided that the commodity after oil is compute, and it is buying that future almost entirely from American companies.

The United Arab Emirates and Saudi Arabia are pouring sovereign wealth into data centers, equity stakes in frontier labs, and the most advanced chips that Nvidia and AMD will sell, with Qatar a step behind and writing large checks of its own.

The strategy is coherent and it is fast. The catch lives in the fine print of nearly every deal, which is a quiet agreement to keep Chinese technology out and to build on a stack that Washington can inspect.

That bargain is the organizing fact of Middle Eastern AI strategy. Each Gulf state wants to be a third center of gravity in artificial intelligence, separate from the United States and China, hosting enough compute to serve roughly half the planet within a short network hop.

None of them can get there without American silicon, and American silicon now comes with conditions. So the region has chosen sides while pretending, when convenient, that it has not.

Sovereign Funds, National Champions, Cheap Power

The capital is staggering and it is concentrated. Saudi Arabia’s Public Investment Fund manages around a trillion dollars, with its own 2024 report putting assets near $940 billion and the tracker Global SWF estimating closer to $1.15 trillion. Abu Dhabi is larger still.

Its three principal funds, ADIA, Mubadala, and ADQ, hold roughly $1.7 trillion between them, and by Global SWF’s count the UAE’s largest state institutions together control close to $2.5 trillion. Only a portion of that is aimed at technology, though the portion is large and rising, and it sits on top of the separate trillion dollar frameworks each state has signed with Washington.

Money at that scale does not wait for venture rounds or congressional appropriations. It moves when a crown prince decides it should.

Each country has stood up a national champion to spend it. The UAE works through G42, the Abu Dhabi technology group, and through MGX, an investment fund launched in 2024 by G42 and Mubadala.

Both orbit Sheikh Tahnoon bin Zayed Al Nahyan, the country’s national security adviser and the brother of its president, which tells you the file sits at the top of the state.

Saudi Arabia created HUMAIN in May 2025, a PIF company chaired by Crown Prince Mohammed bin Salman and run by the former telecom executive Tareq Amin. Their mandate is to build the entire stack from data centers to Arabic language models. Qatar moves more quietly through its sovereign fund and a homegrown model called Fanar.

Geography does the rest. The Gulf offers three things that crowded Western markets cannot supply at once. There is empty land, and a lot of it. There is energy that is cheap and abundant, with gas and solar today and nuclear arriving, which matters when a single campus can draw as much power as several mid sized cities.

And there is patient state capital that treats a data center as national infrastructure rather than a quarterly bet. Stargate UAE, the flagship, is designed to run on a blend of nuclear, solar, and gas precisely because the math of gigawatt scale compute is, before anything else, a math of electricity.

The ambition is not only to host other people’s models. All three are building sovereign systems tuned to Arabic rather than bolted onto English first ones.

The UAE’s Technology Innovation Institute ships the Falcon family, and its Falcon H1 Arabic models have topped the open Arabic leaderboard, beating larger systems from Saudi Arabia, Qatar, and even some Chinese and American labs on Arabic benchmarks.

Saudi Arabia has ALLaM through HUMAIN. Qatar has Fanar. The point of these models is leverage, since a country that can train its own systems is a country that can negotiate over the chips for everyone else’s.

Who is Paying Whom, and for What

The clearest way to read the region is to follow the contracts. They form a web with Gulf capital on one side, two national champions in the middle, and the American technology stack on the other. The headline projects are large enough that they have rearranged the global data center industry around them.

Stargate UAE is the centerpiece. Announced during President Trump’s Gulf tour in May 2025, it is a five gigawatt campus in Abu Dhabi, the largest AI build anywhere outside the United States, spanning ten square miles and capable of housing on the order of two and a half million GPUs at full size.

G42, through its data center arm Khazna, is constructing it. OpenAI and Oracle operate it. Nvidia supplies Grace Blackwell GB300 systems, Cisco the networking, and SoftBank rounds out the consortium.

The first one gigawatt cluster anchors the site, with an initial two hundred megawatts due in 2026. Sam Altman has called it the first milestone of OpenAI’s plan to build infrastructure for allied countries, which is a polite way of saying the model layer and the host country are now bound together.

MGX is the capital arm of the same ambition. It took a stake in OpenAI and joined the United States Stargate venture alongside OpenAI, SoftBank, and Oracle, a project carrying a five hundred billion dollar headline. With Microsoft and BlackRock it set up an infrastructure fund that started near thirty billion and aims toward one hundred billion. It has also put money into xAI, Databricks, and Europe’s Mistral.

It has put money into…

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The world’s oceans look vast on a map; the places that actually matter are narrow. A handful of straits, canals and channels carry almost all seaborne commerce, and five of them stand out. The Strait of Hormuz funnels hydrocarbons. The Strait of Malacca carries the energy that fires East Asia and the manufactured goods that pay for it. Bab el-Mandeb is the southern gate to the Suez Canal. The Turkish Straits move Black Sea grain and oil. The Taiwan Strait shuttles the silicon and electronics that run the digital economy. Each is currently shadowed by a political dispute that could narrow or close it.

Yet the past two years contain a useful surprise. The Houthi campaign in the Red Sea diverted most container shipping from Bab el-Mandeb for the better part of two years, and the world economy absorbed it. Freight rates spiked. Egypt’s canal revenues halved. Insurers raised premia. But global trade kept moving, inflation barely twitched, and Asia did not slow.

The lesson is that the world has more shipping slack, more inventory and more capacity for rerouting than worst-case rhetoric assumes. The chokepoints to worry about are the ones for which detour is harder, or where the cargo cannot be substituted. Hormuz and the Taiwan Strait both qualify. The others matter less than their headlines suggest.

Hormuz: the World’s Hydrocarbon Artery

No waterway pays a higher energy dividend than the slim passage between Iran and Oman. Around 20m barrels of crude and refined product moved through it each day in 2025, by the EIA’s count, roughly a quarter of seaborne oil and a fifth of global liquids consumption.

The strait also carries about a fifth of global LNG trade, almost all of it Qatari or Emirati cargo bound for Asia. Saudi Arabia accounts for around 38% of the crude transiting Hormuz, Iraq for 22%, the UAE for 13%. The destination mix is overwhelmingly Asian: China and India alone take about 44% of crude exports, with Japan and South Korea close behind. America imports under 0.5m b/d through the strait, around 2% of its petroleum needs.

What makes Hormuz exceptional among the five is the absence of meaningful workaround. Only Saudi Arabia and the UAE operate pipelines that could shift oil around the strait, with roughly 3.5m to 5.5m b/d of usable bypass capacity between them.

That covers a fraction of the daily flow, and none of the LNG. Iranian harassment of tankers has continued in spurts since 2019, including the seizure of the MSC Aries in April 2024. After Israeli and American strikes on Iranian nuclear sites in June 2025, transits paused briefly, freight insurance ticked up, and Brent rose for several sessions before settling. Tehran’s standing threat to close the strait has never been carried out, and most analysts judge a full closure unlikely; Iran would gut its own oil exports first. A partial disruption, by contrast, is the kind of risk markets have learned to price.

Two diplomatic developments cushion the threat. The Saudi-Iran rapprochement brokered by China in March 2023 has held. The October 2025 Gaza ceasefire has steadied the wider region. Neither has changed the underlying arithmetic: a sustained closure would force a deep drawdown of strategic petroleum reserves, lift prices sharply and squeeze Asian refining margins for as long as it lasted. America would feel it through prices, not volumes.

Malacca: Where Asia Funds its Growth

If Hormuz is the world’s filling station, the Strait of Malacca is its supermarket aisle. The 900-kilometre channel separating Sumatra from peninsular Malaysia is the single busiest maritime corridor on the planet. By the EIA’s accounting it handled 23.2m barrels of oil per day in the first half of 2025, the largest of any chokepoint, including 9.2 billion cubic feet of LNG.

Estimates of how much of global trade by value passes through Malacca vary widely, from a fifth to a third depending on definitions; even the lower number is enormous. Its narrowest point, the Phillips Channel, measures just 1.7 miles across. Tens of thousands of vessels squeeze through each year.

The most exposed customer is China. Around 48% of the crude entering Malacca is bound for Chinese refineries, and roughly four-fifths of China’s oil imports must transit this strait. Hu Jintao referred to this as China’s ‘Malacca dilemma’ as early as 2003; Beijing has been working to ease it since.

The Kyaukpyu pipeline through Myanmar, Pakistan’s Gwadar port, the Hambantota terminal in Sri Lanka and overland Russian crude all chip away at the share funnelled through the strait. None comes close to replacing it. Japan and South Korea import a comparable share of their energy by this route. Coordinated patrols by Singapore, Malaysia and Indonesia have suppressed piracy to a fraction of its 2000-era peak.

The peacetime threat is…

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By gating its chips, fencing off its lithography and rationing its model weights, Washington has converted a commanding lead in artificial intelligence and quantum computing into a deliberate instrument of statecraft against Beijing.

The strategy, refined across two administrations, aims less to outrun China than to lock the doors behind itself. Deny the silicon. Deny the software. Deny the equipment. Let economic distance compound.

For now, the bet is paying off. American frontier compute remains roughly three generations of process technology, an order of magnitude in private capital, and one strategic vocabulary ahead of its rival. Whether the moat keeps its depth depends on the durability of the controls, the elasticity of smuggling routes, and Beijing’s capacity to substitute scale for sophistication.

The Structural Gap

The numbers favour America with uncomfortable consistency. In 2025 organisations based in the United States released 50 notable AI models. Chinese institutions ranked second but well behind. Industry, mostly American, produced over 90% of the field.

Private investment in American AI startups reached $109.1bn in 2024, against $9.3bn for Chinese peers, the tenfold gap that funded the data-centre buildout now underwriting the lead. America hosts 5,427 data centres, more than ten times any other country.

The performance gap on the main benchmarks has narrowed almost to a sliver. As of March 2026 the top American model led its nearest Chinese competitor by 2.7 percentage points, down from a double-digit chasm two years earlier.

Closeness reflects Chinese efficiency, not parity of resources. China still produces more AI publications and patents than any other country, but the high-impact citations and the frontier model releases continue to come from California, Washington state and London.

The quantum picture mirrors the asymmetry. Beijing has poured roughly $15bn of public money into quantum information science, against America’s $4bn from federal sources. Private capital reverses the imbalance: American quantum firms have drawn around $3.7bn from venture and corporate backers, Chinese counterparts about $255m.

IBM’s Condor processor exceeded 1,000 superconducting qubits in 2023. China’s flagship Tianyan-504, announced in late 2024, runs 504. Its Zuchongzhi-3, opened for cloud use in October 2025, runs 105. American firms also lead the harder race for fault-tolerance, demonstrated by Google’s below-threshold error correction on its Willow chip in late 2024.

The Diffusion Framework

The Biden administration’s last major export-control act, the Framework for Artificial Intelligence Diffusion of January 15th 2025, codified that lead. The rule split the world into three tiers governing access to advanced AI accelerators and frontier model weights.

Tier 1 comprised the United States and eighteen treaty partners with unrestricted access. Tier 3 captured arms-embargoed jurisdictions plus Macau, all locked out entirely. Tier 2 was everywhere else, subject to licensing caps, per-country chip allocations and a 7% deployment ceiling for any single jurisdiction.

The framework was explicit about its purpose: to keep Tier 2 countries at least a generation behind the frontier, defined at 10 to the 26th floating-point operations of training compute, an order of magnitude beyond today’s leading models. The architecture acknowledged a hard truth. The geography of compute is the geography of power, and most of that compute already sits in a handful of allied territories.

From Biden to Trump

The diffusion rule’s life was short. The Trump administration rescinded it on May 13th 2025, two days before its compliance date. The Commerce Department called it overly complex, accused it of downgrading diplomatic partners and promised a simpler replacement.

The harder architecture has survived. Successive expansions of the…

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In a quiet moment in Gades, the young Julius Caesar, then a Roman quaestor in Hispania, is said to have wept before a statue of Alexander the Great.

He had done nothing memorable, he complained, at an age when the Macedonian had conquered most of the known world. Europe’s AI policymakers, surveying the American landscape, know the sentiment.

Europe’s bid…

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The US and China have stopped competing within a shared technological system and started constructing two parallel ones, with the export control regimes built since 2022 doing the chiseling.

There is no better symbol to illustrate this kind of weaponized interdependence than the ancient Chinese symbol of the Yin and Yang. Like Beijing and Washington, each carries a necessary essence of the other despite their contrasting oppositions.

For investors, businesses, and policymakers, the operative question for the next decade is where the seams form and how much each side is willing to bleed defending them.

The Strategic Frame

The US-China technological relationship rests on an asymmetric architecture of interdependence. Washington’s leverage sits upstream in the value chain, concentrated in intangibles: chip design software, advanced lithography, the foundational architecture of frontier AI models, and the patent and standards regimes that govern them.

The US and its allies control roughly 90 percent of global semiconductor manufacturing equipment and about 92 percent of the broader chip supply chain value. Beijing’s leverage sits downstream in tangibles: refined critical minerals, magnet production, battery precursors, active pharmaceutical ingredients, and a manufacturing labor base no other economy currently replicates at scale.

China controls 85 to 90 percent of global rare earth processing capacity, and dominates refining for graphite, gallium, germanium, antimony, and several heavy lanthanides without which precision-guided munitions, electric vehicles, MRI machines, and frontier chip fabs cannot be built.

Each side, then, sits on a different choke point along the same circulatory system. That is the geometry of weaponized interdependence. The export control war is the working out of who can squeeze hardest without inducing fatal blowback at home.

The Mechanics of Tit-for-Tat

The post-2022 sequence has been remarkably symmetrical in form even where it is asymmetrical in substance. Washington imposes restrictions calibrated by performance threshold, end use, and entity. Beijing responds with licensing regimes, extraterritorial reach, and selective approvals that deliver pain through ambiguity rather than outright bans.

The October 2022 BIS rules began the modern phase by cutting China off from advanced computing chips and chipmaking equipment. They were updated in October 2023 to close loopholes and expanded in December 2024 to cover high-bandwidth memory and additional equipment.

The Trump administration supplemented them again in January 2026, imposing a 25 percent Section 232 tariff on advanced semiconductor imports effective January 15. The same package shifted export review for Nvidia’s H200 and AMD’s MI325X from presumption of denial to case-by-case evaluation. Blackwell-class chips remain under presumption of denial.

China’s countermeasures have moved on a parallel track. Beijing imposed export bans on gallium, germanium, and antimony in December 2024, and in April 2025 it restricted exports of seven medium and heavy rare earths, including terbium, dysprosium, and yttrium.

The Trump administration’s September 29, 2025 affiliates rule extended entity-list reach to companies 50 percent or more owned by listed parties, and Beijing met it ten days later with its most aggressive measure yet: extraterritorial licensing on rare earth oxides, metals, and magnet products, covering items produced abroad with Chinese inputs or technology.

The escalation erased over $1.5 trillion in equity market value in two days, forcing the Busan summit at the end of October 2025, where both sides agreed to a one-year mutual suspension.

That truce expires in November 2026. The MATCH Act cleared the House Foreign Affairs Committee on April 22, 2026, in what lawmakers called the largest export control markup in congressional history.

The bill signals where the next round goes: country-wide prohibitions on chokepoint chipmaking tools, a 150-day allied alignment deadline aimed at the Netherlands and Japan, and the closure of servicing loopholes that have kept Chinese fabs operating older Western equipment.

The pattern is now a stable cycle. Escalation, market reaction, summit, partial suspension, legislative or regulatory ratchet, repeat.

Why the Truces Are Not Detentes

Two structural features make the current pause unstable:

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The state of play

Six weeks into the war, the contours of an exit have grown murkier rather than clearer. The 10-day ceasefire between Israel and Lebanon that took effect on Thursday, 16 April, at 5 pm Eastern remains in place, but its fragility is now the dominant feature.

Prime Minister Netanyahu has reiterated that Israel will not withdraw from southern Lebanon until Hezbollah is fully disarmed, while Defense Minister Israel Katz continues to describe the campaign as incomplete. On the Iranian front, the picture has deteriorated sharply over the past 48 hours.

What began as a tentative diplomatic opening on 17 April, when Iranian Foreign Minister Abbas Araghchi declared the Strait of Hormuz open for commercial vessels along a coordinated route, has reversed. Tehran has reimposed effective control, citing the ongoing U.S. naval blockade of Iranian ports.

New data confirm zero oil tankers transited the strait today, marking the first complete closure in its modern history. The U.S. blockade, now in its seventh day, has already turned back more than a dozen vessels. A second round of U.S.-Iran talks, originally floated for this weekend in Pakistan, is now in serious doubt.

Iran has publicly rejected or deferred participation “as long as the naval blockade remains,” while accusing Washington of “deception” and warning that the two sides are “on the verge of a new round of escalation.” President Trump has responded by dispatching Vice President Vance and special envoys to Pakistan for what he calls the “last chance” round on Monday, simultaneously warning that failure will trigger strikes on every Iranian power plant and bridge.

Hormuz reopens, then slams shut again

The 21-mile chokepoint, which normally carries roughly one-fifth of global seaborne oil and 20% of LNG, had shown the first signs of life earlier in the week.

Throughput had collapsed to near zero after the initial blockade and mine threats; Kpler data and Goldman Sachs estimates pegged it at roughly 10% of normal on a four-day average. The 17 April announcement triggered an immediate relief rally. Brent fell more than 9% into the low $90s from near $99, and U.S. equity indexes hit fresh records.

That relief proved short-lived. With zero crossings on Sunday and Iranian forces reasserting “tight military control,” the market is repricing the risk. War-risk insurance premiums, which had eased from their March peaks above 5% of hull value to the 0.8% to 1% range on coordinated routings, are once again climbing.

Capacity in London remains strained, reinsurance tight, and most quotes are still limited to vessels tied to China, India, and Pakistan. Washington has directed the DFC to partner with U.S. insurers on a reinsurance facility providing up to $40 billion in revolving coverage, but shipowners are waiting for tangible de-escalation before committing capital.

Prediction markets, which briefly lifted odds of full Hormuz normalization by 30 April, have reversed course; the probability now sits well below 30%, reflecting the widening gap between political statements and on-the-water reality.

The Uranium Endgame

At the core of the standoff remains a proposed three-page memorandum of understanding linking a cash-for-uranium transaction to a voluntary enrichment moratorium. Washington has sought the surrender of Iran’s roughly 2,000 kg stockpile (including 450 kg at 60% purity) in exchange for unlocking approximately $20 billion in frozen funds.

Tehran has pushed back hard on both the timeline, countering a U.S. demand for…

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Hormuz Holds Its Breath

The two-week ceasefire between Washington and Tehran, announced by President Trump late on 7 April ahead of an 8 p.m. Eastern deadline, has not reopened the Strait of Hormuz in any commercial sense.

In the first day or two after the truce took effect, ship-tracking services counted only a handful of transits: MarineTraffic and Kpler recorded five bulk carriers in the first 24 hours, and S&P Global Market Intelligence logged nine vessels across Wednesday and Thursday.

That is a trickle against a pre-war baseline of more than 100 vessels a day carrying roughly a fifth of global seaborne oil. ADNOC chief executive Sultan Al Jaber said on 9 April that the strait was not open, that access was being “restricted, conditioned and controlled,” and that around 230 loaded oil tankers were waiting inside the Gulf.

Iran’s deputy foreign minister Saeed Khatibzadeh told ITV News that vessels would be permitted through only if they coordinated directly with Iranian armed forces, and the Iranian navy released a map on 8 April indicating mined zones and narrow designated lanes hugging the Iranian coast near Larak Island.

Oil markets told the same ambivalent story: Brent crude fell 13.29% on 8 April to settle at $94.75, its lowest since 11 March and its biggest single-day drop since April 2020, while WTI tumbled 16.41% to $94.41. Both benchmarks remained well above their 27 February pre-war levels near $73 and $67.

Insurance and the Quiet Veto

Tanker war-risk insurance is the quiet veto on any political reopening. Until underwriters restore meaningful cover, compliant operators cannot sail regardless of what Trump or Tehran declares.

Industry voices have been explicit that owners are waiting on technical clarity from both Washington and Tehran on how to transit the strait safely before resuming operations. The gap between official rhetoric about reopening and the actual willingness of blue-chip operators to send hulls through is the defining feature of the current moment.

Specific figures on current war-risk premium levels, the status of protection and indemnity cover from the International Group of P&I Clubs, and the structure of the US International Development Finance Corporation’s reinsurance backstop are all material to this story. They are not asserted here and are pending direct verification.

Cohesion in Tehran and the Strategic Puzzle

Ayatollah Ali Khamenei was killed on 28 February in the opening US-Israeli strikes, and that single fact reshapes the strategic landscape. In essence, since the start of the war:

1. There has been no regime change in Iran.

2. The current leadership is no less radical than its predecessors.

3. And that Tehran has emerged from the war with more leverage over the Strait of Hormuz, not less.

That is the strategic paradox at the centre of this crisis. Regime collapse was an implicit aim of the Israeli campaign in particular, and what has materialized instead is…

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An Easter message from the US President:

“open the f***** Strait of Hormuz, you crazy bastards, or you’ll be living in hell”. Investor tension around Iran is expected to grow compressed between calls for a potential deal/ceasefire and biblical-scale annihilation. But let’s get strait to the point.

The Strategic Logic of the Strait

The Strait of Hormuz has ceased to function as a transit corridor and has become the primary instrument through which a militarily degraded Iran is prosecuting an economic war that now spans energy markets, alliance architecture, sovereign fiscal positions, and the battlefield in Ukraine.

This reframing matters because the policy and investment community has largely treated the conflict as a Middle East story with global side effects, when the more accurate structural reading is that it is a global economic disruption with a Middle East origin.

The war’s stated objectives, as articulated by Washington, center on the destruction of Iran’s ballistic missile arsenal and production capacity, the neutralization of its naval forces, and the permanent removal of any pathway to nuclear acquisition.

In a national address on April 1, the Trump administration declared that core strategic objectives were nearing completion and argued that regime change had effectively occurred through the attrition of Iran’s leadership class, even as Trump simultaneously maintained that regime change was never an objective. The gap between those two positions is not rhetorical slippage.

It reflects a genuine unresolved tension at the center of U.S. strategy: Washington designed a campaign premised on Iranian capitulation, and is now confronting a regime that, however structurally degraded, has not capitulated.

Iran’s surviving leadership, now operating under a power structure dominated by IRGC commanders, has concluded that its stranglehold over global energy transit provides more negotiating leverage than any remaining military capacity, and that assessment is not operationally wrong.

This is the central strategic paradox of the current phase of the conflict. The campaign has been effective by most conventional military metrics: strikes on more than 15,000 targets have degraded the Iranian navy, air defense apparatus, and military-industrial base, with U.S. intelligence estimating that nearly two-thirds of Iranian missiles and drones have been destroyed or damaged.

Yet military effectiveness has not translated into political resolution, because the IRGC’s control of the strait provides the remaining Iranian command structure with a lever that air campaigns alone cannot remove. The war has thus entered its most consequential phase not because Iran is prevailing militarily, but because the costs of the stalemate are being distributed across the global economy in ways that increasingly complicate American diplomatic and domestic positioning.

The Geometry of the Hormuz Blockade

The insurance market is the clearest barometer of how the commercial world has priced the blockade, and the trajectory of rate escalation tells a structural story rather than a transient one. War-risk premiums, which ran between 0.02% and 0.05% of vessel value before the conflict, rose immediately to between 0.5% and 1% in the opening days of the war.

They have since climbed to approximately 5% of vessel value, roughly five times the level seen even in the conflict’s early weeks. For a tanker valued at $120 million, a voyage that once carried an insurance cost of approximately $40,000 now requires a premium approaching $6 million. The more operationally significant data point, however, is that premium availability has not resolved the blockade.

Multiple tanker owners have obtained revised war-risk coverage and are still refusing to transit the strait, because the decision ultimately rests with individual ship masters who can decline the voyage regardless of what underwriting has been arranged. A $20 billion U.S. reinsurance program through the International Development Finance Corporation has generated insurer interest, but implementation remains opaque, and financial coverage does not address crew safety risk, which is the actual constraint on commercial transit.

The physical consequences of that commercial calculus extend well beyond the strait’s immediate geography. Major carriers including Maersk, MSC, CMA CGM, and Hapag-Lloyd have suspended Gulf voyages entirely. Iranian drones have struck energy and refinery infrastructure across the region, including Kuwait’s largest oil refinery, the UAE’s Habshan gas facility, and Saudi installations, expanding the disruption zone into the broader Gulf economy rather than confining it to the waterway itself.

Roughly 30% of internationally traded fertilizers normally move through Hormuz, and because nitrogen fertilizer production relies on natural gas as a primary feedstock, rising energy costs have compounded production expenses, with global fertilizer prices estimated to average 15-20% higher in the first half of 2026 if the closure persists.

That figure is relevant to investors not as a standalone commodity data point but as a leading indicator for agricultural input costs, food price inflation, and fiscal deterioration among import-dependent sovereign borrowers across Africa, South Asia, and Southeast Asia.

The diplomatic response has exposed a structural gap between the distribution of costs and the concentration of decision-making authority. A 40-nation virtual conference convened by the UK produced a collective statement but no enforcement mechanism, and notably neither the United States nor Israel participated.

The UK’s foreign secretary publicly observed that the international community had been left to manage the consequences of a war it did not initiate. That observation describes more than a diplomatic grievance. It describes a configuration in which the coalition capable of materially reopening the strait, one that necessarily includes the United States and its full naval and diplomatic weight, is not the coalition that has formed.

What has formed is a multilateral grouping without the primary belligerent, debating escort frameworks for a waterway that Washington has indicated will open on its own timeline and on its own terms.

The IRGC, Regime Cohesion, and the Question of What Comes Next

The internal dynamics of the Iranian state are the variable with the longest geopolitical half-life, and the current evidence points toward consolidation rather than fracture. The regime has absorbed severe structural damage.

The killing of Supreme Leader Khamenei on February 28, followed by the deaths of Iran’s defense minister and several senior IRGC generals in the opening strikes, represented the most extensive decapitation of an adversary command structure in recent U.S. military history.

The key analytical question for investors and policymakers is…

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The war’s decisive battlefield is maritime access, because pressure in the Strait of Hormuz is now shaping military options, diplomacy, and energy pricing faster than airstrikes can reshape Iran’s order of battle.

A Hot Weekend in Iran

Over the weekend, the campaign tempo stayed high while the target set widened toward systems that matter for command, mobility, and coercion. Iranian state outlets and international reporting described attacks on the electricity network around Tehran and the nearby city of Karaj, producing temporary outages and signaling a willingness to use grid disruption as leverage.

That matters strategically because power reliability underwrites radar coverage, internal security logistics, and the credibility of the state’s “business as usual” posture, especially when leadership is trying to project continuity under sustained pressure.

Iran’s internal command picture also shifted again, in a way that looks like consolidation rather than fragmentation. Mohammad Baqer Zolqadr, a hardline former Revolutionary Guards commander, was appointed secretary of the Supreme National Security Council after the prior secretary was killed in strikes, reinforcing the trend of security institutions tightening their hold over wartime decision making.

Parallel reporting has described how the Revolutionary Guards pushed through the elevation of Mojtaba Khamenei after Ali Khamenei was killed, sidelining pragmatic objections and narrowing the regime’s room for compromise.

A headline weekend development for the maritime theater was Iran’s confirmation that IRGC naval commander Alireza Tangsiri has died, after Israel said it had targeted him and other senior naval commanders.

Removing an operator at that level does not remove the capability set, but it can temporarily disrupt coordination across mine warfare, fast attack craft, coastal missiles, and electronic interference, which are the tools that most directly translate into leverage over Hormuz traffic.

The Chokepoint at Hormuz

The Strait of Hormuz remains the war’s price setter because Iran does not need a textbook blockade to impose a commercial shutdown. The United Kingdom Maritime Trade Operations and the Joint Maritime Information Center have described a “critical” threat environment marked by repeated incidents, kinetic strikes on merchant vessels, and widespread navigation interference including GNSS disruption and AIS anomalies.

Their transit reporting frames the scale of the shock: historical traffic averages around 138 vessels per day, while recent periods show single digit transits, including as low as one confirmed commercial transit in a 24 hour window.

Iran’s coercive logic also shows up in its explicit escalation signals. Iran’s Defence Council warned that an attack on Iran’s southern coast and islands would trigger sea mine laying and a fuller cutoff of Gulf routes, a direct reminder that mines are the low cost way to convert uncertainty into weeks of operational delay.

Separately, the Revolutionary Guards warned of tit for tat retaliation if Iran’s electricity sector is targeted, including strikes on Israel’s power plants and on power plants supplying U.S. bases in the region, which links the grid attacks to a broader deterrence ladder.

This is also a commercial war waged through risk pricing. Reporting from early March described war risk premiums for hull cover jumping from around 0.25% to as high as…

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Iran’s recent strikes on Gulf energy infrastructure have turned the conflict into a global energy shock. Attacks on key LNG plants and oil terminals imply multi-year supply losses, raising the risk of $100+ oil prices and a renewed inflation surge.

The crisis began with a U.S.-Israeli strike inside Iran on February 28, 2026 aimed at Iran’s leadership and nuclear facilities. On March 18, Israel bombed Iran’s South Pars offshore gas field and its Asaluyeh processing hub. Iran responded that day with widespread attacks on Gulf energy assets.

President Trump publicly distanced the United States and Qatar from Israel’s strike on South Pars, confirming that neither Washington nor Doha had prior knowledge of the operation. He directed Israel to refrain from further attacks on the field absent renewed Iranian aggression against Qatari infrastructure.

Trump warned that any such Iranian strikes on Ras Laffan would elicit a decisive U.S. response, including the potential destruction of the entirety of South Pars “at an amount of strength and power that Iran has never seen or witnessed before.” Administration officials have signaled reluctance to authorize such extensive long-term damage to critical energy infrastructure while reaffirming the commitment to defending Gulf allies.

Missile strikes damaged Qatar’s Ras Laffan LNG complex with two trains hit and Abu Dhabi’s Habshan gas plant. Rockets hit Saudi Arabia’s Yanbu SAMREF refinery and Kuwait’s Mina al-Ahmadi refineries, forcing shutdowns. Bahrain’s Sitra oil refinery also shut after missile strikes. Iranian forces have since warned they will continue targeting oil and gas installations if attacks continue.

The U.S. has bolstered naval and missile defenses in the region and publicly urged allies to avoid further escalation against Iranian energy infrastructure. U.S. warplanes had earlier struck Iran’s Kharg Island, which handles roughly 90% of Iran’s oil exports, signaling that energy flows are now central to the conflict on both sides.

The United States has also reinforced its ground and amphibious capabilities in the region. The Pentagon has deployed elements of a Marine Expeditionary Unit comprising approximately 2,500 Marines and supporting assets, including the amphibious assault ship USS Tripoli, raising total U.S. personnel in theater above 50,000.

Senior officials confirm that President Trump is actively considering limited ground troop deployments to secure key energy chokepoints—particularly around the Strait of Hormuz and Kharg Island—while publicly stating he is “not putting troops anywhere” in the context of a major ground invasion. This reflects heightened U.S. efforts to protect global energy flows amid persistent maritime disruption risks.

Crude Awakening

These attacks have materially disrupted Middle East oil and gas flows. Saudi, Kuwaiti and Iraqi oil exports through the Gulf were cut by several million barrels per day. Iraq alone reportedly reduced exports by about 1.0 million barrels per day due to sabotage risk and logistical constraints. Shipping through the Strait of Hormuz, which carries roughly 20% of global oil supply and a similar share of LNG, has largely stalled. Market estimates suggest that up to 12 million barrels per day of crude exports are effectively offline.

This represents the largest sudden disruption to global oil supply in modern history outside of world war scenarios. On the LNG side, the damage to Qatar’s Ras Laffan complex introduces a more persistent supply constraint. Ras Laffan typically liquefies around 77 million tonnes per annum of gas, making Qatar the largest LNG exporter globally.

The destruction of two out of fourteen trains removes approximately 12.8 million tonnes per annum of capacity. Industry estimates indicate that restoring this capacity will require between three and five years due to the complexity of rebuilding liquefaction infrastructure and associated upstream and midstream systems.

Given that roughly one fifth of global LNG trade passes through the Strait of Hormuz, the combination of physical damage and maritime disruption creates a structural shortage equivalent to approximately 3 to 4 percent of global LNG supply.

This shortfall disproportionately impacts…

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In early 2026, crude prices are increasingly shaped by geopolitical risk rather than simple supply balances. The key variable is whether oil can safely move through the Strait of Hormuz, the main artery for Middle Eastern exports.

Mind the (Price) gap

As of March 13, 2026, oil markets are trading firmly above the levels seen earlier in the year, reflecting rising geopolitical tension in the Middle East. Brent crude is trading in the low $100s per barrel while West Texas Intermediate is in the mid to high $90s.

MarketWatch reported Brent around $101.06 and WTI near $96.11 during the trading session, while separate futures pricing showed Brent closer to $102.05 and WTI about $96.88. Contract data for Brent May 2026 futures shows prices around $101.52 with a previous settlement of $100.46.

The more revealing signal has been the size of daily price swings. Oil markets have experienced sharp intraday volatility as traders react to developments in the Iran conflict and the risk to Gulf shipping routes. Reuters reported Brent briefly reaching about $119.50 earlier in the week before pulling back. The Wall Street Journal noted that Brent’s settlement above $100 marked the highest level since 2022, highlighting how quickly geopolitical shocks can move the market.

Options markets show the same shift in sentiment. Implied volatility has surged as traders price in the possibility of supply disruptions in the Persian Gulf. The Cboe Global Markets crude oil volatility index, known as OVX, closed at 120.22 on March 12, 2026. Levels above 100 are typically associated with severe market stress and signal expectations of large price swings over the following month.

The shape of the volatility curve provides further insight into how traders view the risk. Short-dated options have become significantly more expensive than longer-dated contracts. Reuters reports that implied volatility in near-term options has risen sharply relative to later maturities. This pattern suggests that markets expect the most intense disruption risk in the immediate term while remaining uncertain about how long the conflict may affect global oil flows.

Derivatives markets show that the surge in activity is driven as much by hedging as by speculation. Market participants across the energy system are moving to protect themselves against price swings tied to the conflict in the Gulf.

CME Group reported a record 8.3 million energy contracts traded on March 6, 2026, including record options volume. The scale of activity suggests that producers, refiners, airlines, and trading houses are all attempting to lock in prices as geopolitical risk rises.

Trading activity on other exchanges tells a similar story. Reuters reported that Intercontinental Exchange recorded about 12.7 million energy futures and options contracts traded at the open of the initial shock week. The surge reflects a broad rush by producers and investors to secure forward prices before further escalation in the region.

The shape of the oil futures curve reinforces this interpretation. Reuters reported that the spread between the Brent front month contract and the six month contract widened to roughly $10, the steepest backwardation since 2022. This pattern typically appears when markets fear immediate supply disruption rather than a gradual imbalance between production and demand.

Backwardation also changes how investors experience returns in oil markets. Funds that maintain exposure through front month contracts benefit when they roll positions forward because the next contract is cheaper.

The result is a positive roll yield for many strategies tied to prompt crude exposure. In periods of geopolitical tension, this dynamic can attract additional capital into front month oil markets, reinforcing price volatility and amplifying the market’s response to news about the Strait of Hormuz and Gulf shipping routes.

Oil’s Strait Jacket

Oil markets are tightly linked to events in the Persian Gulf because the Strait of Hormuz sits at the center of the global energy system and cannot be easily bypassed. The U.S. Energy Information Administration estimates that about 20 million barrels per day of oil moved through the Strait in 2024. That volume represents roughly 20 percent of global petroleum liquids consumption and more than one quarter of global seaborne oil trade.

The Strait is equally important for natural gas. The Energy Information Administration estimates that around one fifth of global liquefied natural gas trade passed through the Strait in 2024, much of it exported from Qatar. The International Energy Agency presents a similar picture of the chokepoint’s scale.

It estimates that roughly 20 million barrels per day of oil and petroleum products transit the passage, equal to about a quarter of global seaborne oil trade. The agency also notes that about 93 percent of Qatar’s LNG exports and 96 percent of the United Arab Emirates’ LNG exports pass through the Strait.

Together these shipments represent about 19 percent of global LNG trade. UN Trade and Development highlights the same concentration of flows and notes that the Strait carries large volumes of oil, LNG, and fertilizers that are critical to global commodity markets.

Alternative export routes exist but they provide only limited relief during a disruption. The Energy Information Administration estimates that pipelines in Saudi Arabia and the United Arab Emirates could move about 2.6 million barrels per day of crude to ports outside the Strait during an emergency.

These systems include the Saudi East West pipeline network, which normally has capacity of about 5 million barrels per day and was temporarily expanded to about 7 million barrels per day in 2019. The United Arab Emirates operates a separate pipeline capable of moving about 1.8 million barrels per day to the Fujairah export terminal on the Gulf of Oman.

The International Energy Agency places the potential bypass capacity somewhat higher, estimating a range of roughly 3.5 to 5.5 million barrels per day. Even at the top of that range, the capacity would cover only a portion of the oil that normally flows through the Strait. The agency also notes that rerouting large volumes of crude through these pipelines has never been tested at scale under sustained disruption.

The vulnerability is even greater for natural gas. Unlike crude oil, LNG exports from the Gulf rely almost entirely on shipping routes that pass through the Strait.

The International Energy Agency notes that there are effectively no alternative export routes for the majority of LNG volumes that normally transit the chokepoint. As a result, any prolonged disruption in the Strait of Hormuz would affect both oil and gas markets simultaneously, amplifying the economic consequences for energy importers around the world.

A Gulf Between Supply and Safety

Iran’s strategy in the Gulf relies on coercive maritime pressure rather than outright closure. The objective is to keep the Strait formally open while making commercial transit increasingly difficult to insure and schedule. Reuters describes this approach as a long developed playbook shaped by the Islamic Revolutionary Guard Corps, which views disruption at Hormuz as an economic lever against militarily stronger adversaries.

The pattern of incidents reported by maritime authorities fits this logic. Attacks are designed to create uncertainty through stand off strikes, naval drones, electronic interference, and constant signaling that raises perceived risk for insurers and shipowners even when ships are still physically capable of passing through the waterway.

Sea drones have become one of the most visible elements of this strategy. Reuters reported that unmanned surface vessels were used in at least two attacks on oil tankers after the conflict began. These systems are relatively inexpensive and can be deployed at scale, which makes them particularly disruptive in narrow and congested shipping lanes such as the Strait of Hormuz.

Electronic interference has also emerged as an important force multiplier. Advisories from UK Maritime Trade Operations and the Joint Maritime Information Center document widespread disruption to navigation systems in the approaches to the Strait. Reports describe severe GNSS spoofing and jamming, anomalies in Automatic Identification System signals, and other forms of electronic interference that complicate navigation.

One advisory recorded more than 600 GNSS disruption events within a single twenty four hour period. Maritime authorities also warned that AIS based traffic data may significantly undercount vessel movements when signals are degraded or intentionally disabled. From a commercial perspective this matters because…

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Iran’s war is a contest of throughput, i.e. how fast each side can generate targets, move munitions, and impose friction on the other’s logistics and corridors, especially at sea and in the cloud.

The conflict began on February 28, 2026, when a joint U.S.-Israeli opening salvo killed Iran’s supreme leader Ayatollah Ali Khamenei and triggered a rapid regional escalation.

In its second week, the war has widened from strike-and-counterstrike inside Iran to a broader campaign against what keeps modern states functioning—fuel distribution, missile-defense “eyes,” desalination, shipping insurance, and hyperscale data centers.

Operational picture

The U.S. campaign—publicly described as Operation Epic Fury—has emphasized rapid effects against command-and-control, missile infrastructure, and naval assets, aiming to “daze and confuse” the system early and then exploit resulting air advantage.

Those operational choices matter because Iran’s retaliatory capacity is heavily mediated by launch survivability (mobile launchers, hardened sites) and by the ability to keep maritime pressure on the Gulf.

On the Israeli side, official updates from the Israel Defense Forces describe near-complete air superiority over Iranian skies and large-scale degradation of air-defense and launcher capacity, while stressing that remaining missile risk is “not yet removed.” Parallel campaign assessments also point to extensive strike volume against missile launch sites and enabling infrastructure.

Iran’s response has shifted from trying to win a symmetric air contest (which it cannot) toward denial and disruption: drones and missiles aimed at raising the cost of regional basing, choking shipping, and pressuring third countries’ domestic resilience (water, power, aviation, data).

The fighting has also spilled into Beirut and broader Lebanon dynamics as Israel attacks Iranian-linked networks and command nodes tied to Hezbollah.

Succession and the IRGC

Leadership is the war’s most underpriced variable. A formal succession process was thrown into crisis by Khamenei’s killing; Iran’s Assembly of Experts has indicated it has reached (or is close to) consensus on the next supreme leader, but public confirmation and durable internal buy‑in remain opaque. Reporting across multiple accounts suggests Mojtaba Khamenei is a leading contender, but not definitively and not uncontested—an important distinction for anyone modeling regime stability.

This vacuum has empowered operational autonomy inside the security apparatus—especially the Islamic Revolutionary Guard Corps (IRGC). In public messaging, Masoud Pezeshkian has apologized for attacks on neighbors and signaled an intention to suspend regional strikes unless launches originate from those countries; domestic backlash and inconsistent follow-through suggest that command coherence is degraded and that IRGC “field logic” is not fully subordinated to conciliatory political signaling.

Outside actors are actively trying to turn succession into leverage. Israel has publicly framed the leadership transition itself as a targetable part of the war’s logic, an approach that raises the probability of continued decapitation pressure and a longer tail of instability even if major strike waves slow.

Why Iran is striking neighboring countries

Iran’s regional strikes are not random escalation; they are an attempt to re-write the coalition map and re-price the war. Several lines of intent are visible.

First, Iran is trying to make Gulf basing politically toxic. The argument Tehran has pushed—explicitly and implicitly—is that U.S. facilities on Gulf soil make those states part of the battlespace, whether or not their governments want that role. This approach is designed to pressure Gulf capitals to limit support, intelligence sharing, or access for U.S. and allied operations.

Second, Iran is exploiting civilian fragilities with strategic payoff. The move into desalination (reported damage in Bahrain) is a signal that, in a water‑scarce region, “life support” infrastructure can be held at risk just as oil once was—creating a new class of coercive targets and insurance events.

Third, Iran is expanding the definition of what can be targeted to include digital choke points. Strikes on major cloud infrastructure in Gulf states—reported to have hit facilities tied to Amazon Web Services—turn data centers into wartime “critical terrain.” For investors and policymakers, this is the clearest marker that the modern economy’s physical substrate (cooling, substations, redundancy zones) is now part of escalation ladders.

The strategic end state appears to be coercive: persuade neighbors to reduce cooperation with the U.S. and Israel, fracture the regional alignment against Tehran, and raise global economic costs enough to create external pressure for an off‑ramp on terms less humiliating than outright capitulation.

The new kill chain

The most consequential “new weapon” in this war is a…

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Khamenei’s confirmed killing has pushed Iran into a contested succession at the same moment the Strait of Hormuz is becoming the fastest lever for imposing global costs, which makes the next days less about battlefield tempo than about regime cohesion and maritime risk.

Iranian state media announced his death early Sunday after initial uncertainty, while the United States and Israel framed the joint campaign as a decisive operation against Iran’s security apparatus and missile and drone capabilities, and Iran began retaliating with strikes across the region.

What we know so far is specific and fast moving. Early Saturday, coordinated US and Israeli strikes reportedly targeted senior Iranian leadership and strategic facilities. Iranian state media later confirmed the death of Ali Khamenei. Within hours, Tehran moved to activate a temporary leadership mechanism consistent with constitutional provisions governing the incapacitation or death of the Supreme Leader.

The regional response unfolded in parallel. Commercial shipping behavior shifted sharply as speculation mounted over a possible disruption in the Strait of Hormuz. Several vessels altered course or paused transit pending clarity. Maritime authorities in the US and UK issued formal advisories warning operators of elevated operational risk in the Gulf, including the potential for misidentification, aggressive radio hailing, and interference with navigation systems.

The speed of these developments has compressed the strategic timeline. Military action, leadership transition, and maritime risk repricing are occurring simultaneously rather than sequentially. That concurrency is what makes this episode structurally different from prior flare ups.

Where uncertainty persists is in the depth of senior Iranian command losses beyond Khamenei, the durability of Tehran’s internal command and control under continued strikes, and whether Iran can translate rhetorical or VHF restrictions on Hormuz into sustained, enforceable disruption without triggering overwhelming escalation.

What happened over the weekend

The weekend opened with coordinated U.S. and Israeli strikes on targets inside Tehran and elsewhere, with the U.S. component publicly described by U.S. Central Command as Operation Epic Fury.

In its own press release, CENTCOM said U.S. and partner forces began strikes at 1:15 a.m. Eastern Time to dismantle Iran’s security apparatus, prioritizing IRGC command and control nodes, air defenses, missile and drone launch sites, and military airfields.

Inside Iran, reporting described immediate social shock: fear, attempts to stockpile essentials, and the classic early pattern of information constriction that makes rumor management as strategic as air defense.

Iran’s military response rapidly widened beyond a bilateral Israel-Iran exchange. Iranian retaliation across the Gulf, with explosions, intercepts, and debris impacts affecting infrastructure in multiple Gulf states and disrupting aviation and trade nodes. Reuters also reported casualties in the region and described the conflict as expanding into a broader regional confrontation rather than remaining confined to strikes on Iranian soil.

Israel’s domestic posture also shifted to a wartime footing. Israeli emergency measures including restrictions on public gatherings and closures, reflecting an expectation of sustained missile and drone pressure, not a single wave. This matters because it signals that Israel’s leadership is planning for endurance, which tends to reduce the political attractiveness of a quick ceasefire unless core objectives are already achieved.

Khamenei’s death and the succession problem

On the core question of leadership, the basic fact is now confirmed by multiple authoritative sources: Iranian state media announced Khamenei’s death early Sunday, after earlier uncertainty when an Israeli official said he had been killed and there was no immediate Iranian confirmation.

The succession mechanism is now moving on constitutional rails, but under wartime stress. Reported that Iran’s president said a temporary leadership council composed of President Masoud Pezeshkian, judiciary head Gholamhossein Mohseni Ejei, and a member of the Guardian Council had assumed the supreme leader’s duties. Separately, Alireza Arafi was appointed as the jurist member of that interim council as reported by ISNA.

The strategic implication is that Iran’s center of gravity has shifted from a single clerical apex to an institutional contest between emergency governance and the security organs that can enforce it.

The Israel Defense Forces publicly portrayed the opening strikes as simultaneous attacks on gatherings of senior Iranian officials, with its spokesperson claiming eliminations including senior IRGC leadership figures.

Those claims, while authoritative as statements of Israeli intent and assessment, are not fully corroborated in a single, comprehensive Iranian accounting as of this writing; the fog here matters because uncertainty about who precisely remains can itself fuel miscalculation.

A second order effect is the risk of hardline security consolidation. Ahead of the operation, the U.S. Central Intelligence Agency assessed that even if Khamenei were killed, he could be replaced by hardline IRGC figures, which is another way of saying that decapitation can shorten diplomatic horizons rather than open them.

The Israeli operational story implies…

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China is deliberately building an artificial intelligence and robotics ecosystem designed to convert commercial scale into sustained military and geopolitical advantage. Over the next decade, this strategy will intensify US-China competition, reshape defense modernization trajectories, and materially alter risk calculations for businesses and investors embedded in advanced technology supply chains.

Strategic Intent: Industrial Policy Anchored to Military Modernization

China’s AI and robotics strategy is not a conventional defense R&D program. It is a whole-of-system industrial policy structured to ensure that advances in computing, automation, and data science strengthen national power across economic and military domains simultaneously.

National planning documents lay out explicit targets to achieve global leadership in artificial intelligence by 2030. These plans link AI development directly to national security and defense applications. Military modernization objectives emphasize building an “intelligentized” force capable of integrating advanced data analytics, networked systems, and autonomous technologies into joint operations. The robotics industry roadmap reinforces this logic by promoting deep integration of AI, advanced communications, cloud platforms, and automation into both civilian and security functions.

The emphasis on humanoid robotics and embodied AI is especially revealing. China is not merely pursuing productivity gains in manufacturing. It is attempting to cultivate a domestic robotics ecosystem that can serve logistics, surveillance, infrastructure protection, and potentially combat-adjacent missions. By building scale in commercial robotics first, Beijing reduces marginal costs of adaptation for defense use cases later.

This is a structural approach. Technology leadership strengthens economic output. Economic output funds defense modernization. Defense modernization reinforces geopolitical leverage. The strategy is iterative and cumulative rather than dependent on singular technological breakthroughs.

For geopolitics, this means AI and robotics are central to China’s long-term competition with the United States. For businesses, it means entire sectors such as sensors, industrial automation, edge computing, machine vision, and AI software operate within a framework that treats them as strategic assets. For investors, it introduces embedded political risk into what might otherwise appear to be secular growth themes.

Civil-Military Fusion as the Transmission Belt

The core mechanism that links commercial innovation to military capability is civil-military fusion. Rather than isolating defense research inside closed military institutions, China has sought to reduce the friction between civilian R&D and defense application.

Universities, startups, industrial firms, and defense contractors operate in overlapping ecosystems supported by state guidance, procurement incentives, and capital allocation frameworks. Commercial breakthroughs in computer vision, robotics control systems, and machine learning architectures can migrate into defense-adjacent domains without structural barriers.

The People’s Liberation Army benefits from this architecture even when it is not the originator of innovation. The production system spans industrial parks, research laboratories, standards bodies, and state-backed investment vehicles. The objective is not only to innovate but to institutionalize pathways for rapid absorption into military modernization programs.

For foreign investors, this raises a fundamental due diligence challenge:

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The 2026 Munich Security Conference confirmed that the global system has moved from cooperative interdependence to managed strategic rivalry, where military posture, technology control, and capital allocation now operate as one integrated security architecture.

From Globalization to Managed Rivalry

Munich was not defined by a single crisis. It was defined…

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The United States and India have reached an interim trade agreement that slashes tariffs and recalibrates their economic ties – a development with far-reaching implications for both countries and the broader Indo-Pacific.

Announced in early February 2026, the framework deal reduces U.S. import duties on Indian goods to 18% from a punitive 50% and commits India to halt Russian oil purchases in favor of U.S. energy imports. Both nations describe this as a “reciprocal and balanced” arrangement that will boost bilateral trade, provide tariff relief, and lay groundwork for a fuller trade pact.

Coming after months of escalated tariffs and diplomatic strain, the deal marks a decisive reset in U.S.-India economic relations and underscores the strategic convergence of the two democracies in an era of shifting supply chains and great-power competition.

From Trade War Tactics to a Tariff Truce

This interim accord represents a pivot away from the tariff wars of recent years toward a more constructive bilateral trade relationship. Under President Donald Trump, U.S. trade policy (2016–2020) was defined by aggressive tariffs, deal-by-deal bargaining, and a turn from multilateral free trade frameworks to bilateralism.

Trump’s first term saw punitive duties on rivals and allies alike – exemplified by sweeping tariffs on Chinese goods and “reciprocal” levies on countries with high trade surpluses – as he sought to renegotiate what he viewed as unfair trade relationships. India was no exception: after Trump’s return to office in 2025, the U.S. imposed a 25% “reciprocal” tariff on virtually all Indian imports, and by August 2025 Trump doubled the duty to 50% to pressure New Delhi over its Russian oil imports.

These actions pushed India into the highest U.S. tariff bracket (on par with adversaries like Syria), jolting a relationship that had been steadily improving for two decades. Indian officials protested the “unreasonable” 50% tariff as unjust punishment – noting that India’s Russian oil purchases were driven by energy security, even as Western nations continued certain trades with Moscow.

The steep tariffs jeopardized up to 70% of India’s exports to the U.S., stalled some foreign investment plans, and made India’s stock market the worst-performing among emerging markets in 2025 as foreign investors pulled out capital en masse.

It was against this fraught backdrop that negotiators pursued an off-ramp. The new interim deal effectively rescinds the extra 25% punitive tariff (imposed over Russian oil) and leaves in place a single 18% U.S. tariff on Indian goods.

While 18% is still high by historical standards, it brings India “broadly in line with its Asian peers on tariff rates” (typical range ~15–19%). This concession eliminates what had been a disproportionate drag on India’s export competitiveness and on the rupee. In exchange, India has “committed to stop directly or indirectly importing” Russian oil, severing a major link to Moscow in its energy supply.

New Delhi will instead source more oil and gas from the U.S. (and potentially U.S.-approved suppliers like Venezuela), cementing a fledgling energy partnership with Washington. Prime Minister Narendra Modi hailed the tariff cut as “great news” and expressed “big thanks” to Trump, framing it as a win for India’s 1.4 billion citizens and for U.S.-India friendship.

For Trump’s part, the deal validates his hardball strategy: he leveraged tariffs to extract commitments on both trade and geopolitics, reinforcing his belief in transactional bilateral deals rather than traditional free-trade accords.

Notably, the interim agreement is explicitly a stepping stone toward a broader U.S.-India Bilateral Trade Agreement (BTA). It reaffirms negotiations launched in early 2025 and is expected to be formalized by March 2026. The deal’s text lays out immediate market-access gains while deferring more complex issues to the comprehensive BTA talks.

In effect, this truce stops the bleeding caused by the tariff war and restores stability for businesses, allowing both sides to move forward on a more ambitious trade partnership. U.S. business groups cautiously welcomed the development as “progress” toward a long-sought market-opening deal.

Indian trade officials likewise cheered “unprecedented opportunities” now unlocked for exporters and entrepreneurs to “Make in India for the world”, even as some American small-business coalitions grumbled that an 18% import tariff still amounts to a hefty tax increase from pre-2025 levels.

Overall, the tariff truce has shifted sentiment markedly: it removes a major overhang on India’s economy (which the U.S. Chamber of Commerce called a step back to “stable ground”) and signals to investors that U.S.-India economic ties are on a more predictable, upward trajectory.

Indo-Pacific Alignment: Countering China and Reordering Trade Networks

Beyond the bilateral trade ledger, this agreement carries strategic weight in the Indo-Pacific geopolitical context. It aligns the U.S. and India more closely as economic partners at a time when both are reevaluating their relationships with China and seeking to “realign global supply chains” away from dependence on Chinese manufacturing.

Washington and New Delhi openly describe their trade collaboration as part of a broader strategy to diversify supply chains, enhance energy security, and address “non-market policies of third parties” – an unmistakable reference to China’s trade practices.

In practical terms, the U.S. has secured India’s cooperation in isolating two strategic rivals: Russia (through the oil import halt) and China (through joint scrutiny of Chinese economic behavior). The joint statement even notes that the countries will coordinate on export controls for sensitive technologies and investment screening to guard against unwanted Chinese influence. This represents a remarkable tightening of U.S.-India strategic alignment, considering India’s traditional non-aligned stance.

For India, the deal comes amid its delicate balancing act in the Indo-Pacific. Long wary of being too entangled in great-power rivalry, India has nonetheless drifted closer to the U.S. orbit as tensions with China have risen.

A bloody border clash with Chinese forces in 2020 and China’s expanding footprint in South Asia have accelerated New Delhi’s pivot toward the U.S. and its allies. India has joined the Quad (Quadrilateral Security Dialogue) alongside the U.S., Japan, and Australia, and increased military exercises and defense tech cooperation with America.

However, economically India had hesitated to open its markets or formally join U.S.-led trade initiatives. It notably opted out of the China-centric Regional Comprehensive Economic Partnership (RCEP) in 2019, fearing that…

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Rare earth elements have become a focal point of U.S.–China strategic competition in the past year, driving major policy shifts and market moves. The United States is aggressively investing in domestic rare earth mining and magnet production, exemplified by new public-private deals with companies like MP Materials and USA Rare Earth.

These initiatives aim to reduce reliance on China – which supplied about 70% of U.S. rare earth imports in 2023 – amid concern that Beijing could use its dominance as leverage. In effect, Washington is embracing an industrial policy approach, directly funding and taking equity stakes in firms deemed strategically important.

This unprecedented government intervention is already impacting markets: rare earth company stocks have surged on news of government support, underscoring how geopolitics is now a key driver for businesses, investors, and supply chains.

Strategic Importance and Recent Developments

Rare earth elements (a group of 17 specialty metals) are critical inputs for high-performance magnets used in everything from fighter jets and drones to electric vehicles and wind turbines. They “are key components in a range of military weapons systems including the F-35 warplane, drones and submarines,” according to the U.S. Defense Department.

Civilian industries likewise depend on rare earth magnets for EV motors, robotics, and clean energy technologies. Despite this broad importance, the U.S. has virtually no complete domestic supply chain for rare earths – it imports almost all its rare earth materials and was roughly 70% dependent on China for these imports as of 2023. This heavy reliance has long been viewed as a strategic vulnerability.

In 2023 and 2024, U.S.–China tensions over trade and technology sharpened the focus on rare earth security. China dominates both the mining and especially the refining of rare earths, and has not hesitated to flex its muscle in the past. Notably, in 2010 China halted rare earth exports to Japan amid a diplomatic dispute, causing Japanese industry panic and sending rare earth prices up ten-fold within a year.

That episode was an early warning for other countries about the risk of over-reliance on China. Fast forward to the last 12 months: amid an ongoing trade conflict with the U.S., China began restricting rare earth shipments again in early 2025, underscoring the threat of supply curbs becoming a geopolitical weapon.

Beijing’s move to “halt exports” in March 2025 as part of a trade spat led to immediate disruptions – rare earth magnet exports from China reportedly plunged 75% in one month after the restrictions, forcing some automobile manufacturers to suspend production due to lack of materials. This backdrop of Chinese dominance and potential export curbs set the stage for urgent policy responses in Washington.

U.S. Industrial Policy: Public-Private Partnerships and Investments

Over the past year, the United States has undertaken a series of aggressive steps to build an independent rare earth supply chain. In a notable shift toward state-guided industrial policy, the U.S. government is directly investing in and partnering with private companies to boost domestic mining, processing, and magnet manufacturing capacity.

The most prominent example is MP Materials, owner of America’s only rare earth mine (Mountain Pass in California). In July 2025, MP Materials announced a “transformational” partnership with the Department of Defense (DoD) involving a multibillion-dollar package of funding and contracts. Under this deal, the Pentagon will become MP’s largest shareholder by purchasing $400 million of preferred stock – roughly a 15% stake in the company.

This equity infusion, alongside loans and other support, is aimed at dramatically scaling up MP’s capabilities. MP Materials will build a second U.S. magnet manufacturing facility (dubbed the “10X” facility) to come online by 2028, expanding its magnet output to 10,000 metric tons per year.

The DoD has committed to purchase 100% of the magnets produced at this new plant for its first 10 years of operation – essentially a guaranteed market – and set a price floor for MP’s rare earth oxides at $110/kg over that period.

For context, $110/kg is almost double the prevailing Chinese market price for the main rare earth (NdPr) prior to the deal. This kind of price guarantee insulates MP from China’s ability to drive prices down and “has long been sought by U.S. critical minerals companies” facing China’s market manipulations.

In short, the U.S. government has picked MP Materials as a national champion, providing it with capital, assured demand and price stability to “reduce foreign dependency” and secure the supply chain.

The MP Materials partnership is Washington’s most high-profile critical minerals investment to date, but it is not an isolated case. In January 2026, reports emerged that the Trump administration (as of 2026) will take a 10% equity stake in USA Rare Earth – a company developing a new rare earth mine in Texas – as part of a $1.6 billion funding package.

The deal, expected to be formally announced with an investor call, combines government equity and debt financing to help USA Rare Earth build out a mine at Sierra Blanca, Texas (slated to open by 2028) and a magnet manufacturing plant in Oklahoma (launching in 2026).

As part of the arrangement, the government would receive warrants for additional shares, and total U.S. ownership could reach about 10–16% of the company. This follows a pattern: a senior official signaled that more “historic deals” with the mining sector were planned, targeting lithium, rare earths and other critical minerals needed for national defense and advanced industries.

Indeed, the past year saw U.S. strategic investments not only in rare earth firms but also in a major lithium developer (Lithium Americas) and a domestic copper company (Trilogy Metals), with the government taking equity stakes in those as well. Such moves represent a remarkable turn toward direct government involvement in supply chains, reminiscent of a sovereign wealth fund strategy “to compete with Chinese state capital” in these sectors.

Another example on the rare earth front involves Lynas Rare Earths, the Australia-based firm that is the largest rare earth producer outside China. The U.S. Department of Defense had earlier awarded Lynas $120 million in 2022 to build a heavy rare earth separation plant in Texas, complementing a planned light rare earth facility.

However, after the massive MP Materials deal, Lynas has faced uncertainty regarding its U.S. project. In August 2025, Lynas warned there was “considerable uncertainty” about proceeding with its Texas plant absent acceptable offtake agreements, noting that new U.S. policies must be crafted to support all non-China supply chain players.

The company pointed out that the U.S. government’s multibillion-dollar support for its “biggest rival outside China, MP Materials” – including becoming top shareholder, guaranteeing a floor price, and lending $150 million for expansion – could potentially alter the competitive landscape.

This highlights that while the U.S. is injecting capital into the sector, it will have to balance support among multiple projects (domestic and allied) to truly diversify supply. Notably, Lynas’ CEO emphasized that Lynas remains the lynchpin of the non-China rare earth supply chain and is eager to participate in the emerging ecosystem of magnet manufacturing outside China. She noted at least seven rare earth magnet projects are under development in the U.S., “many of which have some form of government funding,” illustrating the breadth of industrial policy efforts now underway.

China’s Dominance and the Risk of Leverage

China’s overwhelming dominance in rare earths is the fundamental reason behind these U.S. policy interventions. China spent decades building up a near-monopoly: it not only possesses large rare earth reserves but also controls the vast majority of processing capacity, which is crucial for turning mined material into high-purity oxides, metals, and magnets.

As of 2023, China accounted for about 70% of U.S. rare earth imports, and similar or higher shares of global output for certain processing stages. This reliance is especially acute in defense supply chains – one analysis in 2025 calculated that over 78% of U.S. military weapon systems depend on Chinese-sourced materials (including rare earth components).

U.S. officials and lawmakers have grown increasingly vocal about the national security risks of this dependency, warning that in a crisis China could choke off supplies critical to missiles, fighter jets, and other hardware.

Recent events underscore that these worries are not hypothetical. In 2023, China tightened export controls on other strategic materials like gallium and germanium (used in semiconductors and military applications), signaling a willingness to retaliate in kind against U.S. technology export restrictions.

Then, in 2025, as trade tensions flared, Beijing moved on rare earths – reportedly restricting exports of certain rare earth products. Defense analysts noted this was a “long-warned-of vulnerability… becoming an urgent reality” as China began to “restrict exports of rare-earth minerals crucial to U.S. military might”.

The immediate impact was dramatic: a 75% collapse in China’s rare earth magnet exports was observed in one month after the curbs, contributing to production halts at some Western factories. China’s ability to swing the pendulum is two-edged – it can withhold supply, but it could also flood the market with product if it chose to undermine emerging competitors.

Industry observers note that Chinese authorities could at any time “roll back export restrictions and flood the global market,” causing a glut and price crash, or conversely “stop exporting… altogether,” causing a painful shortage. This leverage—born of China’s market power—creates a precarious environment for non-Chinese producers and consumers alike.

The U.S. policy response, therefore, is framed as a matter of urgent strategic necessity. American leaders see boosting domestic (and allied) production as the only way to neutralize China’s leverage. In fact, in early 2025 the U.S. President invoked the Defense Production Act – a Cold War-era emergency law – to accelerate critical mineral projects, explicitly aiming to counter China’s near-total control of the rare earth supply chain.

By offering guaranteed prices and purchase commitments to U.S. producers, the government hopes to offset the market distortions caused by Chinese state influence. The public-private partnership model is intended to quickly stand up a full supply chain that does not depend on China. MP Materials’ CEO James Litinsky described the situation bluntly: Western buyers currently have “a binary choice” – either the “Chinese sphere of influence” or a supplier like MP – and the goal is to position MP as a robust alternative.

In essence, rare earths have become a frontline in the broader “decoupling” trend between the West and China. Each side is reassessing and reshaping supply lines for strategic goods: the U.S. is cutting reliance on Chinese minerals, while China explores how to reduce its vulnerability to U.S. technology sanctions.

For businesses caught in between, this decoupling means adaptation is necessary – diversification of sourcing, redesign of products to use less of controlled materials, and increased inventories are all potential strategies, echoing steps Japan took after the 2010 rare earth shock.

Market and Industry Impacts

Geopolitical developments around rare earths are reverberating through financial markets and corporate strategies. One immediate impact of the U.S. government’s rare earth push has been surging stock prices for favored companies. For example:

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Artificial intelligence is rapidly emerging as a cornerstone of military strategy across the United States, China, and Europe. Each power is investing heavily in AI-driven defense capabilities, but their approaches and priorities reveal as many differences as similarities in this new era of high-tech geopolitics.

The New Battlefield: AI as a Strategic Priority

In the past year, an AI arms race in the military arena has accelerated. All three regions – the U.S., China, and Europe – see AI as critical to future warfare and are ramping up investments accordingly.

Global venture funding for defense tech startups hit a record $49.1 billion in 2025, nearly doubling from the year before. This surge is driven in part by real-world validation: the use of drones and AI-enabled systems on the Ukrainian battlefield has demonstrated their effectiveness, fundamentally shifting how investors view defense.

Military budgets are reflecting this trend as well, prioritizing projects like autonomous drones, AI-enabled decision support, and “collaborative combat” platforms that team manned and unmanned systems.

The result is a global race to harness AI for strategic advantage. Yet the means and motives differ.

The U.S. leverages its vibrant private tech sector and open innovation ecosystem; China pursues a state-directed push for “intelligentized” warfare and self-reliance in AI; Europe, spurred by security threats, seeks to boost capability while aligning with ethical norms and multilateral cooperation.

Despite disparate methods, all acknowledge that mastering military AI will be pivotal to deterring adversaries and winning future conflicts.

United States: Private-Sector Innovation and Defense Contracts

The United States has placed AI at the heart of its defense modernization. In mid-2025, the Pentagon’s Chief Digital and AI Office awarded contracts of up to $200 million each to four leading AI firms – Anthropic, Google, OpenAI, and xAI – to accelerate adoption of cutting-edge “frontier” AI models.

This reflects the U.S. strategy of tapping private-sector innovation to maintain a technological edge. Agentic AI systems are being pursued to enhance battlefield planning, threat detection, and command decision-making, with the Department of Defense aiming to support troops and maintain a strategic advantage through AI.

American defense startups have accordingly seen a flood of capital. Venture funding for U.S. defense-tech companies nearly tripled to $14.2 billion in 2025, far outpacing Europe’s ~$2.5 billion.

Heavyweight investors are shedding previous taboos around defense and reframing it as backing technologies that safeguard democracies. The poster child is Anduril Industries, a California-based firm building AI-enabled military systems, which raised a massive $2.5 billion round in mid-2025, valuing it at $30+ billion.

Anduril has secured billions in U.S. government contracts, from counter-drone networks to surveillance towers. In March 2025, the Marine Corps awarded Anduril a $642 million deal to deploy a family of AI-enabled systems protecting bases from small drones. At the core of this solution is Anduril’s “Lattice” AI software, which fuses sensor data and provides autonomous threat detection and tracking across its network of towers, cameras, interceptors and drones.

The U.S. military’s embrace of such platforms underscores a “software-first” approach to warfighting technology, where adaptable AI and autonomy are just as important as the hardware.

Beyond startups, traditional defense players and the Pentagon’s own labs are deeply involved. DARPA projects in recent years showcased AI-piloted fighter jets and helicopters, proving that autonomous systems can handle complex tasks like dogfighting and flight without humans.

The Air Force has experimented with human–AI teaming for rapid targeting decisions – in one 2025 exercise, an AI “Smart System” suggested real-time courses of action along the “kill chain,” with human operators validating targets and ultimately making the kill decisions. The Defense Innovation Unit similarly launched Project “Thunderforge” with industry partners to integrate intel feeds and sensor data into AI-driven operational plans, again keeping humans “in the loop” for final calls.

American policymakers acknowledge the risks alongside the rewards of military AI. Experts have cautioned that increasingly autonomous weapons could accelerate conflicts or trigger unintended escalation, so the DoD has adopted ethical AI guidelines and testing protocols.

The prevailing U.S. view is that AI should augment human decision-makers, not replace them, ensuring commanders retain control over the use of force. This careful stance, however, goes hand-in-hand with a resolve that the U.S. must lead in military AI lest rivals gain an upper hand. As such, from an investor lens, the U.S. defense sector now offers enormous opportunity – but also high expectations to deliver AI innovations that can be fielded at scale and with reliability.

See my previous work on AI in military applications:

The Geopolitics of AI: Large Language Models

Geopolitical Power Play: AI Unleashed

Battle of the Bytes: Too Little Too Late for China in AI US Face-Off

China: State-Driven “Intelligentization” and Algorithmic Sovereignty

China likewise sees AI as transformative for its military, but its approach is centrally orchestrated and shrouded in secrecy. The People’s Liberation Army (PLA) has officially embraced the doctrine of “intelligentized warfare,” viewing AI, autonomy, and data as the keys to surpassing conventional military strength.

In practice, Beijing is methodically integrating AI across its defense industry under a policy of “military–civil fusion.” A Reuters investigation in late 2025 revealed a systematic effort by the PLA and China’s defense giants to harness AI for battlefield advantage, focusing on capabilities like autonomous target recognition and real-time decision support. Many of these efforts mirror U.S. initiatives in concept, underlining that China is determined not to fall behind.

However, China’s strategy also reflects its unique constraints and goals. Faced with U.S. export controls on high-end chips and tech, the PLA has been **pushing for “algorithmic sovereignty” – reducing dependence on Western technology and using Chinese alternatives wherever possible.

In 2025, Chinese military procurement shows a growing preference for domestic AI models and hardware. One standout is “DeepSeek,” an AI model developed in China that has become the pride of China’s tech sector and a favorite across PLA research projects. In fact, dozens of PLA tenders in 2025 explicitly requested DeepSeek-based solutions, while mentions of Alibaba’s competing model were scarce.

This dominance of DeepSeek underscores Beijing’s drive to build homegrown AI champions under its control. At the same time, Huawei’s AI chips are increasingly appearing in military tech, as Chinese firms respond to government pressure to use indigenous components. (Notably, the PLA still covets advanced NVIDIA chips that are now banned for export; patents filed in 2023 suggest some units experimented with NVIDIA’s A100 and H100 processors, possibly stockpiled before the ban.)

Chinese officials frequently tout breakthroughs as evidence that AI will help close the gap with the U.S. In early 2025, for example, state-owned Norinco unveiled the P60 autonomous combat vehicle, a robotic tank-like platform that can drive at 50 km/h and perform combat support missions without a human crew.

The P60 is powered by the DeepSeek AI engine, and Chinese media lauded it as a sign that China is catching up in the arms race. PLA research institutes have filed patents on AI-powered command systems that can analyze sensor data from satellites and drones to aid battlefield decisions. One paper claimed a DeepSeek-driven system could simulate 10,000 battlefield scenarios in 48 seconds, exploring different terrains and force deployments to recommend optimal strategies.

In another project, scientists at Beihang University leveraged DeepSeek to improve drone swarm decision-making against “low, slow, small” targets (like swarms of hostile drones or light aircraft). These snippets reveal a PLA intent on using AI to outthink, outpace, and outmaneuver – whether through rapid war-gaming simulations or decentralized drone swarms that can adapt in real time.

On the hardware side, China is experimenting with exactly the kind of systems AI enables. The PLA has deployed…

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