OPINION | The asymmetric fallout: How an AI bubble burst realigns great power competition

Over the last few years, the language of great power competition has been steadily rewritten in the vocabulary of artificial intelligence (AI). Compute clusters have become the new dreadnoughts, foundation models the new carrier groups, while GPU export controls have become the new naval blockades. But is this AI boom here to stay, or will it eventually turn into a bubble waiting to burst? 

Bubbles, by definition, do not stay inflated forever. Should the current AI investment cycle deflate sharply, whether through a demand shortfall, a capability plateau or simply the arithmetic of unsustainable capital expenditure catching up with revenue, the consequences will not fall evenly across the international system. That is because a bursting bubble does not erase power; it redistributes it. And it does so along fault lines that were already there before the boom began.

Why the fallout cannot be symmetric

The instinct here is to visualise an AI bubble burst as a generalised deflationary shock, with valuations falling, data centres left half-built and the geopolitical salience of AI receding proportionately for everyone. But there is a catch. Such a view misreads how technological power is actually harnessed to attain strategic goals.

This challenge arises because states do not maintain AI capability in the way they hold currency reserves, as a fungible asset that can be drawn down uniformly. Instead, they embed it within domain-specific institutions such as the military, industry, diplomatic instruments and regulatory regimes, each of which converts raw capability into strategic capability at a different rate and under different conditions. A financial contraction in the AI sector, therefore, does not shrink national power evenly. It exposes exactly how differently each domain was converting that capability in the first place.

This is the core asymmetry. States that built genuine downstream conversion pathways through defence integration, manufacturing linkages and public infrastructure will be able to absorb a valuation correction as a balance-sheet event. States whose AI power was concentrated in speculative capital markets, prestige signalling or unconverted frontier-lab valuations will absorb it as a strategic setback. To assess the impact of an AI bubble burst on the nature of great power rivalry, it is essential to first understand how it would affect each of the major global actors in the field.

The United States: financial shock but institutional cushion

The American AI position is unusually exposed to a market correction. That is precisely because so much of its perceived strength has been priced into equity markets and venture capital rather than embedded in state capacity. A bubble burst would hit not only US technology valuations but also the fiscal confidence of an economy that has leaned on AI-driven growth narratives to offset other structural weaknesses.

Yet the US retains something that a market crash cannot easily erase: an entrenched military-industrial conversion pipeline. Programmes built to integrate AI into command-and-control systems, logistics and autonomous platforms will not evaporate simply because NVIDIA's valuation multiple—the ratio comparing its market price to core earnings or revenue—contracts. The institutional plumbing connecting frontier AI research to defence procurement has already been built over the past decade and operates on a very different timeline from quarterly earnings.

This creates a paradox. The country most exposed to the financial shock may ultimately prove among the most resilient in retaining hard-power conversion because its most consequential AI capabilities were never fully priced into the bubble in the first place.

China: insulated capital but exposed dependencies

On the contrary, China's state-directed investment model insulates it from the sharpest edges of a market-driven correction. Capital allocated through state banks and industrial policy does not face the same redemption pressures as venture-backed valuations. China's vulnerability, however, lies elsewhere: in the compute (computational capacity) supply chain.

A bubble burst that consolidates the global semiconductor and AI hardware industry around fewer, larger and more cautious players could tighten, rather than loosen, the chokepoints that Beijing has spent years trying to route around.

Where the American story is one of financial exposure with institutional insulation, the Chinese story inverts it: financial insulation with supply-chain exposure. China's ability to convert AI investment into military and industrial outcomes depends less on capital markets than on physical access to compute, and a downturn reshuffles who controls that access rather than eliminating the constraint.

The middle powers: a narrowing window

Another noteworthy redistribution occurs outside the US-China binary. The European Union (EU), already converting AI capability primarily through regulatory and normative channels rather than frontier compute ownership, is comparatively insulated from a valuation collapse in which it never fully participated. However, such a burst could also foreclose the window in which European regulatory frameworks, exemplified by the AI Act, meaningfully shape global governance norms. After all, normative power depends on having live technology to govern. This presents the EU with strategic leverage in global AI norm-setting, but only under certain conditions.

India, meanwhile, presents a distinct pattern. Its AI strategy has increasingly rested not on frontier model ownership but on public digital infrastructure such as Aadhaar, UPI and language-model layers like BHASHINI, functioning as a fungible substrate across governance, financial inclusion and economic domains. This model is comparatively insulated from a frontier-lab valuation crash precisely because it was never predicated on frontier valuations. An AI bust that punishes speculative frontier investment while leaving applied, infrastructure-embedded AI largely intact could accelerate a relative repositioning in which India's conversion efficiency, though modest in absolute capability terms, appears structurally stronger than that of states whose AI power was priced into a bubble.

Differential conversion as the real variable

What a bubble burst actually tests is not which global power possesses the greatest AI capability, but which has built the deepest and most diverse conversion pathways from technological capability to strategic outcomes across the military, economic, diplomatic and normative domains.

States that treated AI investment as an end in itself, chasing valuation and prestige, will discover that a single correction strips away precisely the layer in which much of their perceived power resided. By contrast, states that treated AI as one input among several within pre-existing institutional apparatuses will find that the machinery continues to function, albeit at a different price.

The realignment that follows an AI bubble burst will not be a story of AI mattering less in great power competition. Rather, it will be a story of AI remaining strategically significant, with the market noise that once obscured underlying structural differences finally being pared down.

The author is a PhD candidate, SIU-JRF, Symbiosis School of International Studies, Symbiosis International (Deemed) University, Pune.

The opinions expressed in this article are those of the author and do not purport to reflect the opinions or views of THE WEEK.