The U.S. and China are both making enormous gains in artificial intelligence capabilities as the rival superpowers battle it out to harness the rapidly evolving technology for economic and military dominance.

While the conventional wisdom has been that America is a few years ahead of China in this race, Beijing is striving to close the gap, committing tens of billions of dollars toward its goal of becoming the world leader in AI innovation by the end of the decade.

The U.S. is actively working to keep its adversary at bay, but both countries have their own sets of challenges to overcome in a competition that is far from over.

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Doug Calidas, the former chief of staff to Sen. Amy Klobuchar, is a fellow at the Harvard Belfer Center where his research focuses on how the U.S.-China rivalry impacts American technology, politics and policies. In an interview with FOX Business, he broke down the state of the AI race between the U.S. and China, which he says both nations are "taking very seriously."

Calidas explained that in terms of policy, there are two prongs to America's approach. One is investing in U.S. capabilities to push the U.S. ahead, and the other is trying to slow down China. The U.S. is doing both.

America is actively working to restrict China's ability to get the most cutting edge chips and chip manufacturing equipment, and Calidas said the U.S. government has also started taking some measures to try to prevent China from getting access to the best AI algorithms and systems.

Although there has been a great deal of funding in this sector for years, he said, after OpenAI grabbed everyone's attention with its release of ChatGPT in November of 2022, "the money started pouring in for all kinds of VC funds and every company is now trying to be an AI company."

But in the public sector, "the federal government has talked a lot about trying to fund research and development – particularly for national security purposes – of evolving AI, [but the] rhetoric has been stronger than the action," Calidas said.

The high watermark was the Chips and Science Act that came out in the summer of 2022, and that was primarily funding for semiconductors because there was a concern that if we somehow lost access to imports from Taiwan, and possibly South Korea, the US would not have the ability to manufacture the most cutting edge chips. So, the aim is to produce them here at home.

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There was also a big push to overhaul the scientific research and development apparatus in the US, he explained, but since that time, "Congress hasn't funded it very much, and it just shows that even if people care a lot about something, it's hard to get new money in DC for anything, including this."

Calidas pointed out that despite China lagging the U.S. when it comes to AI, Beijing does have certain advantages.

"China really doesn't put a lot of stock in civil rights and privacy rights," he said. "They can collect data from their citizens all across the facial recognition databases and all this stuff."

But he says facial recognition is probably the only area of AI where China is arguably ahead of the U.S. "We could probably catch up if we really wanted to," he said, "but we don't use it as much as they do because they use it for a lot of law enforcement purposes that we just don't agree with."

Still, the US also has incredible data, given all the leading current systems were trained on internet-scale databases.

As for disadvantages in the race, China actually has a lot more onerous regulations on the development of AI systems, particularly with generative AI, according to Calidas.

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Generative chatbots like ChatGPT are "terrifying" to the Chinese government, he said, because "one of the ways that Xi Jinping and the Chinese Communist Party have stayed in power is tightly controlling access to information."

The risk of allowing Chinese citizens the ability to ask questions about, for example, what happened in Tiananmen Square in the 1980s, is not something the CCP would allow, so they have clamped down on the use of generative AI systems by the broader public.

Yet, he said, Chinese leadership has realized that if they completely clamp down on generative AI systems, they're going to lose the AI race, "so they have their own struggle."

"First and foremost is military power," Calidas says. "The U.S. versus China military rivalry is very real."

The belief is that fighting in the next generation or two is going to be absolutely transformed by AI.

Calidas pointed to the example of drone swarming. A few drones are easy to defend against, he said, but if a military has thousands of them and they are all moving in formation in real-time based on an AI feedback system, that is difficult to defend against.

As such systems speed up, he said, the ability to have more sophisticated AI systems integrated into the military is going to be a huge advantage, "So both nations want it, and both nations are terrified of the other one having it before they do."

Because many AI systems have developed so far in just a few years' time, the thinking is that the more advanced they get, they will accelerate the development even more quickly. "So there's a fear that if you fall behind, now, you could fall behind for the long run."

Military strength is based largely on economic power, and AI is expected to play an enormous role in economic growth over the next few generations. 

Calidas says currently, China is ramping up its spending on AI and other emerging technologies, while the recent U.S. budget that came out for the federal appropriations for fiscal year 2024 "really shortchanged" investments in science and technology research, including for AI.

"If you care about the competition between the U.S. and China, then [that] really is bad policy," Calidas said. 

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He doesn't believe there are policymakers who specifically wanted to shortchange that funding, noting that there are a lot of competing items in the budget that people care about, so AI was not at the top of the list.

"Voters [are] not specifically thinking about science and research funding for AI," Calidas said. "But it's really important, and I feel like if we don't fix that and fund this stuff better in coming years – we're really going to regret it."