Techno-Federalism: How Regulatory Fragmentation Shapes the U.S.-China AI Race

Abstract

The U.S. and China are engaging in a regulatory arms race over artificial intelligence (AI). Yet, existing debates often overlook a critical factor shaping this AI race: federalism—the division of regulatory authority between federal and state governments. In the U.S., states lead in AI regulation, with the federal government taking a limited, backseat role. Key laws governing AI use and liability—contract, corporate, licensure, and tort law—fall within state jurisdiction. Similarly, in China, local authorities play a pivotal role in AI policy. Although China does not have a formal federalist system, it fosters decentralized innovation through local policy experimentation, reflecting a form of “federalism, Chinese style.” Despite opposing value systems, both countries are converging towards a fragmentary approach to AI governance.

What explains this convergence? The answer, I argue, lies in industry self-governance. In both countries, the tech industry is increasingly acting as a co-regulator of AI systems alongside traditional central and local authorities. As gatekeepers, suppliers, and beneficiaries of disruptive AI technologies, the tech industry imposes market discipline on regulators at both levels, often by exploiting jurisdictional differences and leveraging local protectionism to advance its interests. However, as national security takes center stage in this AI race, the tech industry is assuming both commercial and geopolitical roles, emerging as a third regulatory force that reshapes center-local relations.

This new paradigm reflects what I call “techno-federalism.” Combining “technocracy” with “federalism,” it describes how AI both disrupts and transforms traditional federalism by enabling industry self-governance. Techno-federalism departs from traditional federalism in three aspects. First, it does not originate from deliberate constitutional design. Rather, it emerges organically in response to AI’s rapidly evolving landscape, leading to blurred regulatory boundaries across different levels of government. Second, it is characterized by legal uncertainty over AI governance responsibilities, contrasting with traditional federalism’s clear power divisions. Third, it is shaped by the market norms of tech firms—platforms, developers, and data intermediaries—that operate under state and local law.

Techno-federalism challenges the dominant view that the U.S.-China AI race is merely a “battle of values” between liberal democracy and techno-autocracy. By highlighting the tripartite interplay between central, local, and market power, techno-federalism offers a more nuanced perspective, addressing the limits of conventional geostrategic approaches to AI engagement with China.

Keywords: US-China Relations, Geopolitics, National Security, Artificial Intelligence, Federalism, Industrial Policy, AI, AI Governance, Techno-Authoritarianism