The European Union (EU) is set to implement the world’s first comprehensive artificial intelligence (AI) regulations on August 1. These new rules are expected to significantly increase compliance and assessment costs for Chinese tech companies operating within the EU’s 27 member states. Industry experts have highlighted the challenges of these regulations, especially in terms of innovation.
The Artificial Intelligence Act was approved by the EU Council in May, following its passage by the European Parliament in March. The Act aims to protect fundamental rights, democracy, the rule of law, and environmental sustainability from high-risk AI applications. At the same time, it seeks to boost innovation and establish Europe as a leader in AI technology.
Some Chinese AI firms, such as Hong Kong-based Dayta AI, are already preparing for the financial impact of these regulations. Patrick Tu, co-founder and chief executive of Dayta AI, predicts compliance and assessment requirements will increase the company’s research and development (R&D) and testing costs by 20 to 40 percent. This increase will cover additional documentation, audits, and technological measures.
The introduction of the AI Act reflects a global push to establish AI regulations amidst the rise of generative AI (GenAI) services. GenAI refers to algorithms that create new content, such as audio, code, images, text, and videos, in response to short prompts. Despite concerns about overregulation, Tanguy Van Overstraeten, a partner at Linklaters and head of the law firm’s technology, media, and telecommunications (TMT) group in Brussels, believes the EU’s goal is to create an environment of trust.
The AI Act categorizes AI technology based on potential risks and impacts. It covers prohibited practices, high-risk systems, transparency obligations, governance, post-market monitoring, information sharing, and market surveillance. The regulation also requires member states to establish regulatory sandboxes for real-world testing, which allow companies to test AI applications within set boundaries for up to 12 months.
Non-compliance with certain AI practices can lead to administrative fines of up to 35 million euros (US$38 million) or up to 7 percent of the offending firm’s total worldwide annual turnover, whichever is higher.
Chinese tech firms face significant challenges as they adapt to these new regulations. Dayta AI’s Patrick Tu explains that the financial impact is substantial, with compliance costs expected to rise significantly. This includes costs related to additional documentation, audits, and the implementation of technological measures to meet the new standards.
Expected Cost Increases:
| Area | Estimated Increase |
|---|---|
| Research and Development | 20-40% |
| Testing | 20-40% |
| Documentation | Significant |
| Audits | Significant |
Tu points out that these increased costs are necessary to ensure that AI applications are safe, reliable, and compliant with the new EU regulations. While the initial financial burden is high, the long-term benefits of compliance, including enhanced performance and fairness of AI solutions, are expected to outweigh these costs.
The EU’s focus on data quality and user rights sets it apart from other regions. For instance, China’s GenAI regulations, implemented on August 15 last year, require AI service providers to adhere to core socialist values and avoid generating content that threatens national security or promotes terrorism, extremism, or other harmful ideologies. Alex Roberts, a partner at Linklaters in Shanghai, pointed out that these regulations can confuse multinational corporations that are unfamiliar with such requirements.
Roberts also mentioned that China’s AI regulations are more state-led, whereas the EU’s regulations focus on user rights. Despite these differences, he believes the core principles of both regulatory frameworks are similar, including transparency, data protection, accountability, and providing clear guidance on AI products.
- EU Regulations:
- Focus on user rights and data quality
- Establish regulatory sandboxes for testing
- High compliance costs for companies
- China Regulations:
- Emphasis on state control and national security
- Core socialist values must be adhered to
- Multinational corporations face challenges in compliance
The State Council, China’s cabinet, has listed a comprehensive AI law in its legislation plans for 2023 and 2024, though a draft law has yet to be proposed. Other Asian countries, like South Korea, are also working on AI regulations. South Korea’s draft “Act on Promotion of AI Industry and Framework for Establishing Trustworthy AI” is still under review.
The new AI regulations have elicited mixed reactions from the tech industry. While some companies see the regulations as a necessary step to ensure the ethical use of AI, others are concerned about the potential stifling of innovation. Tanguy Van Overstraeten believes that despite the initial hurdles, the AI Act will foster a more trustworthy environment for AI development and deployment.
- Support for Ethical AI:
- Ensures safe and reliable AI applications
- Protects user rights and data
- Concerns About Innovation:
- Potentially stifling innovation
- High compliance costs
As the AI Act comes into effect, companies operating within the EU will need to navigate these new regulations carefully. The establishment of regulatory sandboxes is seen as a positive step, allowing companies to test their AI applications in a controlled environment before full-scale deployment.
Overall, the implementation of the AI Act marks a significant milestone in the regulation of artificial intelligence. As other countries look to the EU as a model for their own AI regulations, the global landscape for AI development is likely to become more harmonized, promoting safer and more ethical AI practices worldwide.
Featured Image courtesy of DALL-E by ChatGPT