China's tech companies face rising compliance costs under new EU AI regulations

The world's first comprehensive artificial intelligence (AI) regulation, which comes into force across the European Union (EU) on August 1, is expected to raise assessment and compliance costs for Chinese tech companies operating in the EU's 27 member states, according to industry experts. Passed by the European Parliament in March and approved by the Council of the EU in May, the Artificial Intelligence Law aims to protect fundamental rights, democracy, the rule of law and environmental sustainability from so-called high-risk AI, while also promoting innovation and establishing Europe as a technology leader.

Some Chinese AI companies are already expecting to spend more time and money complying with the new EU rules, facing concerns that over-regulation could stifle innovation.

Dayta AI, a Hong Kong-based global retail analytics software provider, is anticipating EU regulatory compliance and assessment requirements. [to] Increase research and development [research and development] The company's co-founder and chief executive officer, Patrick Tu, said the company's testing costs will be reduced by about 20% to 40%. He said the increased spending will be due to additional documentation, audits and [certain] Technological measures. Catchy artificial intelligence-related slogans displayed at the Google booth at the Hannover Messe 2024 trade fair in Germany, April 22, 2024. Photo: BloombergThe passage and implementation of the EU's new rules reflect a global race to create AI guardrails amid a boom in generative AI (GenAI) services since OpenAI released ChatGPT in November 2022. GenAI refers to algorithms that can be used to create new content, such as voice, code, images, text, simulations and videos, in response to short prompts.

EU institutions may give people the impression of over-regulation, said Tanguy van Overstraeten, a partner at Linklaters and head of the law firm's Technology, Media and Telecommunications (TMT) group in Brussels. What the EU is trying to do with its AI law is create an environment of trust.

The AI ​​Act sets out obligations for technologies based on the extent of their potential risks and impacts. The regulation consists of 12 main titles covering prohibited activities, high-risk systems, governance, post-market surveillance, information sharing, and transparency obligations for market surveillance.

The regulation also requires member states to establish so-called regulatory sandboxes and real-world testing at national level. However, the rule does not apply to AI systems or models (including their outputs) that have been specifically developed and operated solely for the purposes of scientific research and development.

The European Union took an early lead in the global race to develop guardrails for artificial intelligence. Photo: Shutterstock

If a company wants to test [an AI application] In the real world, they could benefit from a so-called sandbox that could last for up to 12 months, during which they could test their systems to a certain extent, Linklaters' van Overstraeten said.

Failure to comply with rules banning certain AI practices could result in administrative fines of up to 35 million euros (US$38 million) or up to 7% of the violating company's total worldwide annual turnover for the previous financial year, whichever is greater.

Dayta AIs Tu said that due to EU regulations on the quality, relevance and representativeness of training data, more care must be taken in selecting data sources.

This focus on data quality will ultimately improve the performance and fairness of our solutions, he added.

Du said the AI ​​law takes a comprehensive, user-rights-first approach and imposes strict limits on the use of personal data.By comparison, he said, China and Hong Kong's rules appear to be more focused on enabling technological advances and aligning them with the strategic priorities of their governments.

Beijing put new GenAI regulations into effect on August 15 last year, which stipulate that GenAI service providers must adhere to the core socialist values ​​and not generate content that incites subversion of state power or subversion of the socialist system, endangers national security and interests, tarnishes the country's image, incites secession from the state, undermines national unity and social stability, or promotes terrorism, extremism, national hatred and ethnic discrimination, violence, obscenity and pornography.

More generally, AI models and chatbots must not generate false and harmful information.

Chinese regulations require companies and products to adhere to socialist values ​​and ensure that AI outcomes aren't seen as harmful to political or social stability, said Alex Roberts, a partner at Linklaters' Shanghai office and head of the firm's China TMT group. For multinationals unfamiliar with the concept, this can cause confusion among compliance officers.

He added that China's regulations are so far only focused on GenAI and are seen as a state- and government-led rulebook, while EU AI law focuses on user rights.

Still, Roberts said the main principles of EU and Chinese AI regulation are very similar: being transparent to customers, protecting data, being accountable to stakeholders, and providing direction and guidance on products.

The European Union's comprehensive artificial intelligence rules, which come into force on August 1, will serve as a blueprint for the world as more governments seek to regulate the technology. Photo: ShutterstockBeijing is also pushing for a comprehensive AI law. China's cabinet, the State Council, included the effort in its annual legislative plan for 2023 and 2024. But no bill has yet been proposed. Other jurisdictions in Asia are also working on AI regulations. South Korea, for example, drafted a law on the promotion of the AI ​​industry and a framework for establishing trustworthy AI last year. The proposed regulations are still under consideration.

Now some governments [Asia-Pacific] Linklaters Roberts said regions are drawing heavily from EU regulations on data and AI as they work on their own AI legislation, and businesses could consider lobbying local government stakeholders to encourage greater harmonisation and consistency of rules across markets.

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