What you are arguing is that all progress on models (outside of government labs or internal corporate workings) will effectively stop because there won't be funding for it. That seems unlikely to me. You just need to play it out...
US companies/investors go and invest a trillion dollars or something on models. Someone "does stuff" and reverse engineers their model. They go out of business (you said so [1]).
So now what happens?
Well, the US/DARPA/universities/whatever (all countries with interest) will keep working on this stuff and there will be some funding for it but that's about it. Military applications, physics, things like that.
Chinese companies will also fail and it will not be possible to create new SOTA ones because they'll obviously just be reverse engineered too and given away for free or at super low pricing - whatever happens in America must happen in China too.
So who will build new models? There's nobody around to pay for it besides governments or maybe corporate labs. But corporations and governments will protect the models (obviously, as OpenAI and Anthropic do today to varying extents) and keep the weights and stuff closed source. They'll have some productive use for them even if it's not in the download Claude Code and have at it style of B2C/B2B we have today.
Or
Maybe the trillions of dollars of investment going into these companies actually makes sense and the threat of open-weight models isn't what you and others seem to be suggesting it is. Whatever fate we seem to want to assign to America also happens to China here. To the extent they are behind, they're still running the same exact race. If open-weight models undercut companies they'll also undercut Chinese companies.
Just as Open Office exists today, so does Microsoft Office. Microsoft just makes all the money. I'm not sure why some seem to think that they can use the open source comparison here but not also use the open source economics that we've seen play out.
I think as a productive exercise someone should run this argument and explain why Chinese companies won't also be eaten alive by this alleged race to the bottom and have all of their stuff reverse engineered and given away. How can they invest in new AI companies with SOTA aspirations? Whatever argument you want to make for the US applies to China as well, and we can just give away freedom models to all the countries just like supposedly they will.
[1] "The important distinction is SOTA US labs - ANT and OAI - who can not economically survive reverse engineering / fast following PRC models at PRC pricing."