The U.S., which once had a dominant head start in artificial intelligence, now has just a few year's lead on China and risks being overtaken unless government steps in, according to a new report to Congress and the White House.

Why it matters: Former Google CEO Eric Schmidt, who chaired the committee that issued the report, tells Axios that the U.S. risks dire consequences if it fails to both invest in key technologies and fully integrate AI into the military.

Driving the news: The National Security Commission on Artificial Intelligence approved its 750-page report on Monday, following a 2-year effort. Schmidt chaired the 15-member commission, which also included Oracle's Safra Catz, Microsoft's Eric Horvitz and Amazon's Andy Jassy.

• On both the economic and military fronts, the biggest risk comes from China.
• "China possesses the might, talent, and ambition to surpass the United States as the world’s leader in AI in the next decade if current trends do not change," the report states.
• And It's not just AI technology that the U.S. needs to maintain a lead in. The report mentions a number of key technologies, including quantum computing, robotics, 3D printing and 5G.

"We don’t have to go to war with China," Schmidt said. "We don’t have to have a cold war. We do need to be competitive."

The big picture: On the military front, the report calls for AI systems to help guide and inform human decision making, but draws the line at autonomous weapons systems, which Schmidt argues are both destabilizing and violate international law.

• Computer vision is one area where AI can help the military now, Schmidt said, saying it is a mistake for the U.S. to rely only on humans to examine drone and satellite footage, for example, when computers perform that task better than humans. 
• Schmidt also reiterated his view that Google was wrong to withdraw from the Defense Department's Project Maven, an effort to improve its computer vision systems.
• Military leaders also want AI systems that can support broader decision making, Schmidt said, but added that is probably a few years away.
• My thought bubble: This might give you a flashback to the 1983 film "WarGames" and its computer called WOPR, which planned 24 hours a day for World War III.

Between the lines: Semiconductors and software are both critically important, but Schmidt said it is much easier to control exports of hardware than algorithms, which he said inevitably spread beyond national borders.

• The report calls for the U.S. to maintain a two-generation advantage over China in semiconductor manufacturing. As we've reported, the U.S. has been losing ground: Intel is the only U.S. company focused on leading manufacturing technology, and it's already struggling to keep pace with Korea's Samsung and Taiwan's TSMC.
• China has set ambitious goals to catch up on chips, but the U.S. has limited its access to the gear needed to manufacture semiconductors, much of which is American designed or made.
• In addition to defensive moves, the report calls for the U.S. to double research spending each year until it reaches $32 billion.

Yes, but: China already holds the lead in some areas, including some aspects of payment technology and facial recognition. While mass surveillance may not be an area where the U.S. needs to be ahead of China, Schmidt said, he is concerned that China has a five-year lead in e-commerce systems and electronic payments. "I think that’s a very big deal," he said.

The bottom line: Schmidt said competition can be a good thing for innovation, pointing to past technology battles such as PCs vs. Macs and iOS vs. Android. The key. he said, is that the White House and Congress need to provide the focus and dollars to match what's coming from China.