The warnings come from data centre operators and AI experts who said current policy might only capture a fraction of the benefits on offer, during a federal inquiry holding its second round of hearings in Sydney on Wednesday.
While the opportunities were enormous, overwhelming focus on foreign investment risked squandering Australia's considerable potential advantages, the MPs and senators heard.
"We've seen this economic extraction pattern before," Vault Cloud chief executive Rupert Taylor-Price said.
"Domestic taxi services replaced by multinational rideshare, domestic retail yielding to the global online platforms, traditional media subsided by foreign social networks.
"In each case, consumers gained short-term convenience and long-term value left Australia, reducing our national self-reliance."
Genuine sovereign AI capacity meant owning parts of the technology's supply chain, not just hosting hardware, the experts said.
They added Australia could still have the upper hand in luring the industry's leading edge compared to bigger economies.
"From a regulatory and trust perspective, we're essentially at the top of the pile ... so there's a natural advantage," Mr Taylor-Price said.
Australians would be lumped with second-rate tech, termed "n minus one" by the experts, if it stayed the course, but that was perfectly acceptable in almost every case, the committee members heard.
"The majority of work that an organisation needs is not the absolute smartest brain at all times, and it's very inefficient," Mr Taylor-Price said.
"Really complex, world-changing problems are where frontier models are best suited," AI firm Nexrupta director Dan Navfield added, using curing cancer as an example of where deep research could come in handy.
"You don't need them for most work that happens every day, and so it is important to have them available ... but they make up a smaller portion than we are led to believe."
With abundant natural resources and native talent, Australia had everything in its toolkit to gain control of so-called "frontier" AI models, the committee heard.
But things like offshore firms being able to dodge taxes and an entrenched prejudice favouring foreign over domestic tech spelled an uphill battle for home-grown developers.
It is a critical time for the AI industry, as companies fight to increase sovereign capacity and convince Australians they are worth investing in, even at risk of personal inconvenience.
Some states, including Victoria, have cracked down on data centre companies and no longer allow them to build warehouses in residential areas.
In NSW, a community group in a Sydney suburb campaigned against plans for a now-scrapped centre just 150 metres from a school. Other neighbourhoods are following suit.
But sovereignty over AI was also related to ensuring the technology was safe, an issue hashed out the previous day when OpenAI executive Jason Kwon issued an apology for one of the company's models hacking a Medicare website in June.
"If we're training onshore, we have more agency over how the process is done, and maybe even more intimate knowledge of the inner workings," Australian Institute for Machine Learning director Simon Lucey told the hearing.
"Not owning the entire stack, but having agency over parts of the stack, and the greater agency we have, the more voice that Australia has."
Professor Lucey said open slather for data centres, rather than AI training centres, would merely provide a "sugar hit" to the economy which would wane over time.
"If we actually strategically get more training data centres in place, it's more like our vegetables," he said.
"We're actually getting some nourishment that will actually sustain the economy over a long term because we get an economic multiplier."
