The United States' strategy of imposing technology restrictions on China, intended to curb its technological advancements, appears to be backfiring. Instead of hindering progress, these restrictions are acting as a catalyst, accelerating China's pursuit of self-reliance and boosting domestic innovation, particularly in the fields of artificial intelligence and semiconductor manufacturing. This article explores how companies like DeepSeek and Huawei are navigating these challenges and emerging as strong competitors in the global tech landscape.
The emergence of DeepSeek, a Chinese AI app challenging OpenAI's ChatGPT, has sparked concerns about the United States' future dominance in AI. Despite facing hardware constraints due to US restrictions, DeepSeek has developed a cost-effective AI solution by focusing on efficient algorithms, proving China's ability to innovate and find workarounds. This development highlights a critical flaw in the US containment strategy.
Similarly, Huawei, once written off after being placed on the US Entity List in 2019, has demonstrated remarkable resilience. Cut off from advanced US technology, Huawei has emerged stronger by building a vertically integrated semiconductor ecosystem, encompassing everything from wafer fabrication to chip design. Huawei's latest Mate 70 series smartphones, powered by the indigenous Harmony OS NEXT, signify a complete break from dependence on American technology.
Although Huawei's chips still lag behind global leaders in performance and production yield, the company is steadily closing the technology gap, driven by the need to develop domestic alternatives in response to US restrictions.
The US strategy, initially envisioned as a "small yard, high fence," has expanded, encompassing more technologies and stricter controls. This expansion includes the extensive semiconductor controls implemented in late 2024, followed by AI controls. However, China has responded with its own counter-strategy, including:
This tit-for-tat escalation signals a clear response to the US containment efforts.
Despite the challenges posed by US restrictions, China has made significant progress towards its "Made in China 2025" objectives. According to Bloomberg’s research, China leads in five out of 13 advanced technologies:
China is also competitive in other sectors such as pharmaceuticals, robots, AI, semiconductors, and commercial aircraft.
However, sectors like advanced semiconductors face serious challenges. Shanghai’s Semiconductor Manufacturing International Corporation’s (SMIC) (SMIC) struggles with yield rates in the production of 7-nanometer chips, requiring heavy state subsidies.
The economic costs of this decoupling are rising, forcing companies to build parallel supply chains and marking the end of efficient globalization. Ironically, this intensifying race to boost technological capabilities is pushing both the US and China to innovate further.
As Chinese companies adapt through clever solutions, particularly parallel supply chains that benchmark indigenous production against foreign technology, they enable continuous learning and improvement. This learning-by-doing approach suggests that China's technological catch-up is likely to continue, despite US restrictions. You can read more about China's AI advancements in this commentary on China's AI video rush.
The US underestimated China's technological progress and grew complacent about its own tech leadership. While US restrictions create genuine obstacles for China, they also accelerate its drive for self-sufficiency and spur domestic innovation. The ultimate winner of this technological race remains uncertain. However, the costs of this divorce are mounting for both sides. The real challenge lies in managing this technological decoupling and ensuring that the world's two leading powers can navigate this without triggering conflict.
This article is based on commentary by Diana Choyleva, founder and chief economist of Enodo Economics and a senior fellow at the Asia Society Policy Institute’s Center for China Analysis.
