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LONDON: “A wake-up call” for the United States.

That’s what US President Donald Trump said on Monday (Jan 27) about the emergence of Chinese AI app DeepSeek, a competitor to OpenAI and its ChatGPT tool.  

The rise of the little-known Chinese tech startup has triggered alarm about the future of American dominance in artificial intelligence, erasing nearly US$600 billion from Nvidia’s market value in just one day.

It has also highlighted cracks in US efforts to curb China’s technological advancements. Instead of stalling progress, Washington’s containment strategy appears to be having the opposite effect of accelerating China’s drive toward self-reliance and innovation.

DeepSeek stands out for delivering a cost-effective AI solution, and by focusing on creating an efficient algorithm, the firm has demonstrated China’s ingenuity of finding workaround and that significant AI advancements are possible even under hardware constraints.

CRACKS IN AMERICA’S “SMALL YARD, HIGH FENCE” STRATEGY

DeepSeek is not an isolated case of Chinese firms developing workarounds to navigate US export controls and sanctions.

When the US placed Huawei on its Entity List in 2019 - a move that barred the Chinese tech giant from accessing American technology without government approval - few could have predicted the outcome.

Written off by many after being cut off from advanced US technology, the company has emerged stronger and more vertically integrated. Huawei has built an entire semiconductor ecosystem encompassing everything from wafer fabrication to chip design. Its latest Mate 70 series smartphones, running on the completely indigenous Harmony OS NEXT operating system, represents a clean break from US technology dependencies.

This is not to say the path has been easy. Huawei's chips still lag global leaders - its GPUs deliver only 80 per cent of Nvidia's performance, and production yields remain challenging. But the direction of travel is clear: Forced by US restrictions to develop domestic alternatives, Chinese tech companies are gradually closing the gap.

The implications of this tech decoupling are profound. For consumers, it means a world of incompatible standards, with Harmony OS potentially becoming a major platform across the Global South where China's influence is growing. While adoption by non-Chinese manufacturers faces significant hurdles, the platform's success in China's massive domestic market alone would make it a force to be reckoned with.

For businesses, the challenge is even more acute. Companies increasingly face an impossible choice: Maintain access to the Chinese market and risk US restrictions, or align with US policy and face Chinese retaliation.

Former National Security Advisor Jake Sullivan's vision of a "small yard, high fence" strategy has morphed into an ever-expanding yard with increasingly higher fences.

The extensive US semiconductor controls implemented in late 2024, followed by former President Joe Biden's three-tier AI controls as his administration's final salvo, showcase this continued mission creep.

Yet as each new restriction has been undermined by Chinese workarounds and inconsistent US application, Washington has responded by casting an even wider net over critical technologies like advanced AI chips and ultra-fast memory chips used for advanced computing.

Beijing's evolving counter-strategy, from targeting American drone maker Skydio's battery supply chain, a ban on the export of dual-use commodities, notably graphite, germanium, gallium and antimony to launching probes into US chip exports, signals a clear escalation in its response to Washington's containment efforts.

The economic costs of this decoupling are mounting as companies build parallel supply chains, marking the end of efficient globalisation. Yet paradoxically, as the world becomes more inefficient overall, both the US and Chinese spheres are locked in an intensifying race to boost their own technological capabilities. Each side is pushing harder than ever to lead in the technologies that will define the future.

MADE IN CHINA 2025

This competitive dynamic has supercharged Chinese innovation across multiple domains. President Xi Jinping's recent acknowledgement of continuing technological dependencies masks significant progress toward the objectives of Made in China 2025.

According to Bloomberg’s research, China now leads in five out of 13 advanced technologies - unmanned aerial vehicles, solar panels, graphene, electronic vehicles and batteries, and high-speed rail. It is also competitive in others including pharmaceuticals, large tractors, machine tools, robots, AI, semiconductors and commercial aircraft. 

Yet US restrictions have undeniably created serious hurdles in China's most ambitious technological pursuits.

In advanced semiconductors, Shanghai’s Semiconductor Manufacturing International Corporation’s (SMIC) production of 7-nanometre chips for Huawei's Mate 70 series suffers from yield rates that require heavy state subsidies to remain viable, while industry experts doubt the company can progress beyond 5-nm using its current technology.

As export controls expand deeper into China's semiconductor supply chain, companies like SMIC, Yangtze Memory Technologies Corp, and ChangXin Memory Technologies face mounting challenges in advancing both logic and memory chip production.

The stockpiling strategies that have helped bridge technology gaps, including allowing DeepSeek to develop its model which its founder has gone on record saying still needs the most advanced US GPUs, are reaching their limits, potentially forcing Chinese firms to accept significant performance downgrades in sophisticated systems like smartphones and advanced computing clusters.

Access to high-bandwidth memory and other advanced components will be particularly critical for Chinese companies designing cutting-edge systems in 2025.

However, Chinese firms are adapting through clever solutions, particularly by running parallel supply chains that allow them to benchmark indigenous production against foreign technology, enabling continuous learning and improvement.

Though increasingly opaque due to tightening information controls, this process of learning-by-doing suggests China's technological catch-up, while complicated by US restrictions, is likely to continue.

The irony is striking: Having underestimated China's technological progress and grown complacent about its own tech leadership, the US found itself with few options but to pursue an aggressive containment strategy.

Yet while these restrictions are creating genuine obstacles for China's advancement, they may also be accelerating its drive for self-sufficiency and spurring domestic innovation in unexpected ways.

The ultimate winner of this technological race remains unclear. What is certain, however, is that the costs of this divorce are mounting for both sides.

The real challenge ahead lies not just in managing this technological decoupling, but in ensuring that the world's two leading powers can navigate this transition without triggering a devastating conflict.

Diana Choyleva is the founder and chief economist of and a senior fellow at the Asia Society Policy Institute’s Center for China Analysis.