Data arguably constitutes China’s primary AI advantage. With fewer obstacles to data collection and use, China has amassed huge data sets that do not exist in other countries. But, China’s achievements in AI applications lack a robust foundation in leading-edge chips, leaving them vulnerable to imposed supply disruptions, as we’re seeing amid the coronavirus pandemic.

China’s AI strategy has largely neglected the role of computing power as it was assumed that the necessary chips could always be purchased from global semiconductor industry leaders.

The outbreak of the technology war, however, has blocked China’s access to advanced chips from the Americans.

Back to the 80s – the unintended result of US campaign against Huawei

Faced with these US restrictions, China can no longer count on secure access to leading-edge AI chips. China’s leadership believes that a robust domestic AI chip industry is needed if they want to sustain its still highly fragile achievements in commercial AI applications.

Nevertheless, China continues to lag considerably behind the US in the depth of its domestic chip design and fabrication of semiconductors. For instance, the Semiconductor Manufacturing International Corporation (SMIC), China’s largest semiconductor foundry, continues to lag more than three years behind in leading-edge process technology.

While the US semiconductor industry has consistently retained nearly half of the global market, China-based production is only around 5 per cent. Reflecting these weaknesses, China’s semiconductor trade deficit has more than doubled since 2005, surpassing crude oil to become China’s biggest import item.

This massive import dependence explains why the Chinese leadership has made it a priority to catch up and forge ahead in this industry.

How China’s semiconductor insiders rate the nation’s self-reliance drive

America’s technology export restrictions will no doubt slow China’s push into AI and semiconductors. But there will be immense collateral damage. Technology warfare against China may end up hurting the US even more, in particular its semiconductor and AI industries.

US suppliers will suffer as Huawei responds to the US ban by doubling down on efforts to become self-reliant and sourcing components from alternative suppliers based in Europe and elsewhere in Asia. US semiconductor firms are therefore losing their privileged status as trustworthy suppliers.

While decoupling between the US and China is real, it remains porous and meandering, and hence may leave room for pragmatic counter-strategies.

The US needs to return to a policy that promotes rather than disrupts the rule of law in international trade, to regain stability, predictability and a more equitable distribution of gains from trade. It will take quite some time to repair the tremendous damage done by current US policies.

China, in turn, needs to reconsider the notion that the country can only progress in AI if it pursues a zero-sum competition policy in its relationship with the US and other advanced countries.

China should provide safeguards to foreign companies against forced technology transfer, through policies such as compulsory licensing, cybersecurity standards and certification, and restrictive government procurement policies.

Dieter Ernst is a senior fellow at the Centre for International Governance Innovation, headquartered in Waterloo, Canada