What can the international market do to address Chinese technological innovation?

Two dec­ades ago, China was the world’s fact­ory floor—a place where West­ern-designed products were assembled by low-cost labour and shipped back to afflu­ent mar­kets. Today, Chinese com­pan­ies are set­ting the pace in arti­fi­cial intel­li­gence, dom­in­at­ing elec­tric vehicle sales, and chal­len­ging Sil­ic­on Valley’s tech­no­lo­gic­al suprem­acy. This trans­form­a­tion has sent shock­waves through Wash­ing­ton, Brus­sels, and oth­er West­ern cap­it­als, for­cing poli­cy­makers to craft increas­ingly soph­ist­ic­ated responses to what they see as an exist­en­tial threat to their eco­nom­ic leadership.

The res­ult is a com­plex web of policies that many exec­ut­ives mis­takenly view as simple “decoup­ling” from China. But the real­ity is far more nuanced. West­ern gov­ern­ments are deploy­ing three dis­tinct yet over­lap­ping strategies—each with dif­fer­ent implic­a­tions for busi­nesses try­ing to nav­ig­ate this new land­scape. Under­stand­ing these approaches is cru­cial for com­pan­ies seek­ing to identi­fy both risks and oppor­tun­it­ies in an increas­ingly frag­men­ted glob­al economy.

The stakes couldn’t be high­er. China’s rap­id tech­no­lo­gic­al ascent has cre­ated depend­en­cies that are dif­fi­cult and expens­ive to unwind, while its 1.4 bil­lion con­sumers rep­res­ent a mar­ket too large for most com­pan­ies to aban­don. Yet nation­al secur­ity con­cerns are driv­ing policies that could fun­da­ment­ally reshape how glob­al busi­ness oper­ates, from sup­ply chains to research part­ner­ships to mar­ket access strategies.

The most aggress­ive West­ern response has been techno-nationalism—the delib­er­ate exclu­sion of Chinese com­pan­ies from crit­ic­al tech­no­logy eco­sys­tems based on nation­al secur­ity grounds. This approach rep­res­ents a fun­da­ment­al shift from the eco­nom­ic logic that has driv­en glob­al­isa­tion for dec­ades, pri­or­it­ising secur­ity con­cerns over com­mer­cial interests. The clearest example remains the com­pre­hens­ive cam­paign against Hua­wei, once the world’s largest smart­phone man­u­fac­turer and a lead­er in 5G tele­com­mu­nic­a­tions equip­ment. The Trump administration’s restric­tions, which have been main­tained and expan­ded under Pres­id­ent Biden, effect­ively cut Hua­wei off from Google ser­vices, advanced semi­con­duct­ors, and crit­ic­al soft­ware updates. The impact was dev­ast­at­ing: Huawei’s glob­al smart­phone mar­ket share col­lapsed from 20% to barely 2% with­in two years.

The US Bur­eau of Industry and Secur­ity now main­tains entity lists with over 600 Chinese com­pan­ies banned from receiv­ing Amer­ic­an technology.

But Hua­wei was just the begin­ning. The U.S. Bur­eau of Industry and Secur­ity now main­tains entity lists with over 600 Chinese com­pan­ies banned from receiv­ing Amer­ic­an tech­no­logy. These restric­tions span from obvi­ous tar­gets like tele­com­mu­nic­a­tions giant ZTE to less­er-known firms in arti­fi­cial intel­li­gence, bio­tech­no­logy, and advanced man­u­fac­tur­ing. The Chinese AI com­pany Deep­Seek, des­pite its open-source approach, has seen its gen­er­at­ive AI tools banned from U.S. gov­ern­ment sys­tems, with law­makers pro­pos­ing even broad­er restric­tions. Europe has fol­lowed suit, though often with less sweep­ing meas­ures. The UK banned Hua­wei from its 5G net­works by 2027, while the European Uni­on has giv­en mem­ber states tools to exclude “high-risk vendors” from crit­ic­al infra­struc­ture pro­jects. The Neth­er­lands, home to crit­ic­al semi­con­duct­or equip­ment man­u­fac­turer ASML, has restric­ted exports of advanced litho­graphy machines that are essen­tial for pro­du­cing cut­ting-edge com­puter chips.

The semi­con­duct­or sec­tor has become a par­tic­u­lar flash­point. Export con­trols now pre­vent Chinese com­pan­ies from access­ing not just advanced chips, but also the equip­ment needed to man­u­fac­ture them. These restric­tions have forced China to invest bil­lions in domest­ic semi­con­duct­or cap­ab­il­it­ies, though experts debate wheth­er these efforts can over­come the tech­no­lo­gic­al gaps any­time soon. For West­ern busi­nesses, techno-nation­al­ist policies cre­ate imme­di­ate and often pain­ful dis­rup­tions. Com­pan­ies with Chinese part­ners, sup­pli­ers, or cus­tom­ers in restric­ted sec­tors face forced sep­ar­a­tions with little time to adjust. The les­son for exec­ut­ives is clear: wait­ing for restric­tions to be announced is often too late. Smart com­pan­ies are con­duct­ing reg­u­lar risk assess­ments, devel­op­ing con­tin­gency sup­ply chains, and lob­by­ing for reas­on­able imple­ment­a­tion timelines through industry associations.

Where techno-nation­al­ism shuts the door entirely, techno-loc­al­ism keeps it open but demands a price: Chinese com­pan­ies can par­ti­cip­ate in West­ern mar­kets, but they must estab­lish sub­stan­tial loc­al pres­ence and often trans­fer tech­no­logy as the cost of admis­sion. This approach recog­nises that com­plete exclu­sion of Chinese tech­no­logy may be eco­nom­ic­ally dam­aging or even coun­ter­pro­duct­ive. Instead, it seeks to cap­ture the bene­fits of Chinese innov­a­tion while main­tain­ing domest­ic con­trol over crit­ic­al tech­no­lo­gies and pro­duc­tion cap­ab­il­it­ies. Iron­ic­ally, this mir­rors China’s own play­book from the past two dec­ades, when for­eign com­pan­ies faced sim­il­ar require­ments to access the Chinese mar­ket. The most prom­in­ent example has been the ongo­ing battle over Tik­Tok. Rather than ban­ning the app out­right, U.S. law­makers have deman­ded that Byte­Dance sell its Amer­ic­an oper­a­tions to domest­ic own­ers. The under­ly­ing logic is that Tik­Tok’s algorithm and user data rep­res­ent valu­able assets that should bene­fit Amer­ic­an rather than Chinese interests. Sim­il­ar pres­sures have been applied to oth­er Chinese apps and ser­vices that handle sens­it­ive user information.

In the elec­tric vehicle sec­tor, the European Uni­on has embraced techno-loc­al­ism as a way to bene­fit from Chinese bat­tery tech­no­logy while build­ing domest­ic indus­tri­al capa­city. Chinese bat­tery giants like CATL and BYD have estab­lished European man­u­fac­tur­ing facil­it­ies to access sub­stan­tial devel­op­ment grants and sub­sidies. These arrange­ments give European gov­ern­ments some con­trol over crit­ic­al sup­ply chains while allow­ing Chinese com­pan­ies to par­ti­cip­ate in the luc­rat­ive trans­ition to elec­tric mobil­ity. The approach extends to data loc­al­isa­tion require­ments, where Chinese tech com­pan­ies must store European user data with­in EU bor­ders, and joint ven­ture man­dates that effect­ively force tech­no­logy shar­ing as a con­di­tion of mar­ket entry. Some arrange­ments go fur­ther, requir­ing licens­ing deals that ensure West­ern com­pan­ies gain access to Chinese innovations.

For busi­nesses, techno-loc­al­ist policies present both oppor­tun­it­ies and risks. In the short term, West­ern com­pan­ies can gain access to cut­ting-edge Chinese tech­no­logy, expan­ded mar­ket share, and cost advant­ages through these arrange­ments. How­ever, forced tech­no­logy trans­fer can reduce Chinese com­pan­ies’ incent­ives to innov­ate in open part­ner­ships, poten­tially leav­ing West­ern part­ners with access to out­dated tech­no­logy as Chinese com­pan­ies focus their latest devel­op­ments on unres­tric­ted mar­kets. The key for exec­ut­ives is to care­fully bal­ance imme­di­ate gains against long-term com­pet­it­ive risks. Com­pan­ies that become too depend­ent on forced tech­no­logy trans­fers may find them­selves at a dis­ad­vant­age as Chinese part­ners devel­op altern­at­ive strategies or focus innov­a­tion elsewhere.

The third strategy, pro­tec­tion­ism, takes a dif­fer­ent approach entirely. Rather than focus­ing on com­pany own­er­ship or secur­ity con­cerns, it seeks to pro­tect domest­ic indus­tries through tar­iffs, sub­sidies, and pro­cure­ment preferences—regardless of where a com­pany’s headquar­ters hap­pens to be loc­ated. The Biden administration’s 100% tar­iff on Chinese-built elec­tric vehicles rep­res­ents per­haps the starkest example of this approach. The tar­iff effect­ively doubles the price of Chinese EVs, mak­ing them uncom­pet­it­ive with domest­ic altern­at­ives regard­less of their tech­no­lo­gic­al mer­its. Sim­il­ar duties have been imposed on Chinese sol­ar pan­els, semi­con­duct­ors, steel, and alu­mini­um, cre­at­ing sub­stan­tial cost dis­ad­vant­ages for Chinese exporters.

But mod­ern pro­tec­tion­ism goes bey­ond tar­iffs. The Infla­tion Reduc­tion Act provides up to $369bn in clean energy incent­ives, with domest­ic con­tent require­ments that favour Amer­ic­an man­u­fac­tur­ers. The CHIPS Act alloc­ates $52bn for semi­con­duct­or man­u­fac­tur­ing, with restric­tions pre­vent­ing recip­i­ents from expand­ing advanced chip pro­duc­tion in China. Europe has respon­ded with its own Green Deal Indus­tri­al Plan, includ­ing sub­stan­tial sub­sidies for clean tech­no­logy man­u­fac­tur­ing with­in the EU.

Pro­tec­tion­ist policies often prove less effect­ive than inten­ded because they address geo­graphy rather than own­er­ship or control.

These policies aim to rebuild domest­ic indus­tri­al capa­city that has been hol­lowed out by dec­ades of glob­al­iz­a­tion. “Buy Amer­ic­an” pro­vi­sions in fed­er­al pro­cure­ment give domest­ic com­pan­ies sig­ni­fic­ant bid­ding advant­ages, while state-level pref­er­ences extend pro­tec­tion­ist policies to region­al gov­ern­ment pur­chas­ing. How­ever, pro­tec­tion­ist policies often prove less effect­ive than inten­ded because they address geo­graphy rather than own­er­ship or con­trol. Chinese com­pan­ies have demon­strated remark­able adapt­ab­il­ity in cir­cum­vent­ing trade bar­ri­ers through dir­ect invest­ment, third-coun­try strategies, and com­plex part­ner­ship arrangements.

BYD, des­pite facing high tar­iffs on Chinese-built vehicles, has main­tained luc­rat­ive con­tracts with Amer­ic­an trans­it author­it­ies through its Cali­for­nia man­u­fac­tur­ing facil­ity. The com­pany tech­nic­ally pro­duces « Amer­ic­an-made » vehicles while retain­ing Chinese own­er­ship and con­trol. Sim­il­arly, Chinese sol­ar man­u­fac­tur­ers have estab­lished sig­ni­fic­ant U.S. pro­duc­tion capa­city, enabling them to qual­i­fy for the very sub­sidies designed to sup­port Amer­ic­an industry. Chinese man­u­fac­tur­ers are also increas­ingly rout­ing products through Mex­ico, Viet­nam, and oth­er coun­tries to avoid tar­iffs, while main­tain­ing con­trol over key tech­no­lo­gies and pro­cesses. These strategies high­light a fun­da­ment­al chal­lenge with pro­tec­tion­ist approaches: in a glob­ally integ­rated eco­nomy, nation­al­ity of pro­duc­tion and own­er­ship can be decoupled in ways that under­mine policy effectiveness.

The three-strategy frame­work reveals why simple “decoup­ling” nar­rat­ives miss the mark. West­ern gov­ern­ments are not uni­formly shut­ting out Chinese tech­no­logy but are instead deploy­ing soph­ist­ic­ated tools to reshape com­pet­it­ive dynam­ics in their favour. The chal­lenge for busi­ness lead­ers is under­stand­ing which approach applies to their spe­cif­ic industry and adjust­ing strategies accord­ingly. Com­pan­ies oper­at­ing in sec­tors deemed crit­ic­al to nation­al security—telecommunications, semi­con­duct­ors, arti­fi­cial intelligence—should expect techno-nation­al­ist restric­tions and plan accord­ingly. Those in indus­tries where tech­no­logy trans­fer is valu­able may find oppor­tun­it­ies in techno-loc­al­ist arrange­ments, though they must care­fully man­age long-term com­pet­it­ive risks. In sec­tors facing pro­tec­tion­ist meas­ures, the key is recog­niz­ing that these policies often cre­ate win­dows rather than walls—opportunities for stra­tegic repos­i­tion­ing rather than per­man­ent exclusion.

The broad­er trend is clear: the era of purely mar­ket-driv­en glob­al­iz­a­tion is end­ing, replaced by a more com­plex sys­tem where geo­pol­it­ic­al con­sid­er­a­tions increas­ingly shape com­mer­cial rela­tion­ships. Com­pan­ies that adapt quickly to these new rules of engage­ment will find oppor­tun­it­ies even in a more frag­men­ted world. Those that cling to old assump­tions about fric­tion­less glob­al mar­kets may find them­selves increas­ingly dis­ad­vant­aged. As China’s most cap­able com­pan­ies con­tin­ue adapt­ing to each policy shift, West­ern firms face a stark choice: evolve their strategies to match this new real­ity or risk being left behind in a rap­idly chan­ging com­pet­it­ive land­scape. The com­pan­ies that thrive will be those that view these policy frame­works not as obstacles to over­come but as new rules of the game to master.