By: Tarinee Gupta

Abstract

The ongoing technological separation between the United States and China, intensified by Donald Trump’s 2024 re-election campaign, has reshaped global digital commerce. Stricter U.S. export controls, scrutiny of Chinese tech firms, and laws like the “U.S.-China AI Decoupling Act” have accelerated China’s push for self-sufficiency, forcing U.S. allies to navigate economic and geopolitical trade-offs while disrupting global supply chains.

The dispute has raised concerns over digital protectionism, exemplified by the U.S. ban on TikTok, and has fuelled regulatory fragmentation. As nations align with competing technological blocs, multilateral trade agreements may give way to regional deals. Without diplomatic efforts to foster cooperation, the division of global technology ecosystems could hinder innovation, restrict trade, and destabilise economies. This article analyses the widening divide between the U.S. and China, the strategic responses enacted by each country, the difficulties encountered by international allies, and the broader consequences for digital trade agreements in a fragmented technological environment.

Introduction

Donald Trump’s re-election in 2024 has heightened tensions between the U.S. and China, especially in the technology sector, resulting in a stronger drive for a technological separation between the two largest economies globally. Based on earlier policies, the government has enacted tighter export regulations, widened limitations on Chinese technology companies, and heightened examination of international tech investments, further strengthening what is commonly referred to as “The Great Digital Firewall.” This change indicates a significant transformation in global technological governance, innovation networks, and digital trade policies, urging countries to rethink their economic and security approaches. In reaction, China has intensified its commitment to attain technological self-reliance, pouring significant resources into semiconductor manufacturing, AI innovation, and alternative supply networks, while also enacting counteractions against American companies. This intensifying standoff has put U.S. allies in a challenging situation, compelling them to balance intricate trade-offs between economic priorities and geopolitical affiliations. 

The partitioning of global digital markets, interruptions in supply chains, and changes in regulatory frameworks have had extensive effects on international trade and multilateral trade agreements. Furthermore, the recent U.S. ban on TikTok, defended by national security concerns, has introduced further controversy, sparking discussions about data privacy, digital sovereignty, and the wider consequences of employing trade restrictions as geopolitical instruments. 

Escalation of Technology Restrictions

In early 2025, Senator Josh Hawley introduced the “U.S.-China AI Decoupling Act,” which aims to sever AI-related trade between the two nations. The legislation proposes prohibiting U.S. imports and exports of AI and generative AI technologies to and from China and barring U.S. investments in AI technology developed or produced in China.

Supporters argue that such measures are essential to prevent sensitive technologies from boosting China’s military capabilities, particularly in AI and semiconductors. They see these restrictions as necessary to maintain U.S. technological dominance and national security. However, critics warn that broad restrictions could stifle innovation and harm American companies like NVIDIA and Intel, which rely on Chinese markets and supply chains. Losing access to China’s manufacturing and consumer base could slow AI and chip development, ultimately weakening U.S. competitiveness.  

Beyond corporate concerns, economic protectionism raises critical questions about whether the U.S. is sacrificing long-term economic stability for short-term geopolitical leverage. Similar strategies in past trade disputes, such as the 1980s U.S.-Japan semiconductor conflict, temporarily protected American firms but also pushed Japan to develop a more resilient, self-reliant tech ecosystem. The same risks apply today—while limiting Chinese access to high-end semiconductor technology may protect American interests in the short run, it could also force China to over invest in semiconductor self-sufficiency, leading to a competitive industry that ultimately challenges U.S. dominance. Meanwhile, American firms like NVIDIA and Intel, which rely on Chinese demand and supply chain networks, could suffer revenue losses and reduced R&D capabilities, weakening overall competitiveness. If history is any guide, rigid trade barriers may produce unintended consequences that outweigh their strategic benefits.

China’s Countermeasures: Resilience and Retaliation

China has not remained passive in this technological standoff. In February 2025, Jiangsu Jiuwu Hi-Tech halted the export of sorbent equipment essential for lithium processing, reflecting Beijing’s proposed export controls on battery and lithium technologies. This move suggests that the proposed restrictions, though not yet implemented, are already impacting industry behavior.

Additionally, Huawei’s launch of the Mate XT, the industry’s first tri-foldable smartphone, underscores Beijing’s ability to “innovate”, despite American sanctions. This device features a 10.2-inch OLED flexible display and a thin 3.6mm body, symbolising Huawei’s defiance against U.S. technology curbs.

However, reliance on domestic technology presents structural challenges for China, revealing the limitations of self-sufficiency in a globally interconnected tech landscape. The inability to access cutting-edge semiconductor manufacturing from industry leaders like TSMC and ASML constrains its ambitions in AI, advanced computing, and 5G infrastructure, placing it at a strategic disadvantage. Despite substantial state investment and notable progress in chip development, China remains dependent on outdated fabrication nodes, hindering its ability to compete with Western firms producing high-performance semiconductors essential for next-generation technologies.

Furthermore, restrictions on access to Western software and hardware ecosystems further marginalize China from global innovation networks, potentially creating an isolated technological sphere. While the country’s self-sufficiency drive has spurred domestic innovation, it risks fostering a fragmented digital environment where parallel but incompatible advancements emerge, reducing global interoperability and technological collaboration. This bifurcation challenges China’s aspirations for global leadership, as true dominance in the tech sector necessitates seamless integration with international supply chains, research institutions, and software ecosystems. Without access to these critical elements, China’s innovation strategy may result in self-imposed limitations rather than a competitive advantage, potentially reinforcing its dependence on inferior domestic alternatives and slowing its long-term technological progress.

Challenges Faced by U.S. Allies

America’s allies are navigating a complex landscape. While they share concerns over China’s technological rise, they also recognize the economic risks of full-scale decoupling.

South Korea, for instance, is caught between its security alliance with the U.S. and its economic ties with China. Samsung and SK Hynix, two of the world’s largest semiconductor manufacturers, risk losing access to both Chinese customers and U.S. technology. A complete decoupling could force these firms to restructure their supply chains at significant cost. 

Similarly, European nations like Germany and France are reluctant to fully align with the U.S. approach. The European Union has sought a more subtle strategy, promoting “de-risking” instead of full decoupling. This policy allows European firms to reduce dependency on China while still engaging in selective economic cooperation. However, as the U.S. intensifies its restrictions, Europe may be forced to choose sides—a decision that could reshape global trade alliances.

The TikTok Ban: A Case of Digital Protectionism?

Banning a single company rather than implementing sector-wide regulations raises concerns about selective enforcement. If data privacy were the true issue, why aren’t American tech giants like Meta and Google scrutinized similarly? The TikTok ban underscores U.S. policy inconsistencies, suggesting geopolitical motives over consumer protection. The ban also sets a precedent for internet fragmentation. If nations block foreign digital services under national security claims, global digital governance could erode. Such measures may legitimize protectionism, prompting reciprocal restrictions from China, the EU, and other economies, further dividing the internet along geopolitical lines. Digital sovereignty is increasingly a tool for trade protectionism. While justified as national security, such bans often serve economic interests, restricting foreign competition. The TikTok ban exemplifies how governments can manipulate digital access for strategic gains, potentially inviting retaliatory restrictions that reinforce economic nationalism over global cooperation. This shift mirrors traditional protectionism, threatening free trade, innovation, and regulatory stability. The challenge is balancing security with an open digital marketplace that fosters global collaboration rather than deepening geopolitical rifts.

Implications for Digital Commerce Treaties

The technological rivalry between the U.S. and China is not merely reshaping global digital trade but fundamentally destabilizing the established economic order. This contest is not just about market dominance—it is a proxy for broader ideological battles over control of the digital future. While regulatory challenges and rising costs impose severe burdens on businesses, some nations exploit this transition to fortify their domestic industries and assert technological sovereignty. Malaysia, for instance, has positioned itself as a neutral semiconductor manufacturing hub, allowing companies to bypass U.S.-China tensions. Meanwhile, China’s aggressive redirection of investments into Mexico and Hungary is a calculated strategy to circumvent Western de-risking policies, raising concerns over whether these nations will become economic pawns in a deepening geopolitical rift.

The decline of multilateral institutions like the WTO, ITU, and UNCTAD has been driven by rising protectionism, trade disputes, and economic nationalism. The WTO’s inability to enforce rulings against major economies, such as U.S. tariff violations and China’s state subsidies, has weakened its authority, pushing nations toward regional trade agreements like the CPTPP and RCEP. Similarly, the ITU, responsible for global telecommunications standards, has become a battleground for U.S.-China competition over 5G and internet governance, undermining its neutrality. UNCTAD, which promotes fair digital trade policies, also struggles due to conflicting national interests.

With digital protectionism on the rise, these institutions face diminishing influence as countries favor bilateral and regional agreements. If the U.S. and China continue shaping separate digital ecosystems, the WTO and ITU may struggle to enforce global trade rules, accelerating the erosion of multilateral governance. This shift risks deepening economic divisions, creating regulatory barriers and limiting technological collaboration. Without renewed diplomatic efforts, digital protectionism could lead to a fragmented global economy, reinforcing economic nationalism over global connectivity.

Supply chain disruptions test industry resilience, but politically motivated barriers risk deepening economic fragmentation, where market access is dictated by alliances rather than innovation. As international organisations struggle to enforce cohesive frameworks, businesses and governments alike face increasing uncertainty. Without diplomatic efforts to restore trust, digital protectionism may isolate technological ecosystems, reinforcing economic nationalism over global connectivity. The challenge ahead lies in reconciling national security concerns with the imperative for open, cooperative digital trade. If left unaddressed, this growing divide could set a precedent for long-term economic fragmentation, undermining both innovation and the potential for global digital prosperity. Recent industry analyses highlight the impact of political instability on global supply chains. For instance, McKinsey’s 2024 survey indicates that 60% of companies are regionalising their supply chains to mitigate geopolitical risks. Similarly, KPMG’s 2024 report notes an increase in supply chain disruptions due to geopolitical tensions. These findings underscore the necessity for diplomatic efforts to restore trust and balance national security with open digital trade. 

Conclusion

China is transforming the future landscape of digital trade, innovation, and global partnerships. Although national security issues are genuine, this relentless drive for technological self-sufficiency by both parties threatens to divide global digital markets, hinder innovation, and result in inefficiencies within supply chains. 

For U.S. allies and global corporations, the difficulty is in navigating through this progressively divided environment without isolating either significant power. Countries like South Korea and Germany need to find a careful balance between economic priorities and geopolitical influences, whereas companies like Samsung, Intel, and Huawei have to re-evaluate their international strategies to align with changing regulations. 

Moreover, the TikTok prohibition illustrates the wider dangers of online trade barriers. If international regulatory cooperation does not resolve data privacy and cybersecurity issues, but instead relies on exclusive trade barriers, the future of the open internet is at risk. A world where digital commerce is regulated by exclusionary measures instead of multilateral agreements could ultimately disadvantage both consumers and businesses. 

Moving forward, the key question is whether the U.S. and China will find areas for cooperation within this escalating conflict. While a complete technological truce may be unlikely, selective collaboration in fields like climate tech, healthcare AI, or global cybersecurity standards could mitigate some of the worst consequences of this tech war. Otherwise, “The Great Digital Firewall” may become a permanent feature of the global digital economy—one that fundamentally reshapes the way nations innovate, trade, and compete in the 21st century.

About the Author

Tarinee is a second-year BA LLB student at O.P. Jindal Global University with a keen interest in law, policy, and international affairs. As a columnist for Nickeled and Dimed, she explores global issues through a legal and analytical lens.

Image Source: https://www.orfonline.org/expert-speak/the-great-u-s-china-tech-decoupling