At a time when the US-China AI race routinely invites discussion, raising questions of how strong the US’s lead is, the question of whether the competition itself is fair is increasingly cropping up. Interestingly, it is the leader of this race that is levelling accusations of improper behaviour against its fast-moving competitor.Reuters recently reviewed over 80 Chinese academic papers and found that “Chinese military researchers have used outputs from leading U.S. artificial intelligence models developed by OpenAI and Anthropic to train domestic AI systems.” This is in line with broader allegations made by US tech giants against rising Chinese AI companies.But the United States government is not the lone participant in this chain of action and retaliation. On Wednesday (August 5), the Chinese government announced economic countermeasures, including export controls on drones and sanctions on six American entities, in response to recent restrictions imposed by Washington.Finally, we examine a document released by the government, titled “China’s Position on the So-called Excess Capacity Issue”. It addresses questions raised about Chinese manufacturing in many parts of the world, and the cheap goods that reach the rest of the world. The fact that the paper itself refers to the charge as a “so-called” issue speaks to China’s overall interest in challenging those questions.Here is a closer look at these developments:1. China, US, and AI distillationThe Reuters report said documents showed widespread use of a technique known as “model distillation,” where responses from a more powerful AI model (here, the likes of ChatGPT) are used to train smaller ones. This is seen as a more efficient and cheaper way of building models from scratch, and one without requiring large datasets.The review also showed that “distillation is widely used by researchers linked to the People’s Liberation Army and other military institutions.”UPSHOT: Distillation is not a banned method in itself. But reports of Chinese AI models building on their capabilities through it, also reportedly with the help of advanced chips that the US has banned from exporting, have led to a strong response.Story continues below this adChina This Week | Poll shows favourable view of China over US, new GDP data, and Rubio-Wang meetingAs we earlier detailed in this explainer, another complicating factor is that this is a new domain — what exactly constitutes illegal distillation is unclear, as is the extent to which Chinese companies have engaged in the practice.But with some US officials also supporting claims of American companies like Anthropic, and new reports of military use, there could be a greater push for defining the limits of the practice and challenging China on this basis.2. China’s counter, weeks before Trump’s tripIn late July, the US government added 43 companies based in China to the Uyghur Forced Labor Prevention Act (UFLPA) Entity List. According to the government, this is a “key tool” aimed at “preventing the importation into the United States of goods made with forced labor and leveling the playing field for American companies.”China has historically denied claims of forced labour or religious persecution of its Uyghur Muslim minority. It said that the “restrictive measures seriously violated the important consensus reached by the two heads of state and severely infringed upon China’s legitimate rights and interests, leaving China no choice but to respond.”Story continues below this adUPSHOT: In its official statement, the Chinese government drew attention to the US having “repeatedly overstretched the concept of national security” to impose restrictions on Chinese goods, including “advanced robotic devices and power inverters” more recently.Its decision to impose countermeasures, however, marks a change while building on a more aggressive stance. For instance, in 2024, China moved beyond simply denying allegations of human rights abuses in Xinjiang, the home province of the Uyghurs. It opened an investigation against the parent company of apparel brands Calvin Klein and Tommy Hilfiger over its boycott of cotton from Xinjiang over the alleged use of forced Uyghur labour.The measures and their response also come weeks before Chinese President Xi Jinping is expected to visit the US for an official trip, after US President Donald Trump arrived in Beijing in May.3. Chinese paper on excess manufacturingThe 40-page paper from China’s Commerce Ministry covers a range of topics — the historical shifts in global trade, the relationship between subsidies and industrial capacity, and so on.Story continues below this adIn its conclusion, it notes: “China cannot develop in isolation from the rest of world, nor can the world as a whole maintain prosperity without China. China stands ready to work with all parties to safeguard the global free trade system…”UPSHOT: The Economist described the paper as “both rigorous and disingenuous.” It added that while “some parts bring healthy scrutiny to the concept of overcapacity”, “The deep insincerity of other sections suggests contempt for countries facing waves of Chinese exports.”On the issue of insincerity, it is also important to note that Chinese officials have themselves acknowledged the related problem of involution. The word has been used to describe a situation where excess manufacturing, coupled with low demand, leads to manufacturers dropping the prices of their goods to an unsustainable extent. Xi himself has called for curbing “disorderly” price competition.As Chinese goods again pose concerns about a “China Shock”, or the loss of jobs due to rising exports, the timing of the paper assumes significance. That a paper is seeking to counter criticism has been released itself indicates that for all its posturing, China is concerned about a negative global perception of its manufacturing, the sector which propelled it to an economic giant and continues to aid its economy at a time of weak domestic demand.