Bilateral relations between the United States and China have heated up again following allegations of "artificial intelligence (AI) hegemony" leveled by Beijing against Washington. This tension was triggered by US allegations that Chinese startup Moonshot AI used distillation techniques to copy the Claude Fable 5 AI model belonging to US firm Anthropic. Responding to the allegations, China's Ministry of Commerce asserted its readiness to take countermeasures to protect its national interests.
The United States government, through the White House Director of Science and Technology Policy, stated that it has obtained strong evidence regarding the alleged plagiarism. As a consequence, US Treasury Secretary Scott Bessent hinted at the possibility of applying trade sanctions and placing the Chinese company on the Entity List. On the other hand, Beijing is not remaining silent, drafting new regulations that allow local prosecutors to sue foreign entities and individuals deemed to have harmed China's national interests.
This geopolitical escalation comes amid a significant slowdown in China's domestic economy. Recent data shows that diesel and asphalt production in the Bamboo Curtain nation has plunged to its lowest level in more than a decade, indicating sluggishness in the local construction and property sectors. Weakening energy demand from the Asian giant has also put pressure on global oil prices, although supply uncertainty in the Strait of Hormuz still looms over the global market.
This technological competition has now spread to the defense sector. The US Department of Defense (Pentagon) has begun tightening rules by banning the use of Chinese components in their military drones, following concerns about lagging behind Ukraine's production. This supply chain fragmentation step is projected to disrupt the distribution of semiconductor chips, batteries, and various vital electronic components globally.
For the Indonesian economy, the impact of the feud between these two giants needs to be seriously anticipated. Risk-off sentiment has the potential to weaken the exchange rate of the rupiah against the US dollar and trigger capital outflows from the domestic financial market, which could pressure the Jakarta Composite Index (JCI). In addition, the decline in industrial activity in China is expected to reduce the export volume of Indonesia's mainstay commodities such as coal, nickel, and crude palm oil (CPO).
In the technology sector, US export restrictions on chips and AI models could complicate and increase the cost of accessing future technology for industries in the country. This condition requires the Financial Services Authority (OJK) and the Ministry of Communication and Digital to be careful in formulating local regulations regarding AI utilization. In the coming weeks, the market will monitor the realization of US sanctions, developments in China's foreign relations law, and potential restrictions on rare earth mineral exports from Beijing as a retaliatory action.
