So the chinese gov't will need to also invest in hardware production - and surely they are furiously doing so (and getting limited success, but success none the less).
The american chip sanctions is, in my view, an own-goal. In the short term, it might cause some pain, but in the medium to long term, it is the kick that the chinese market would need to adapt. Necessity is the mother of all inventions after all. It might take 10 years, but i have no doubts that china can reach a level equal to that of TSMC.
If the US administrations (both current and previous) had any brains, they should've seen this. They should've put subsidies into chips so that chinese production will not be competitive, and chinese firms will lose money if they go domestic. And the export of such hardware would balance the trade deficits.
You might find this paper from the Hoover Institution interesting, it w goes into some depth analyzing the implications of DeepSeek on US innovation: https://www.hoover.org/sites/default/files/research/docs/Zeg...
Similarly, withholding funding for research, meddling in how universities are supposed to conduct their affairs, the reduced appeal of studying in the US for foreign students, putting wrestling promoter Linda McMahon in charge of dept of Education… these are all going to impact America’s research and innovation abilities.
The field is really moving too quickly to talk too certainly about "dominance" or "ahead". My observation is projects I care about on GitHub come with a Chinese README and many interesting talkers at conferences have strong Chinese accents. But I know a good researcher personally and it isn't so apparent to me if these are Chinese Chinese people or Americans of recent Chinese descent.