HONG KONG — In the world of cheap drones, Skydio was the great American hope. Its autonomous flying machines gave the U.S. defense and police agencies an alternative to Chinese manufacturers, free from the security concerns tied to dependence on Chinese supply chains.

But Skydio’s vulnerabilities came into sharp focus days before the U.S. presidential election, when Chinese authorities imposed sanctions and severed the company’s access to essential battery supplies.

Overnight, the San Mateo, California-based Skydio, the largest American maker of drones, scrambled to find new suppliers. The move slowed Skydio’s deliveries to its customers, which include the U.S. military.

“This is an attack on Skydio but it’s also an attack on you,” Adam Bry, the CEO, told customers.

Behind the move was a message from China’s leaders to Donald Trump, who would go on to win the election with a promise of new China sanctions and tariffs: Hit us and we’ll strike back harder.

From the campaign trail to his Cabinet appointments, Trump has made it clear that he believes a confrontation with China over trade and technology is inevitable. In the first Trump administration, the Chinese government took mostly symbolic and equivalent measures following U.S. tariffs and trade restrictions. This time, China is poised to escalate its responses, experts say, and could aim aggressive and targeted countermeasures at American companies.

“During Trade War 1.0, Beijing was fairly careful to meet the tariffs that the U.S. put in place,” said Jude Blanchette, a China scholar at the Center for Strategic and International Studies in Washington, D.C. “Now they are signaling their tolerance for accepting and dishing out pain,” he said. “It’s clear for political reasons that Beijing is not willing to stand by and watch as significant new waves of tariffs come in.”

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China Took Time to Prepare

China has had time to prepare. During Trump’s first term, officials in Beijing began drafting laws that mirror U.S. tactics, allowing them to create blacklists and impose sanctions on American companies, cutting them off from critical resources. The goal has been to use China’s status as the world’s factory floor to exact punishment.

Since 2019, China has created an “unreliable entity list” to penalize companies that undermine national interests, introduced rules to punish firms that comply with U.S. restrictions on Chinese entities, and expanded its export-control laws. The broader reach of these laws enables Beijing to potentially choke global access to critical materials like rare earths and lithium — essential components in everything from smartphones to electric vehicles.

The new tools are part of what one Communist Party publication described as an effort to “provide legal support for countering hegemonism and power politics and safeguarding the interests of the country and the people.”

Collectively, the strategy marks a calculated shift to counter Trump’s expected policies when he takes office. The fallout could significantly disrupt operations for American companies.

That raises the stakes for businesses and the economy as the new U.S. administration readies its first salvo in what could become a more ruthless second round of trade conflict between the United States and China.

Washington’s relationship with Beijing was already fraught. President Joe Biden has largely continued Trump’s confrontational policies, sanctioning some Chinese companies and restricting others from the U.S. market. This month, the U.S. government announced a ban on 29 Chinese companies over connections to forced labor in the country’s western region of Xinjiang.

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Trump Moves to Increase Tariffs on China

On Monday, Trump went further. The president-elect said he would impose an additional 10% tariff on all products coming into the country from China.

China has given a preview of the lengths it is willing to go to counter U.S. government sanctions.

In September, Chinese authorities accused PVH, the owner of Calvin Klein and Tommy Hilfiger, of “discriminating” against products in Xinjiang, putting it onto its “unreliable entities list.” It was the first time that Beijing punished a foreign company for removing Xinjiang cotton from its supply chain to meet U.S. trade rules.

A few weeks later, a think tank with ties to China’s internet regulatory agency called for a review of Intel, an American chip company, for selling products that “constantly harmed” China’s national security and interests. The last company subject to a cybersecurity review, American chipmaker Micron, was ultimately cut off from supplying chips to a significant portion of the Chinese market.

The Chinese rules leave both PVH and Intel stuck in the tussle between the two global superpowers. Other companies might soon find themselves in a similar position. The conundrum for firms is whether and how to follow U.S. trade restrictions, when doing so could trigger Chinese reprisals.

Forcing companies to question their business practices might be China’s intention, experts say. At the same time, Chinese officials need to strike a balance in their punishments. If they go too far in penalizing foreign companies, they could scare away investors when financial markets are worried about China’s economy.

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And in some cases, Chinese companies still need what the United States offers, including microchips in electronic devices or soybeans that Chinese farmers feed their cattle. Many of China’s state-owned enterprises still use computers powered by Intel chips.

“They have this dilemma where they want to signal to the U.S. government but they don’t want to scare foreign investors and companies too much,” said Andrew Gilholm, a China expert at Control Risks, a consulting firm. “They want companies to know that there is a cost to being too enthusiastic about complying with U.S. and other regulations.”

The strategy, he said, is evolving into one that looks more like “supply chain warfare.”

Still, for the many companies that rely more on China than China does on them, Beijing has the ability to exact major pain. Skydio had spent years building a supply chain outside China, but remained reliant on the country for one crucial item: batteries.

After the sanctions by China, there is no quick fix. It can take months to make the necessary design changes and secure new suppliers. In a statement, Skydio said that it would be forced to ration batteries. That means its customers, which include fire departments, can only get one battery per drone, severely limiting how long a craft can fly. The company said it planned to have new supplies by spring.

“If there was ever any doubt, this action makes clear that the Chinese government will use supply chains as a weapon to advance their interests over ours,” Skydio wrote.

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This article originally appeared in The New York Times.

By Alexandra Stevenson and Paul Mozur/Laura Morton
c. 2024 The New York Times Company