The mechanisms by which differential occupancy of transcription factors (TFs) at similar binding sites leads to context-specific targeting of large transcription complexes remain poorly understood. X chromosome upregulation (XCU), the most highly conserved step in dosage compensation and best studied in Drosophila, serves as a model for understanding how differential occupancy of similar TFs functions context-specifically. Sequence variation within GA-repeat motifs that accumulated on the X chromosome over evolutionary time promotes the binding of a specific GA-binding TF (CLAMP) that recruits the dosage compensation complex (DCC) while outcompeting another similar TF (GAF). However, the mechanism by which CLAMP-GAF competition drives specific targeting of the DCC to the X chromosome remains unknown. Because DCC binding sites cluster in 3D space, we combined Micro-C and Hi-ChIP to determine that CLAMP and GAF directly mediate largely mutually exclusive 3D genomic contacts. Specifically, we show that CLAMP but not GAF drives local short-range interactions that directly link high affinity DCC binding sites with active, dosage-compensated housekeeping genes. In contrast, GAF mediates interactions between transcriptionally silent insulator regions on the X chromosome spanning a wider range of genomic distances. Together, these findings demonstrate that CLAMP outcompetes GAF at active regions on the X chromosome, but not autosomes, to create an X-chromosome specific chromatin environment for dosage compensation. Overall, we provide new insight into how differential TF binding at similar binding sites drives context-specific targeting of transcription complexes.