Government intervention is most effective when targeting industries that meet three criteria: they must be critical to national security or the economy, compromised by foreign dependence or choke points, and fundamentally changeable through targeted financial incentives that can shift their long-term economics.
Related Insights
The Biden administration's approach to China tariffs was more effective because it was highly targeted at strategic industries and coupled with domestic incentives. Simply imposing broad tariffs is insufficient; smart policy requires pairing trade restrictions with domestic investment to build competitive capacity in areas like semiconductors and batteries.
The sectors within the "American Dynamism" thesis—defense, energy, space, manufacturing—are not siloed but form an interdependent system. Strong national security requires a resilient energy grid and space-based communications, which in turn depend on domestic manufacturing and critical minerals. This holistic view is crucial for both investors and policymakers.
Current US policy is reactive, fixing compromised supply chains like semiconductors. A proactive 'offensive' strategy would identify nascent, critical industries (e.g., humanoid robotics) and build the entire supply chain domestically from the start, securing a long-term economic and national security advantage.
The Ministry of Economy, Trade and Industry (METI) categorizes sectors to apply targeted policies. 'Green' areas have lost supply chain autonomy and require diversification. 'Blue' areas possess technological superiority and need control (e.g., export controls). 'Red' areas face disruptive innovation and demand proactive strategic investment.
A U.S. national security document's phrase, "the future belongs to makers," signals a significant policy shift. Credit and tax incentives will likely be redirected from financial engineering (e.g., leveraged buyouts in private equity) to tangible industrial production in order to build resilient, non-Chinese supply chains.
To solve national security gaps without permanent state control, create a single, specialized, and temporary capital fund. It would be politically shielded, operate with a clear mandate to fill critical private sector gaps, and have a built-in expiration date to prevent it from becoming a permanent bureaucracy.
China operates as a two-speed economy. While the consumer side is slowing, Xi Jinping is pouring resources into a state-directed 'national security economy' focused on advanced tech and military modernization. U.S. policy should be narrowly tailored to disrupt this specific sector, not the broader economy.
The administration justifies taking equity stakes in private industries—a form of state capitalism—by reframing the global landscape as an "economic war." The pandemic exposed critical supply chain vulnerabilities in areas like semiconductors and pharmaceuticals, making domestic production a matter of national security, similar to wartime industrial mobilization.
A complete national industrial strategy requires a dual approach. It needs large, congressionally-approved programs for trillion-dollar sectors like semiconductors, paired with a smaller, more flexible fund to quickly address emerging choke points in smaller markets like rare earths or APIs without new legislation each time.
The long-standing American political consensus favoring lower trade barriers has been replaced. Industrial policy, with active government shaping of key sectors via tariffs and investment, is now a durable, bipartisan strategy seen under both Trump and Biden administrations.
