How to Reindustrialize America

For more than a century, America’s unmatched ability to invent, build, and diffuse technology underwrote its prosperity and power. That foundation is now under strain in a new era of state-driven competition. The economists David Autor and David Dorn have warned of a “second China shock,” not of cheap exports, but of technological primacy. Beijing is vying for global leadership across the frontier of advanced industries, including artificial intelligence, quantum computing, aerospace, next-generation energy, and biotechnology. It has done so by constructing a vast, decentralized system of state-backed innovation finance, channeling subsidized capital into priority high-tech sectors and encouraging firms to compete ruthlessly for scale. The result is a market systematically tilted by state intervention, one in which Chinese firms can overbuild capacity and flood markets before American and allied competitors can scale up production. China’s strategy has created a technology ecosystem that now rivals—and in some areas surpasses—that of the United States. Beijing has also used this approach to take control of critical supply chains, exploiting that control to pressure its geopolitical rivals. In 2010, China cut rare-earth exports to Japan during a diplomatic dispute over islands in the East China Sea. Fifteen years later, during a trade war with the United States, it restricted these inputs to gain the upper hand, leading U.S. President Donald Trump to scale back triple-digit tariffs on Chinese goods. For China, industrial capacity has become a tool of coercion as well as competitiveness. At the same time China was building its industrial strength, the United States was allowing much of its productive base to migrate abroad. For a few decades, that shift appeared to carry few strategic costs. America remained the world’s leading center of research and invention even as manufacturing employment fell and supply chains stretched across continents. But the costs of separating innovation from production are now too great to ignore. As factories have moved offshore, the United States has lost much of its skilled workforce and the expertise to build at speed and scale. If it does not change course, the country could cede its technological edge, and, in time, its broader global leadership, to China. To avoid eroding what Alexander Hamilton called “the essentials of national supply,” the United States must revive the ecosystems that allow complex, high-value manufacturing to flourish. Simply put, America must get better at making what it designs. But Washington should not aim to copy Beijing’s state-backed playbook wholesale. After all, the United States has plenty of advantages over China, including its entrepreneurs, universities, and capital markets, which are the deepest in the world. But those markets optimize for efficiency, not resilience or security. The challenge, then, is to turn capital into capability, to channel investment toward the industries that anchor modern national strength and economic vitality: advanced computing, biotechnology, robotics, critical minerals, pharmaceutical precursors, advanced manufacturing, and the electric-energy backbone. And the solution is an ambitious national strategic investment enterprise, headlined by a federal Strategic Investment Fund. FOUNDER FATHERS Since its founding, the United States has treated finance as an instrument of sovereignty. In his 1791 Report on Manufactures to Congress, Hamilton made the case that economic independence was inseparable from political independence. The young republic, he argued, had to use public credit to nurture productive industry and national strength. Hamilton envisioned a pragmatic model of state-enabled capitalism, in which loans and “bounties” encouraged “infant manufactures,” tariffs protected strategic sectors, and public institutions channeled capital toward long-term national aims. Whenever the United States has faced existential tests, its leaders have returned to Hamilton’s logic. When credit markets froze during the Great Depression and World War II, the Reconstruction Finance Corporation (RFC), created in 1932, filled the gap and served as a strategic investor, financing banks, utilities, housing, and manufacturing, earning returns and restoring confidence in U.S. markets. Its wartime subsidiary, the Defense Plant Corporation (DPC), built more than 2,000 factories and shipyards, eventually transferring them to private operators, creating the foundations for America’s postwar dominance in steel, aviation, and chemicals. The DPC ceased operations with the end of the war and the RFC wound down in 1957, but with their independent balance sheets and professional business management, they modeled what a responsible public investment apparatus could look like. They showed that effectively deployed public capital can be used to invest in important industries private capital is either unwilling or unable to finance by itself. Washington should not aim to copy Beijing’s state-backed playbook wholesale. During the Cold War, Washington built a constellation of new institutions that linked scientific ambition to strategic purpose as it sought advantage over the Soviet Union. The founding of the Defense Advanced Research Projects Agency (DARPA), NASA, the Atomic Energy Commission, and the national laboratories reflected a recognition by Washington that geopolitical competition required sustained public investment. The approach worked. Early defense- and space-related procurement of semiconductors provided the demand that, over time, made the technology cheaper and more efficient to produce. The U.S. Air Force’s Minuteman program and NASA’s Apollo missions bought thousands of chips when no private buyer would. As government demand grew and costs fell, a full commercial American semiconductor ecosystem took shape. Fairchild was founded in 1957, followed by Intel and AMD in the 1960s and Micron in the 1970s. Existing tech companies such as Texas Instruments and Motorola expanded their semiconductor businesses to include military and commercial applications. By the mid-1970s, however, the broader political and economic consensus supporting an expansive federal role in industrial development began to weaken. Inflation, energy shocks, and their attendant fiscal strain eroded public confidence in the government’s ability to play a constructive role in the economy. A new consensus took hold in Washington that markets, more agile and disciplined than public bureaucracies, were the only real tool to allocate capital effectively. Through the 1980s and 1990s, Washington’s remit narrowed from investor to regulator. Where it once helped build industries, it now confined itself to setting the rules of market competition through antitrust and disclosure regulations. Agencies such as the National Institutes of Health and DARPA remained formidable through the market liberalization of the Reagan years and the fiscal discipline and global integration of the Clinton administration, but the connective tissue between research, finance, and production atrophied. In the first three decades of the twenty-first century, it has only started to recover. INVESTMENT WITH CHINESE CHARACTERISTICS A generation after the first China shock hollowed out America’s manufacturing base, a second one is underway. In the twenty-first century, Beijing has made technological leadership a national project, mobilizing finance, procurement, and policy to pursue commanding positions in frontier industries. China has built a comprehensive system of state-guided investment that blends central strategy with decentralized experimentation. Provinces, cities, and national ministries have created more than 1,700 “guidance funds,” raising nearly $700 billion in capital. With the support of government-provided land and permits, these professionally managed, profit-seeking vehicles direct equity into priority sectors. The approach has generated immense duplication and waste, but it has also produced national champions able to globally dominate their industries, such as the battery manufacturer CATL, the solar technology producer LONGi, the drone producer DJI, and telecommunications giant Huawei. At the same time, China is converting the knowledge generated in the manufacture of these products into gains at the innovation frontier, including in industries the United States has traditionally dominated, such as biotechnology. The Chinese system extends beyond financing supply. It also creates demand. National and municipal authorities have created new markets through a blend of subsidies, procurement, and regulation. Take Shenzhen’s promotion of electric vehicles. By mandating the electrification of its bus and taxi fleets, the city gave BYD, then an emerging EV maker, guaranteed demand, stable cash flow, and real-world feedback that private markets could not provide on their own. An industrial EV commons soon bloomed. Battery and electronics suppliers clustered around BYD, city and grid companies built charging and testing infrastructure, and local universities produced a steady pipeline of EV engineers and technicians. BYD has since surpassed Tesla in global unit sales, and China has overtaken Japan as the world’s largest auto exporter. Beijing has embraced a lesson the United States, during its competition with the Soviet Union, understood well: technological leadership depends not only on invention, but also on industrial power. China has adapted that logic to its own political system, replacing the U.S. public investment–private enterprise partnership with its party-state capitalist model. BRAWN DRAIN For much of the twentieth century, the United States, blessed with vast natural resources, built the world’s most formidable industrial base, its “arsenal of democracy.” But recent crises have exposed how thin the nation’s capacity to build has become. The world relies on Taiwan for production of the most advanced chips, a single and fragile point of failure. In pharmaceuticals, nearly 700 U.S.-approved medicines, including critical drugs such as antibiotics, depend on at least one chemical produced solely in China. China also dominates rare-earth and graphite refining, essential for the magnets and batteries that power defense and clean energy systems. A scarcity of American dry docks limits naval readiness, and a dependence on imported power transformers has slowed upgrades to the national power grid and left it vulnerable to prolonged outages. While China builds tightly clustered ecosystems where suppliers, materials, and manufacturing move seamlessly from design to mass production, the United States has allowed its “electric tech stack”—the linked supply chains for critical minerals, batteries, power electronics, and chips—to drift offshore, weakening industrial learning and depth. MIT’s Task Force on Production in the Innovation Economy has demonstrated that in complex, high-value industries, innovation depends on proximity between design and production. When manufacturing migrates abroad, the feedback loops between engineers and factory floors break down and innovation suffers. Reindustrialization, done right, is a precondition for renewing the United States’ inventive edge and the foundation of its strategic strength. CAPITAL CONSTRAINTS The United States commands the world’s most sophisticated capital markets, but they are optimized for fields in which revenue can be easily underwritten and risk can be diversified, where feedback is quick and failure is relatively inexpensive. The investments required for American reindustrialization, however, do not necessarily fit that mold. Three main financial hurdles stand in the way. First, some strategic industrial sectors depend on conditions that private markets cannot reliably provide or price. Nuclear plants, semiconductor fabs, shipyards, transformer factories, and rare-earth refineries require considerable upfront capital, decades-long horizons for return on investment, policy stability, and confidence in long-term demand. A shift in tariffs, procurement rules, grid standards, or commodity prices can erase returns overnight. The rational response for investors is to wait and see before committing to large outlays of capital. From each investor’s standpoint, that caution is prudent, but at the societal level, it leads to underinvestment. Government policy can change that equation. When the state provides some certainty with long-term offtake contracts, stable regulations, or guaranteed price floors, it gives investors the predictability they need, and private capital follows. Next, research by the Production in the Innovation Economy Task Force has shown that the United States faces a financing gap in the “scale up” stage between venture funding and public markets, when promising technologies must move from prototype to production. Large multinationals can draw on internal cash flow to bridge that gap, but both main-street manufacturers (the majority of American manufacturing) and advanced-manufacturing startups cannot. The local banks that once financed smaller regional producers have disappeared, and venture investors tend to avoid factory capital, which they see as asset heavy and too slow to yield venture-level returns. The result is a structural shortfall in financing that can carry companies through the long, risky, and capital-intensive scale-up phase. Finally, markets fail to value positive externalities, the spillovers that result when private investments create social or strategic benefits that cannot be fully captured by the investor. Strategic physical industries, including advanced manufacturing, clean energy, semiconductors, and robotics, create learning-by-doing, supplier networks, and engineering capabilities that strengthen the broader manufacturing ecosystem but do not always generate financial returns for a single firm. The course of American manufacturing illustrates this dynamic. Once production ecosystems fragment, they are exceedingly hard to rebuild. U.S. shipbuilding, for example, collapsed after the 1980s, when government subsidies were withdrawn, erasing supplier depth and design expertise. From the 1980s onward, the offshoring of U.S. transformer or machine-tool manufacturing reduced procurement costs for downstream firms in the short run but wiped out the domestic base of engineers and component makers. Each firm’s offshoring decision might have made sense in isolation, but collectively they weakened the nation’s process knowledge and with it its productive core. Geopolitics compounds these market failures. Chinese state-backed interventions into these industries crowd American and allied producers out of markets, even when those producers are technological leaders. As one innovative U.S. manufacturing CEO told me, raising U.S. capital for his first-of-a-kind technology was a series of near-death experiences—one that was quickly undercut by a flood of copycat Chinese competitors propped up by state subsidies, free land, and guaranteed buyers. Yet the hurdle for American industry is as much a fragmented state at home as it is a subsidized rival abroad. In sectors such as nuclear energy or mineral processing, the hindrance is often not just a lack of capital but the prohibitive “soft costs” and uncertainty of a disjointed permitting and regulatory landscape, as well. Navigating this bureaucracy exhausts years of capital, creating no tangible value along the way. And inconsistent and slow government procurement fails to provide the stable demand necessary for firms to reach scale. Washington’s public investment, then, must be paired with a new policy approach. It does not need to match Beijing dollar for dollar. But it must correct a structural imbalance between its financial depth and its productive capacity that markets alone cannot. CONNECT THE DOTS The United States still operates the world’s most powerful early-stage innovation system. DARPA, the national laboratories, and the Defense Innovation Unit continue to support breakthrough technologies. The Defense Production Act and the Office of Strategic Capital provide targeted loans and guarantees in critical security areas. But without a shared framework to coordinate the core instruments of economic statecraft, individual investments are blunted by procedural friction and institutional misalignment. Because the United States lacks such a framework dictating which industries are strategically vital and what baseline domestic or allied capacity is required, federal action has been reactive and crisis driven. The first Trump administration used emergency authorities to secure personal protective equipment and medical supplies under COVID; the Biden administration made targeted interventions to sustain munitions and solid-rocket-motor production after Russia’s invasion of Ukraine; and both the Biden and second Trump administrations invoked the Defense Production Act to support rare-earth processing and permanent magnet capacity as Chinese export threats mounted. As long as Washington lacks a comprehensive strategy, actions will remain episodic and narrow, vulnerable to reversal across administrations. Even where priorities are clear, the United States lacks an institution capable of synchronizing investment, demand-side commitments, regulation, and trade policy behind shared objectives. Previous administrations have assembled deals by combining authorities across different agencies. In recent years, rare-earth and battery-materials investments have moved forward without appropriated long-term procurement or market-stabilization mechanisms; CHIPS Act incentives have been negotiated project by project with uneven integration of trade defenses or downstream demand; and efforts to rebuild shipbuilding and transformer capacity continue to run up against onerous federal, state, and local permitting and regulatory processes. America must get better at making what it designs. The United States also lacks a permanent public investor embedded in capital markets that can partner directly with private funds, banks, and institutional investors. Strategic investments are negotiated agency by agency through bespoke programs that sit outside normal deal flow, limiting the government’s ability to price risk, mobilize large pools of private capital, or scale proven structures across sectors. Without a professional, repeatable coinvestment platform, public support too often serves as a substitute for private finance rather than as a catalyst for it. Finally, the United States has no institutional vehicle to align its strategic investments with allies. Instead, administrations have in recent years shoehorned ad hoc investment “funds” into trade deals with allies such as Japan and South Korea. Without a way to coordinate investment, shared procurement, and trade and industrial policy, allies fragment markets and duplicate subsidies; they cannot provide the scale and staying power needed to compete with China’s state-backed system. Several allied governments have already begun addressing these institutional gaps. In 2024, the United Kingdom launched a $37 billion National Wealth Fund to “crowd in” private capital for strategic infrastructure and energy security. That same year, Australia launched Future Made in Australia, a $16 billion initiative anchored by $9.5 billion in production tax credits for hydrogen and critical mineral refining, paired with a centralized investment-coordination framework. The United States should work with—and learn from—these and other allies. HOW TO MAKE IT IN AMERICA Throughout its history, the United States built institutions that channeled capital toward a national strategy. Resurrecting that tradition today would mean establishing a new kind of public investor: a U.S. Strategic Investment Fund (SIF), a federally chartered, market-facing public investor with its own balance sheet, designed to invest alongside private capital in strategically critical industries, both mature and emerging, where markets alone have proven insufficient. The SIF would launch with $50 billion—comparable to the CHIPS and Science Act but with a broader mandate—and scale over time as it proves its ability to invest prudently and mobilize private capital. The fund would deploy a variety of securities to partner with companies, with a primary focus on attractive financing and credit guarantees, as well as convertible debt and other equity-like securities for investment flexibility and upside for taxpayers. An initial capitalization of $50 billion would be large enough to support a diversified portfolio yet limited enough to allow Congress to evaluate the model before any expansion. Loans and guarantees would stretch each public dollar and crowd in private capital, and convertible and equity-like instruments could give taxpayers a share of upside when investments succeed. The fund would build on recent initiatives to invest in American industrial competitiveness at home and abroad, including the Pentagon’s Office of Strategic Capital and Economic Defense Unit, the Department of Energy’s Loan Programs Office, the Development Finance Corporation, and the CHIPS and Science Act, as well as ad hoc capital interventions from Departments of Commerce and Energy. Rather than replace these efforts, it would effectively unite the nation’s investment, trade, procurement, and regulatory tools within a single framework of economic statecraft. To create a coherent strategic finance strategy, a cabinet-level Strategic Investment Council would coordinate investments with federal procurement, targeted tariffs, tax incentives, regulatory processes, credit programs, and other policy tools. Chaired by the Treasury Department, the council would include the heads of the Departments of Commerce, Defense, Energy, and State, as well as the U.S. Trade Representative. Its central task would be to align the nation’s policy and investment levers. The council would also organize multiyear purchasing commitments from the Department of Defense and other major agencies for critical assets such as shipbuilding, grid transformers, and long-duration energy storage, providing the predictable demand and cash flows private investors need to underwrite projects that would be otherwise unfinanceable. And it would assist priority projects by streamlining permitting and resolving interagency bottlenecks. The SIF would be governed by a professional board of independent directors drawn from finance, industry, and labor, with a minority of ex officio members from Treasury, Commerce, Defense, and Energy providing oversight. In the spirit of the RFC, an experienced private-sector chief executive would be confirmed by the Senate and serve a fixed term, accountable to Congress and the public. The goal would be to build in as many guardrails against abuse as possible. To maintain focus, the SIF would lead a systematic and transparent process to identify the sectors that require a baseline of manufacturing capacity in the United States and among trusted allies. It would seek to answer the questions facing American reindustrialization posed by the economic historian Chris Miller, including: whether a given product could be monopolized and used for geopolitical leverage; whether U.S. manufacturing capacity is ready to withstand a crisis; and whether preserving today’s manufacturing ecosystem in a given sector is necessary to develop tomorrow’s. The fund’s investment approach would recognize that different sectors require different kinds of support. For capital-intensive industries such as shipbuilding and basic battery cells, which are essentially mature and competitively undifferentiated, and in which scale, learning curves, and foreign subsidies define competitiveness, the SIF would help reestablish a base level of foundational capacity. It could pursue joint ventures with trusted and cutting-edge allied firms and pair investment with policy tools: targeted tariffs to counter distortions, multiyear procurement and offtake agreements to create predictable demand, guarantees to unlock private financing, and time-limited tax credits to move plants down the cost curve. Once U.S. capacity grows, the fund could then step back as commercial capital takes over. Innovation-led sectors, such as advanced robotics, next-generation nuclear power, energy storage, biotech, and advanced materials, present a different challenge. In these industries, firms can differentiate themselves through technological innovation, but many remain stuck in the chasm between prototype and production. Here, flexible public capital has the highest leverage. The SIF would bridge the scale-up gap by providing attractive financing, coordinating demand signals, and helping commercially viable technologies reach production scale in the United States. The fund’s reach would not stop at U.S. firms. Taking cues from the CHIPS Act’s funding of the Taiwanese semiconductor fab TSMC and the Korean electronics company Samsung, the SIF could support trusted foreign partners building industrial capacity in the United States through joint ventures, the construction of new facilities, and technology partnerships. Such investments would accelerate the transfer of cutting-edge know-how, diversify supply chains, and embed allied firms in the U.S. industrial base, particularly for industries such as shipbuilding, where foreign producers (often with the help of subsidies) have driven scale and cost efficiencies. Finally, the SIF would serve as a platform for allied investment coordination. By aligning resources and policies in areas of common interest, allies could approach China’s scale without replicating its model. FUND-AMENTAL DISAGREEMENTS Opponents of a sovereign investment fund might object on the grounds that it could become a tool of corruption through which presidents could reward cronies or enrich themselves. Their concern is valid. A public investor empowered to direct large sums toward individual firms could become a vehicle for favoritism. But that risk is not unique to a strategic investment fund; it is in the nature of executive power itself. Any institution with real financial power can be steered toward self-dealing or political reward if a president chooses to do so. The fund’s design, then, should prioritize managing that risk by structuring it to preserve as much political independence as possible. Leadership would serve under a majority-independent board, separating political direction from day-to-day investment decisions. A professional staff would operate under published criteria. Every transaction would be disclosed, audited, and bound by portfolio-level return targets that enforce financial discipline. Others might frame public investment in emerging technology and strategically important but not yet profitable industries as a potential boondoggle that could cost taxpayers billions. The price of rebuilding national capacity, they would argue, outweighs the hard-to-quantify benefits. For more than a decade after Solyndra, the solar panel company subsidized by the Obama administration, fell into bankruptcy, this fear of failure has chilled public investment. But today’s geopolitical environment demands a different mindset. Competing with China requires accepting that some unsuccessful ventures will be inevitable. As with any fund, some investments will fail. Any given investment may be criticized in isolation, but if decisions are made by an independent board and guided by transparent criteria, they can withstand partisan swings. Broad bipartisan support for the fund’s creation and continued existence will be essential. Still others opposed to government intervention in markets might criticize the SIF for picking winners and crowding out private investment. Indeed, industrial policy requires humility, and markets remain the best engine for allocating capital and determining which firms succeed. But the fund would specifically target sectors that private investors have proved unable to finance, investing across those sectors in ways that seek to preserve competition and market discipline. Crucially, the fund’s capital would be structured largely as risk-absorbing financing designed to unlock private investment, not replace it. By offering flexible terms and sending stable demand signals, the fund would in fact lower risks that currently deter institutional investors from entering strategic industries. Those more amenable to public strategic finance in principle might point out that several mechanisms to encourage reindustrialization already exist: tax credits, which mobilize private investment in sectors such as renewable energy, and tariffs, which protect domestic industries from foreign distortion. Both are valuable instruments, but neither supplies the transaction-level coordination or tailored risk-sharing that difficult projects often require. Tax credits lower expected costs across a market but are not always sufficient to convince investors to assume the risks that come with first-of-a-kind technology: uncertain demand, permitting delays, inadequate infrastructure, or absence of financing. Tariffs can counter foreign distortion and create breathing room, but on their own, they cannot create the scale or technological edge needed for long-term competitiveness. And if they are overused, they can shelter domestic incumbents without spurring new investment or innovation. These instruments would still play an important complementary role to the SIF. Tax credits would continue to create marketwide incentives for investment and allow the fund to operate more selectively and patiently, intervening only at the adventurous margin where private capital remains hesitant despite available incentives. Targeted tariffs, particularly against China, would counter unfair practices and level the playing field for domestic industries. The fund would then lower the cost of building new capacity and help firms innovate and compete. Used together, they address both sides of the problem, countering subsidies while rebuilding the productive strength to compete globally. REINDUSTRIAL REVOLUTION For more than two centuries, the United States has shaped its financial institutions to meet the strategic demands of the era. Hamilton’s Treasury built national credit in the young republic. The RFC built industrial scale during the nation’s economic nadir. The innovation agencies built America’s technological leadership as it emerged from World War II. Each moment required the same act of imagination: treating capital as a tool of national purpose and industrial power. That imagination is sorely needed today. China’s rise has forced Washington to answer whether open, market-based democracies can still mobilize capital to serve national ends. The United States still commands the world’s deepest markets and its most capable entrepreneurs. What it lacks are modern instruments to align them with long-term national aims. A strategic investment fund would ensure that the future is not only imagined in America, but made in America, too. You are reading a free article Subscribe to Foreign Affairs to get unlimited access. - Paywall-free reading of new articles and over a century of archives - Six issues a year in print and online, plus audio articles - Unlock access to the Foreign Affairs app for reading on the go Already a subscriber? Sign In