Industrial policy is back in fashion in the United States. As fragile global supply chains and a weakened industrial base present growing economic and national security risks, policymakers in both parties have embraced energetic efforts to rebuild the country’s industrial capacity. With interventions such as the 2022 CHIPS and Science Act, Washington has made historic commitments to strengthening the United States’ technology and manufacturing base, which is becoming increasingly important to the country’s economic success and ability to defend itself. As director of U.S. President Joe Biden’s National Economic Council, I helped to design and drive this shift.

Initiatives to revive domestic capacity are a necessary response to real dangers. But more and more, American leaders are seeking to support industry at home in ways that are counterproductive. In particular, they are growing hostile to foreign investment.

Many policymakers fear that foreign investors could steal sensitive data or gain dangerous leverage over U.S. companies or critical infrastructure. Their aversion is most pronounced with respect to China but has been trained on allies and partners as well. It applies not only to cases of foreign ownership of U.S. companies but also to joint ventures, the licensing of foreign intellectual property, and other arrangements in which a foreign company shares its knowledge or resources. Stephen Miran, the chair of the president’s Council of Economic Advisers, has suggested imposing fees on foreign holdings of U.S. assets, including those owned by allies. Senators Tammy Baldwin and Josh Hawley have introduced bipartisan legislation in the U.S. Congress that would tax foreign capital inflows outright.

At the federal, state, and local level, those in power are taking steps to shut global capital out of the United States and prevent American enterprises from harnessing the latest advances in data storage, critical mineral processing, and chip-making. This is a troubling and ultimately self-defeating strategy. Of course, the U.S. government should mitigate the risks of foreign investment. But today, its screening regime is overzealous. The United States is undermining its own industrial policy by denying itself the tools to become competitive globally in crucial sectors.

What the country needs is a new framework for selectively encouraging investment from abroad to match its industrial ambitions. The U.S. government’s existing policy toolkit isn’t designed to take on this task. Washington has an elaborate apparatus for saying no to inbound investment but few ways of getting to yes. An improved system would welcome foreign capital and know-how while maintaining transparency, protecting U.S. data, and ensuring that Americans have control of companies when it matters. The fact is, the frontier of knowledge for many industries lies outside the United States. The federal government must get better at weighing the risks and rewards of foreign investment to take advantage of that expertise.

THE HIGHEST FORM OF FLATTERY

Throughout its history, the United States has used foreign knowledge and tools for its own gain. At the turn of the nineteenth century, for example, the country’s military readiness depended on a fledgling domestic gunpowder industry. Washington could no longer rely on its single foreign supplier, Britain, against which it had just fought a revolution. Supported by a significant French investment, the chemist Éleuthère Irénée du Pont brought French expertise in advanced manufacturing techniques to the United States, establishing a company in 1802 that would quickly become the biggest purveyor of explosives to the U.S. government. The firm, DuPont, remained at the center of innovation in U.S. chemical and materials production for centuries.

Foreign knowledge has proved invaluable in more recent cases, too. In the early 1980s, when U.S. car companies were lagging behind their Japanese competitors, General Motors and Toyota jointly reopened a shuttered GM plant in Fremont, California. By bringing in state-of-the-art Japanese manufacturing systems, the companies transformed a failed factory into........

© Foreign Affairs