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.

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........

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