What policy steps could the US take to close gaps with China in critical industries?
Executive summary
The United States can close gaps with China in critical industries by combining industrial policy (directed R&D and manufacturing incentives), supply‑chain diversification for critical minerals, tighter export controls and investment screening, and workforce and research capacity expansion; China leads or is closing gaps in batteries, EVs, solar, AI and has dominant rare‑earth processing, with China controlling “nearly 60%” of rare‑earth mining and “over 90%” of processing capacity [1] [2] [3]. U.S. proposals range from targeted “national power industry” strategies and public‑private capital mechanisms to scaled public R&D and industrial research institutes, but each carries tradeoffs and political hurdles [4] [3] [5].
1. Target industries and the scale of the shortfall
Policymakers must prioritize where the gap matters most: semiconductors, rare earths/minerals, batteries/EV supply chains, AI compute and high‑end machine tools; China already leads or has narrowed gaps in EVs, batteries and solar panels and dominates rare‑earth processing [1] [3] [6] [2]. China’s MIC2025 and follow‑on planning mobilized state subsidies, standards, talent programs and acquisitions to push these sectors—making the U.S. challenge systemic rather than a single‑firm problem [7] [8].
2. Industrial policy: adopt selective, strategic “picking of industries”
Analysts urge moving beyond loose innovation policy to a strategic “national power industry” approach that picks critical industries for concentrated support—public capital vehicles, sectoral tax incentives, and manufacturing acceleration centers—to ensure production, not just invention [4]. ITIF and other advocates argue this mirrors elements of China’s playbook (industrial research institutes, public‑private capital, expedited manufacturing incentives), but it requires hard political choices about which industries to prioritize [3] [4].
3. Scale public R&D, mission labs and industry consortia
Competing with China’s public R&D model means expanding federal R&D, creating industrial research institutes tied to manufacturing, and funding long‑term missions in quantum, semiconductors and biotech; CSIS documents China’s massive research workforce and output advantages that the U.S. must reckon with [5]. Careful design is needed to avoid wasteful subsidies and to sustain private‑sector commercialization [3] [5].
4. Secure and diversify supply chains for critical minerals
China’s control of rare‑earth processing gives it leverage; analysts estimate China controls nearly 60% of rare‑earth mining and over 90% of processing, prompting calls for strategic partnerships, allied sourcing and domestic refining capacity investments to blunt export restrictions [2] [6]. The Fortune reporting on Beijing’s export‑licence rules illustrates how quickly downstream industries (EVs, auto supply chains) can be disrupted when processing is concentrated [6].
5. Export controls, investment screening and counter‑acquisition measures
The U.S. has used export controls to slow China’s access to advanced semiconductor equipment, constraining some Chinese progress [9]. Congress and agencies can tighten outbound controls, strengthen CFIUS‑style screening of sensitive outbound investments and curb technology transfer via licensing and joint ventures—but these tools can also fragment markets and provoke reciprocal barriers [9] [7].
6. Talent, education and countering brain‑drain tactics
China’s talent recruitment programs and large STEM graduate output are core competitive advantages; CSIS notes China employs more researchers than the U.S. and EU combined and is on track to graduate far more STEM PhDs, raising the bar for U.S. workforce and education investments [5]. U.S. steps include expanding STEM graduate slots, visas for key talent, and incentives to keep researchers in domestic labs—while recognizing political sensitivities around security‑related hires [5].
7. Trade policy and managing “China Shock 2.0”
China’s ability to export industrial overcapacity (EVs, batteries, solar) shifts global markets; UCLA and USCC reporting document rising Chinese market shares in EVs and batteries, requiring U.S. trade tools and industrial incentives to protect nascent domestic capacity [10] [11]. Tariffs and trade remedies help buy time but are blunt instruments that risk higher consumer prices and escalation [10].
8. Risks, competing viewpoints and governance tradeoffs
Advocates for bold industrial policy (ITIF) argue the U.S. must “pick industries” and accept strategic choices to avoid losing leadership [4]. Critics fear repeating China’s heavy‑handed, distortionary subsidies that produced overcapacity and dependency; Rhodium and USCC reporting stress that China still depends on foreign high‑end inputs in chips and that targeted measures should be precise to avoid misallocation [8] [9]. Available sources do not mention specific cost estimates for a U.S. program of the scale some analysts propose—those figures are not found in current reporting.
Conclusion: a multi‑pronged, politically sustainable strategy
Closing gaps requires coordinated action across R&D funding, industrial incentives, supply‑chain diversification, export controls and talent policies—each informed by sector‑level analysis and allied cooperation. Policymakers face tradeoffs between speed, cost, and market distortions; sources agree that imitation of China’s tactics should be selective, targeted, and embedded in democratic accountability [3] [4] [5].