By Eric Vandenbroeck and co-workers

The U.S. Should treat Beijing as a serious competitor, not as a blueprint.

American policymakers fear that China will leapfrog the United States in the technologies that matter most, including robotics and artificial intelligence. The United States has been here before, in the 1980s. Then, the specter wasn’t Beijing but Tokyo. Best-selling books such as Japan as Number One warned of Japanese dominance. The PBS series Frontline aired the documentary “Losing the War to Japan.” Silicon Valley looked spent after U.S. producers exited the market for memory chips such as DRAM. Detroit, humbled by the Japanese carmaker Toyota’s lean production, seemed a cautionary tale. Japan’s grip on automobiles and consumer electronics appeared unshakable.

But by 1995, when the information technology boom finally showed up in productivity statistics, the United States had pulled decisively ahead. Forecasts of relative American decline were wrong not because Japan stumbled but because the United States excelled when it mattered at the opening of the computer age. The United States didn’t beat Japan by building tariff walls or propping up national champions. U.S. leadership rested on open competition and the flexibility to rewire supply chains globally as technology shifted—in a word, dynamism.

Today, the Trump administration seems to have forgotten that lesson. Since returning to the presidency, Donald Trump has urged Intel’s chief to resign, demanded a 15 percent remittance to Washington on certain Nvidia and Advanced Micro Devices chip sales to China, and carved out a government “golden share” in U.S. Steel as part of the Japanese company Nippon Steel’s takeover. Such arbitrary, deal-by-deal interventions break with the rules-based approach that kept the United States ahead of Japan.

How the United States outcompeted Japan is more than history: it’s a guide to the China challenge. Tokyo’s economic model looked unbeatable for a time, as Beijing’s does now. But the tools that make U.S. markets more innovative and, in the end, more competitive haven’t changed—and Washington should not discard policies that have worked.

 

Adapt or Perish

Japan’s postwar “miracle”—real GDP per capita growth averaging roughly eight percent a year from 1950 until the 1973 oil shock—has deep roots. In the Meiji era (1868–1912), Japanese leaders built a state adept at absorbing Western know-how—drawing especially on the United Kingdom—by creating a national translation bureau, importing thousands of foreign instructors, and standardizing a technical vocabulary. A highly centralized state rolled out rail and telegraph networks, guaranteed returns to investors, and spun off pilot enterprises to family-run conglomerates, or zaibatsu, that coordinated closely with the bureaucracy.

After World War II, Tokyo extended the nineteenth-century formula: a tight state-business partnership importing, adapting, and scaling frontier technologies at speed. The 1951 San Francisco Treaty, which restored friendly relations between Japan and the Allied powers, brought access to U.S. technology and technical assistance. But the Ministry of International Trade and Industry—Japan’s powerful economic bureaucracy overseeing industrial policy, trade, and technology strategy—also played a significant role in channeling foreign knowledge that firms quickly absorbed and improved. By conditioning market access on compulsory patent licensing, most notably in negotiations with the U.S. technology companies IBM and Texas Instruments, MITI ensured that cutting-edge innovations flowed to corporate Japan. In IBM’s case, Shigeru Sahashi, then the head of MITI’s Enterprises Bureau, threatened to block the company’s business in Japan unless it licensed its technologies to local firms at a royalty capped at five percent. IBM agreed.

Meanwhile, Japanese manufacturing emphasized kaizen (continuous improvement), lean production, and just-in-time delivery. Corporate restructuring helped advance those principles as interconnected groups of companies, or keiretsu, replaced the zaibatsu. By the mid-1960s, six of these groups controlled about 30 percent of corporate Japan, coordinating on complex manufacturing and raising barriers to outsiders.

By 1980, this model had produced remarkable results. Japanese autoworkers were about 17 percent more productive than their U.S. counterparts, and the American car companies Ford and General Motors posted losses exceeding $1.3 billion. In the Japanese semiconductor industry, chipmakers worked closely with equipment suppliers to wring defects out of production. By 1989, Japan had become an exporter to the world, supplying a quarter of all U.S. imports and satisfying about half of all global demand. Meanwhile, the United States saw its share of the global market fall from 57 to 40 percent in a little over a decade.

Yet the very institutions that delivered that edge to Japan also held back radical change. The country excelled at absorbing and refining others’ inventions—color television, the Walkman, the video cassette recorder—and channeled a large share of R&D into process efficiency. That made sense for the age of mature hardware, but it left Japan ill-positioned for the shift to software and e-commerce. The reason lies in industrial organization. The keiretsu made internal cooperation easy and outside entry hard. Cartel-like coordination was tolerated, and antitrust enforcement was weak. Compared with the United States’ tradition of competition, Japan’s system favored incumbents. By 1989, Japanese courts had initiated only six criminal prosecutions in the 42-year history of the country’s Antimonopoly Law, which was introduced by the U.S.-led Allied occupation authorities. Over the same period, the U.S. government filed 2,271 antitrust cases—interventions that boosted employment and business formation. U.S. antitrust laws discouraged scale and tight coordination—areas in which Japan excelled—but they kept markets competitive and encouraged entry. On that basis, the United States eventually pulled ahead.

 

Competitive Advantage

Just as the institutional foundations of Japan’s postwar leap reach back to the nineteenth century, so, too, do the roots of American dynamism. The late-nineteenth-century rise of corporate giants and nationwide trusts stoked fears that concentrated power was choking competition and innovation. In response, Congress enacted the 1890 Sherman Antitrust Act, which outlawed monopolization and restraints on trade. A quarter century later, in 1914, Congress passed the Clayton Antitrust Act and the Federal Trade Commission Act, which tightened rules on anticompetitive mergers and exclusive dealing and created the FTC to police unfair competition.

The effects of these laws on technological development were lasting and concrete. Under pressure from the federal government, firms such as the chemical producer DuPont abandoned acquisition-led growth and expanded in-house R & D. Antitrust legislation also opened bottlenecks in computing. IBM used its market dominance to bundle software with hardware, raising barriers to outsiders. But in 1968, under antitrust pressure, it spun off its software business, creating a new market with space for startups, including Microsoft. Similarly, a decadelong antitrust case broke up AT&T in 1984, removing a single corporate chokepoint in telecommunications just as the Internet was emerging. A competitive, fragmented carrier market enabled a burst of experimentation—email, file transfer, collaborative tools—driven by users and new companies.

Decentralized markets did the rest. As big firms spun out and outsourced functions they once did in-house, they created room for new suppliers and product startups to enter. Crucially, those startups could scale through public markets rather than by selling themselves to incumbents. By the early years of this century, companies backed by venture capital made up roughly a third of total market capitalization. This wave—including Amazon, Apple, Cisco, Dell, Google, Microsoft, Netscape, and Nvidia—powered the computer revolution. U.S. productivity revived, and Japan’s stalled out.

Rather than try to replicate Japan’s scale at home, U.S. firms had modularized production, adopted open standards, specialized in design, and tapped global value chains to cut costs and boost flexibility. By the mid-1990s, China’s assembly hubs had become extensions of American innovation, and Taiwan hosted thousands of nimble component makers. U.S. firms’ deep integration with the Chinese mainland, Hong Kong, and Taiwan eroded Japan’s cost advantage and sped the United States’ pivot to software, services, and platforms.

 

Fortress Economics

The key to China’s economic rise is different from that of both Japan and the United States. After Chinese leader Deng Xiaoping visited Japan in 1978, he tried to copy the Japanese playbook, but bureaucratic infighting got in the way, and centrally planned tech-import schemes misfired. A breakthrough arrived in 1979, with the creation of special economic zones, regions permitted to experiment with market economics, in Guangdong and, later, Fujian. With business-friendly regulations, these southern provinces were able to attract foreign capital and swiftly became the heart of China’s electronics and computing industries. China’s leading computer firms, Legend (now Lenovo) and Great Wall, were founded in Beijing but soon relocated significant production and research to the south, where they could plug into global supply chains.

By the first decade of this century, targeted industrial policy had largely receded. What ultimately fueled China’s rise were countless local experiments, backed by a central state able to scale up those that worked. Rural reforms in 1978–79, which permitted farmers to sell extra produce after they met their quotas, became the foundation of Deng’s dual-track approach, with plan quotas alongside market sales. Such changes did not transform China into a full-fledged market economy—the country still lacked secure property rights and the rule of law—but they created transitional institutions that mimicked the effects of one. Tens of thousands of local governments competed for investment and talent, behaving more like firms than governments because their leaders’ careers depended on delivering results.

The Chinese Communist Party, however, retained control over the most important lever: personnel. By appointing, rewarding, and disciplining local leaders, it introduced incentives that resembled those of a market economy while still preserving political authority at the top, resulting in a hybrid system that the economist Branko Milanovic has aptly described as “political capitalism.”

Political capitalism is well-suited for catch-up growth because clear targets (exports, investment, infrastructure) are easy to measure. Yet as China moves closer to the technological frontier, where success depends on unpredictable breakthrough innovations, top-down monitoring becomes more difficult, and the system grows more vulnerable to cronyism. Because innovation payoffs are uncertain and hard to quantify, performance targets invite gaming; officials can hit numerical goals, such as patent counts, without fostering genuinely new technologies.

A challenge that would normally call for more decentralization—stronger policies to enable competition and wider room for local trial and error—has instead been met with greater centralization. In 2008, the National People’s Congress passed an antimonopoly law, but authorities have applied it selectively to discipline foreign firms and powerful entrepreneurs while protecting state-owned firms.

Control over the private sector has tightened in other ways, as well. Beijing has taken shares of companies such as Alibaba, ByteDance, and Tencent, and politically connected citizens have seen their portfolios grow precipitously. Meanwhile, the state has tried to shape the direction of innovation through major initiatives such as a 2003 drive to build national champions, a 2006 effort to expand research and development in science and technology, and more recent projects including Made in China 2025 and Internet Plus, which have channeled trillions of yuan in subsidies, tax breaks, and state-guided venture capital into semiconductors, artificial intelligence, biotechnology, and advanced robotics. As Beijing has oriented the economy around missions such as common prosperity and technological self-reliance, state-owned enterprises have expanded because they are easier to steer toward national goals that do not prioritize profit, while leading private firms, wary of interference, increasingly avoid investors with state ties.

As authority has concentrated in Beijing, local experimentation has waned, and accountability has shifted from performance to political loyalty. State-owned enterprises remain weak innovators and are largely absent from the most dynamic arenas, such as digital platforms, e-commerce, and AI. Private national champions cannot substitute for broad-based dynamism. And smaller private enterprises and foreign-invested firms—the usual sources of novelty—face rising barriers. Since the early years of this century, business dynamism has ebbed and productivity has sagged, turning negative after the global financial crisis of 2007–9 and slowing markedly through the 2010s. Some slowdown is natural as China’s economy catches up, but the trajectory points to a plateau at a far lower income level than in Japan, South Korea, or Taiwan.

 

The Right Lessons

Washington must draw the right lessons from China’s rise—and from how the United States once outcompeted Japan. Like Japan in the 1980s, China is a manufacturing powerhouse moving up the value chain. Its advantage lies not in radical innovation but in scale, integration, and rapid iteration, backed by state coordination and heavy investment. Consider high‑speed rail. China assembled foreign technologies (from France’s Alstom, Canada’s Bombardier, Japan’s Kawasaki, and Germany’s Siemens) and then scaled at record speed, opening its first passenger‑dedicated line in 2008 and building the world’s largest network, spanning roughly 30,000 miles, by the end of last year.

China is following the same script across telecommunications, solar power equipment, and batteries. What Apple did for China’s smartphone ecosystem—training Chinese suppliers that later partnered with firms such as Huawei—Tesla is now doing for Chinese electric vehicle producers. As a latecomer, China has often leaped straight to modern systems—think Beijing Daxing International Airport, with its facial recognition entry systems, geothermal heat pumps, and radio frequency–based baggage tracking. Meanwhile, the United States struggles to upgrade legacy infrastructure. Because the U.S. system disperses power—among a separately elected president, a bicameral Congress, an independent judiciary, and federal, state, and local governments—many actors can block action. Veto points designed as safeguards often slow decisions and hinder the adoption of new technologies and reforms.

For the United States, the politically tempting response is protectionism that shelters incumbents and concedes the future. A better course is diversified interdependence. There are valid security reasons to reduce exposure to China at specific nodes, such as critical minerals, but self-sufficiency is a mirage. The way to blunt Beijing’s leverage is not to sever trade ties but to spur integration with allies such as Mexico and South Korea. Historically, the United States prospered by wiring itself into global networks and turning them to its advantage.

Keeping markets competitive matters just as much. The computer revolution was possible only because startups such as Apple, Google, and Microsoft went public and stayed independent. In the 1980s and 1990s, easier listings and deepening venture capital made initial public offerings the default. But beginning in the first decade of this century, more stringent investor protections—notably under the 2002 Sarbanes-Oxley Act, which tightened oversight of public companies by creating an audit watchdog, making CEOs and CFOs personally certify their financial reports, and requiring yearly proof that antifraud controls actually work—raised the costs and risks of going public, especially for smaller issuers. At the same time, more permissive merger review processes and antitrust enforcement made it easier for dominant platforms to buy fast-growing entrants. Competition has cooled as a result.

What changed wasn’t only doctrine but also incentives. After Buckley v. Valeo—the 1976 Supreme Court decision that equated limits on political expenditures to limits on speech—corporate money poured into politics. From 1980 to 2012, donations from senior executives rose 320-fold, with half coming from the top 0.01 percent of donors. Lobbying outlays have more than doubled since the late 1990s, driven largely by the biggest firms. Although the top four companies in a typical industry capture about 15 percent of revenues, they supply roughly 35 percent of campaign contributions and 45 percent of lobbying expenditures. This pressure has worked: the Federal Trade Commission and the Department of Justice rarely enforce the antitrust laws already on the books.

Rebuilding a more competitive system will require lowering the cost of going public for new companies and sharpening scrutiny of incumbent takeovers so that more high-growth firms can scale independently. The immediate test is in AI. OpenAI, through its deep partnership with Microsoft, now accounts for roughly two-thirds of the market. Incumbents are also major financiers and partners in the AI ecosystem; Amazon, Google, Meta, and Microsoft have taken stakes in or signed multiyear deals with leading AI startups. The question is whether leading labs go public and remain independent or whether exclusive partnerships and acquisition-led consolidation prevail.

Consolidation would be easier to defend if brute-force scaling alone drove AI progress, but it doesn’t. Ideas and rivalry, not sheer resource mobilization, move the frontier. In China, performance is strongest in sectors—such as AI, electric vehicles, and solar power systems—in which competition is fierce and in which oversupply has driven price collapses and even prompted Beijing to rein in “disorderly” low-price competition. By contrast, sectors dominated by old-guard monopolists and state-owned enterprises underperform.

China is not Japan. Its market is larger and its state support is heavier. And for the United States, the security stakes of this competition are much higher. But the same rule holds: the United States should resist fortress economics. Treat Beijing as a serious competitor, not as a blueprint.

 

 

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