• Economics
• United States
• Christina Lu

July 16, 2025, 3:30 PM View Comments ()

Since taking office a second time, U.S. President Donald Trump has embraced state capitalism to a stunning degree. 

He has taken a personal stake, not even a government stake, in a major U.S. steel company. He has dispatched the Defense Department to buy up part of a rare-earths mining company. He has made plans to remake U.S. shipbuilding through direct government investment, directed federal resources toward the promotion of resources such as coal, and picked winners and losers in all the emerging industries that will shape the global economy in the years to come.

“This is a Republican administration embracing state capitalism in a way we haven’t seen in a long time, while all the time decrying ‘socialism,’ so that is jarring,” said Sarah Bauerle Danzman, a professor at Indiana University Bloomington.

The return of dirigisme, or state capitalism, is not unique to Trump or the United States, of course. Every economy and economic bloc is trying to sort out the balance between the state and the market at a time of great flux in new industries, evolving supply chains, and fears over geopolitical and geoeconomic competition. Former U.S. President Joe Biden did much the same, and the European Union would too, if it didn’t have 27 member states bickering over just what to protect and what to promote—and had the money to underwrite it all.

What makes Trump’s cannonball into the pool of state capitalism different is that he heads a political party that has, at least in recent decades, defended the free market above all. Already in his first term, he indicated that his vision of economic security was expansive, which meant that the government had to step in, which led to tariffs on imports of items such as steel on national security grounds. That has been taken to another level in Trump’s second term, with a slew of tariffs and protectionist measures imposed not just on steel and aluminum but also on copper, cars, and soon lumber and medicine. 

“Markets rule for Republicans until it comes to national security, and the definition of national security has expanded beyond all recognition,” said Bauerle Danzman. “There is nothing that cannot be defended through the giant lens of national security—that is what has given Republicans the license to do this.”

The reason that Trump’s America is rediscovering industrial policy is the same reason that every economy is: The world is changing and getting dicier. Supply chains were sorely tested during the COVID-19 pandemic, and that set off a spate of moves in the United States and elsewhere to reshore production of basic medical gear—some of Trump’s first uses of the Defense Production Act (DPA), a legacy of the Korean War, were to deal with the pandemic.

The DPA, if it is renewed by Congress later this year, will likely be a favorite tool of the Trump administration to direct government money to the things that he wants more of; he has already taken some steps in that direction, such as empowering the federal finance arm, the Development Finance Corporation, to boost domestic mining projects, and has hinted at using more of the DPA’s authority to direct federal funds to favored industries.

But there’s more. One of Trump’s first executive orders called for “a full economic and security review of the United States’ industrial and manufacturing base.” Modern economies, especially ones that build products such as wind turbines, electric cars, and F-35s, gobble up critical minerals, including rare earths. Sourcing those inputs locally would be ideal. The problem—and this has been a problem for decades, for both the United States and Europe—is that those critical minerals are largely mined and processed somewhere else, mostly in China. That’s why the United States has spent years, in vain, trying to “de-risk” and establish control of its critical mineral supply chain. 

“Now that the de-risking agenda has utterly failed for critical raw materials, governments have to make much more direct interventions,” said Tobias Gehrke, a senior policy fellow at the European Council on Foreign Relations. “It’s not the wrong conclusion,” he added. “The private sector can’t do that much, and the price signals aren’t there. But it is perhaps a risky step to take.”

Trump is now going even further, most recently with a multibillion-dollar deal that would see the Defense Department become the largest shareholder in MP Materials, the company that operates the biggest—and only operational—rare-earths mine in the United States. With the Pentagon’s support, MP Materials plans to build a new factory for rare-earth magnets, which it expects to launch in 2028. The Defense Department will purchase the factory’s output and establish a price floor to help shield the company from whipsawing prices, particularly since China’s grip over market supply allows it to put pressure on competitors.

“What we’re up against in the rare-earth industry is Chinese mercantilism,” said Matt Sloustcher, the chief communications officer at MP Materials, “and China exploiting its control over supply and its position as the world’s largest end market to set prices in such a way that curtails investment.”

The same dynamics are behind the Trump administration’s lurch into government-directed shipbuilding, as laid out earlier this year in executive orders. It is a massive problem, if you believe that a country should be able to build and repair naval and commercial vessels, especially if there is a looming war in the Pacific. China builds about 200 times more ships than the United States. And the market clearly has not delivered either ships or shipyards for the United States: It is a high-cost producer that cannot compete with China, Japan, South Korea, or even specialized shipbuilders such as Finland. As with rare earths, shipbuilding seems to be one of those sectors where market failures open the door to government intervention. There will be others.

Georges Clemenceau, the former French prime minister, is credited with once saying that war was “too important to be left to the generals.”

“And the economy is too important to be left to the bankers,” Gehrke said. “The advantages the West enjoyed in the 1960s and after were not free-market miracles. It was industrial policy in the 1960s that laid the foundations. Now, we are competing over an entirely new set of industries where the winners are not yet clear. Saying the state has no role just doesn’t work anymore,” he said.

The trick is how one goes about it. During World War II, the United States wanted cargo ships to defeat the German submarine threat. It massively underwrote the construction of new shipyards and promised to buy all those Liberty ships once floated, and left U.S. industrialist Henry Kaiser to do the bits in the middle, such as building the ships.

The Biden administration did industrial policy, too. The Inflation Reduction Act was a clean-energy supercharger, directing government money to attract, enhance, and entice producers of electric vehicles, wind turbines, solar panels, and more. It was so statist that Europe cried foul. The CHIPS and Science Act made the reshoring of semiconductor production a national priority, and it is working.

“This is the direction of travel for global capitalism at this level of development,” said Todd Tucker, the director of industrial policy and trade at the Roosevelt Institute.

The worrisome part about Trump’s approach to state capitalism is that it is not entirely well thought out. 

His administration’s solution to the friendly takeover of a big U.S. steel firm by a deep-pocketed company from an allied nation was to insist on a “golden share,” a vestigial tail of European countries’ struggle to partially privatize all the industries that they’d nationalized in the postwar years. Trump’s golden share would give him—and later, the U.S. government—direct control over the steel company’s investment decisions, personnel practices, and more. It might even influence future foreign investment in the United States, and not in a good way. But at least it’s cheap.

Having government control over critical industries was a key part of Europe’s privatization drive even under former U.K. Prime Minister Margaret Thatcher. But giving veto power over decisions that are industry-specific, such as whether to go further toward green steel and mini steel mills, to a president who is mercurial at best seems imprudent, if not disastrous.

“In Trump 2.0, he is trying to find ways to exert control over the economy without spending a lot of money. The ‘golden share’ is industrial policy for a time of austerity,” Tucker said. “We’re likely to see more of these kinds of interventions in the future, not tapping tax credits like in the Biden years, but tools like state-owned enterprises, national development banks, that were once kind of a sideshow but are really now the main event.”

The Pentagon’s investment in MP Materials and rare earths is an inflection point. The company has already begun filling gaps in the U.S. supply chain, such as the manufacture of permanent magnets, which are used in all sorts of things from wind turbines to fighter jets. But there are still other hurdles to cross. 

If rare earths rear their head again in trade talks with China, then “[t]his doesn’t really emerge as a substantial change to our negotiating position until MP starts delivering magnets,” said Ashley Zumwalt-Forbes, a former U.S. Energy Department deputy director for batteries and critical minerals under the Biden administration.

Rare earths are critical minerals, and there are many—at least 50—critical minerals needed to keep the U.S. economy working and bombers flying. But building the entire infrastructure that would be required to source and process rare earths, let alone do all the other things that the Trump administration wants to do, cannot be done simply via executive order.

“Permanent magnets are notoriously challenging from an intellectual property standpoint, as well as simply from a production know-how standpoint. This is something that is not a built-out industry in the U.S.,” Zumwalt-Forbes said.

Other countries, and economic blocs such as the European Union, are wrestling with these questions about how to balance between the market and the state. China built its workshops of the world on the back of state-owned enterprises, and its state capitalism still gives U.S. trade negotiators fits. Europe practically invented this concept, and it is still trying to regain the patent. 

“The U.S. is just playing catch-up to the rest of the world,” Tucker said.