In the fall of 1957, the Soviet Union launched Sputnik I, the first satellite to reach orbit. Four years later, Yuri Gagarin became the first astronaut to orbit the earth. The U.S. had been left behind. President Kennedy initiated a full court public-private press to catch up and reclaim American superiority. It was a true partnership with NASA providing the funding and infrastructure support while private businesses built the guts of the products and systems necessary that culminated in the first moon landing in the summer of 1969.
Today we are in a different arms race. Rather we are in the midst of several arms races, all strategic to both our leadership and our future abilities to be self-sufficient. There is a race to be the world leader in artificial intelligence. Strategically, we want the world to build AI infrastructure on American created platforms. AI requires lots of energy/electricity to flourish. That means we need to have the capability to supply our own energy and electrical needs required not only for AI, but for a world of electric vehicles, autonomous driving, data center needs, and robotics. At the same time, we want to be the leader in drug development, advanced medical devices, and industrial automation.
Most of us view China as the biggest threat to our dominance. In competition, one can try to slow down an adversary but the greatest opportunity for success is to run faster one’s self. As with the space race, we need to focus and prioritize our efforts to develop the necessary technologies quicker, moving finite resources toward strategic initiatives.
Are we doing that today? In some ways yes, mostly within the private sector. Significant capital has been raised to create the infrastructure to support advancements in AI, drug development, alternative energy resources, and state-of-the-art semiconductors and adjacent software. But what has been missing is government focus to support, facilitate or speed up growth. Instead, government has sought to build barriers that would slow growth elsewhere (mainly China). Export controls, tariffs, defunding research, and stripping away tax incentives are cases in point.
But rather than encircle China in an attempt to isolate it from the rest of the world, actions and chaos have opened opportunities for Chinese companies to expand both within and outside its borders. Developers of AI software and agents that will be built around the world upon LLM platforms will have to choose whether they will build upon American or Chinese platforms. Despite export controls on high performance chips and systems to China, the emergence of DeepSeek and other Chinese competitors have demonstrated the ability to flourish without using the latest and greatest chips built by American companies. Winning a car race is not simply having an auto with the highest horsepower. The same applies here.
The export controls on the fastest semiconductors may slow Chinese progress. But they also rob American companies of their abilities to prosper. While it is obvious that companies like Nvidia# can still do quite well, as last week’s earnings report showed, the export ban on virtually all its chips to China is costing the company over $10 Billion in sales in just the first two quarters of this fiscal year. This then costs our government about $1.5 billion or more in lost tax receipts.
If the only problem was semiconductor export controls, the world could adjust. But there is more, lots more. While the House reconciliation bill explodes government spending, it cuts monies for basic research including the National Institute for Health. In Trump’s DEI battles with Ivy League schools, he is also seeking to defund research, again mostly medical. Isolation policies are seeking to restrict visas for foreign students. About a third of doctorates in recent years have gone to non-US citizens. Within science and engineering that number is close to 40%. One might argue that these doctoral candidates return home to take advantage of what they have learned in our country but that logic has more holes than a slice of swiss cheese. Almost 70% of AI startups in the U.S. over the past decade have been founded or co-founded by non-U.S. citizens. Even going back a generation, Sergei Brin was born in Russia, Steve Jobs in Lebanon, Jensen Huang in Taiwan, and Elon Musk in South Africa.
The way to win a war, especially an economic war, is to strategically provide incentives for American companies to create and develop as fast as possible, while maintaining safeguards that they are doing so in a safe and legal manner. Historically, Congress has used the tax code to provide incentives. The House bill includes provisions to expense capital expenditures in year one, clearly a design to induce more capital spending. Tax incentives have been used to fast start the growth of electric vehicles and alternative energy resources although the Trump administration seeks to revoke some of those incentives. Simplifying permitting processes, and opening up new Federal lands for oil drilling are further examples of providing strategic incentives.
But overall, the environment to fulfill our strategic needs faces headwinds. Researchers are leaving the U.S. at the fastest pace in years in the face of defunding and uncertainty. Similarly, high quality students are staying away. Who wants to come here without clarity regarding student visas? China graduates many times the number of STEM students as we do. It is growing its electric grid more than three times as fast as we are. In the U.S. gas turbine producers are sold out into 2029. Nuclear? Think 2035 or beyond. Coal? Too dirty. Wind? Not in my backyard. Solar? It works in Arizona but not Seattle. In a CNBC interview last week, Elon Musk suggested some form of electrical rationing may be necessary before the end of 2026.
The Trump administration has moved quickly in a lot of different ways. It has had successes effectively sealing our southern border, making attempts to slow bloated government spending, and stripping away unnecessary regulations. But to make America great, it needs to do whatever it can to build and support an environment that fosters or even accelerates key strategic initiatives. Reshoring makes sense but specifically in strategic industries like AI, defense, energy independence and healthcare. No need to make tee shirts in the U.S.! Trump likes to move quickly but when it comes to these strategic initiatives one can’t expect to see results overnight. The results will take time and will only succeed with persistent and focused effort by both government and private enterprise. The private sector will do the heavy lifting but will be most effective within a framework that promotes the needed initiatives. That means minimizing constraints like export controls, and restraints on research focused on strategic needs.
Hopefully, in the weeks and months ahead, the Big Beautiful Bill can be massaged into a package that supports these initiatives and be passed into law this summer. Hopefully, the tariff landscape can be solidified within months. That will allow more focus on making U.S. products and services the backbone for tomorrow’s economy. We are already slipping. China is the dominant leader in electric vehicles already. Our drug companies are licensing future drug prospects from China. There are signs of some focus. Trump’s Golden Dome proposal may sound grandiose and beyond imagination but it is a focus on the need to ensure our safety.
Our one great advantage is an economic system that is the most entrepreneurial in the world. Let American companies loose and they are odds-on favorites to win the battle. Removing tax incentives or erecting export controls only get in the way. They should be used as sparingly as possible. It’s easy to assume American success because our free enterprise system has been so dominant for so long. But nothing is a given. China is formidable. So was Japan 40 years ago. China isn’t to be feared. Rather its success should be the siren that accelerates our need to move ahead faster.
Today, Jerry Mathews of Leave it to Beaver fame is 77. Stacy Keach turns 84.
James M. Meyer, CFA 610-260-2220