In the quest to better balance the software and hardware components of its economy, the United States faces a crucial crossroads in competing with China and fostering growth.
Throughout much of the twentieth century, the United States was the world’s leading industrial force, significantly contributing to the outcomes of two world wars and establishing its status as a global superpower.
However, over the past fifty years, the country has allowed much of its manufacturing capacity to decline, driven by liberalizing economic reforms and further accelerated by the end of the Cold War, leading U.S. companies to offshore manufacturing to regions with cheaper labor and lighter regulations.
This deindustrialization narrative has left visible scars across the American heartland and has profoundly influenced political discourse.
Recently, U.S. policymakers have begun to grapple with the economic and national security implications of this shift.
While the software- and finance-driven economy emerging from this retreat has led to impressive wealth generation and positioned the United States at the forefront of technologies like artificial intelligence, it has also left the country lagging in hardware sectors such as electric vehicles (EVs), consumer drones, batteries, and robotics.
Additionally, this offshoring has weakened the U.S. defense industrial base, raising concerns about its ability to meet wartime demands for materiel.
In stark contrast, China’s strategic investment in building up its manufacturing capacity has provided a diversified approach to technological development, allowing it to dominate the global market in many hardware areas where the U.S. has fallen behind.
Moreover, Beijing has successfully implemented targeted policies to establish a competitive software ecosystem that now poses a significant challenge to leading American firms.
In the coming years, military dominance and economic growth may hinge on the integration of software and hardware across various applications.
AI-powered drones are already altering the landscape of modern warfare, increasingly autonomous EVs are prevalent in the economy, and robotics are disrupting manufacturing globally.
With its integrated software and hardware capabilities, China appears better poised to leverage these synergies, posing a potential threat to U.S. economic and national security.
To effectively compete with China and stimulate growth, the United States must actively work to reestablish a balance between the software and hardware sectors of its economy.
This endeavor will require the federal government to rebuild America’s “physical economy”—the necessary infrastructure and technical expertise needed to produce tangible goods.
Current initiatives, such as President Trump’s ongoing tariff plan, aim to reshape this economic paradigm.
However, this strategy carries the risk of alienating U.S. allies, which could further complicate the realignment of American manufacturing capability.
As the U.S. moves forward, it will be imperative to coordinate with global trading partners and invest in reskilling the domestic workforce to increase production of emerging technologies that will drive future economies and enhance defense capabilities.
Going all in on software, the United States has long turned to financial services and software industries as the engines of its economy following a retreat of heavy industry abroad.
A rollback of regulatory restrictions has fueled Wall Street’s growth, while federal investment laid the groundwork for a vibrant software ecosystem in Silicon Valley, which has effectively capitalized on the rise of the public internet and personal computer revolution.
Sovereign software was ideally suited to the shareholder-driven capitalism that has characterized the U.S. economy over the past four decades, as it requires relatively low upfront capital for development compared to hardware products, which necessitate significant investment in facilities and equipment.
Once created, software solutions are easily reproduced and scaled with minimal cost and instantaneous global distribution, making software development attractive to investors aiming to maximize returns.
This relentless pursuit of market share has led to a current landscape where nearly half of the U.S. stock market’s value is concentrated in technology and finance sectors.
U.S. tech leadership has shifted from companies manufacturing physical goods, such as General Electric and IBM, to corporations focusing on digital solutions, like Google and Microsoft.
Although Silicon Valley still hosts hardware companies like Apple and Nvidia, these firms increasingly rely on foreign suppliers to manufacture their products.
This decades-long transition away from domestic production toward software and financial services has resulted in a situation where the U.S. designs and programs many of the world’s advanced technologies yet depends on countries like China to manufacture them.
While this global division of labor may have once made sense in the aftermath of the Cold War, it is no longer appropriate in today’s era of geopolitical tension.
Military supremacy is becoming ever more reliant on the mass production of dual-use technologies, such as drones, in which China’s diversified industrial base may present a more formidable challenge to U.S. economic and military preeminence.
As the United States shifted its economic focus toward software and finance, China took a different path, establishing itself as a manufacturing powerhouse.
The Chinese economy’s liberalization post-Mao, enhanced by state support and affordable labor, propelled its rise to become a dominant global producer.
Today, China represents around a third of global manufacturing output—three times that of the United States.
Many experts initially anticipated that China would follow a trajectory like other mature economies, moving from manufacturing to software and finance as it grew.
However, Beijing has intensified its focus on a production-first strategy, choosing to establish comprehensive industrial policies such as Made in China 2025 to encourage companies to evolve from producing lower-value goods to more complex and profitable products.
This commitment to advanced manufacturing has created an interconnected ecosystem of competitive technology companies, while also preserving the infrastructure, supply chains, and technical expertise necessary to build those products.
China’s ability to maintain its domestic industrial capacity has led to enhancements in manufacturing techniques and product efficiency across various sectors, thus enabling companies to innovate and create more sophisticated goods.
While this industrial approach has fostered trade tensions and market distortions, it has also helped Chinese firms dominate global markets for key technologies that are applicable in both civilian and military contexts.
Currently, Chinese-made EVs account for up to 76 percent of global sales, Shenzhen-based DJI controls about 90 percent of the consumer drone market, and China has significantly ramped up its production of industrial robots.
Simultaneously, several Chinese enterprises, such as Huawei and TikTok, have emerged as leaders in the international software sector.
Huawei has made headway in the global mobile market with its Harmony OS, designed to mitigate its reliance on U.S. tech giants.
Despite rising scrutiny in the U.S., TikTok has cemented a strong presence, and DeepSeek is becoming a legitimate contender among U.S. AI developers with its innovative, affordable, open-source models.
Despite the progression in China’s software landscape, President Xi Jinping has ensured that the industry does not expand to dominate the entirety of the Chinese economy.
Concerned about the growing influence of large tech corporations and potential wealth inequality due to financialization, Xi previously implemented a regulatory crackdown aimed at limiting the power of giants like Alibaba and Tencent.
While these pressures have ceased amid heightened U.S.-China competition, Xi has reiterated that China will continue to strengthen its physical economy even as its digital sector matures.
The recent disruptions in supply chains, military conflicts, and escalating international tensions have illuminated the vulnerabilities present in the U.S. approach to technology development and the competitiveness of the Chinese model.
Projecting power in this century necessitates the capacity to design, produce, and deploy both hardware and software at scale—something China has pursued aggressively, while the U.S. has over-reliant on software.
Consequently, the United States might find itself at a distinct disadvantage in upcoming economic and military confrontations.
Presently, the U.S. struggles to compete in hardware sectors with considerable growth potential.
American companies find it challenging to produce electric vehicles, robots, consumer drones, and advanced batteries at competitive scales and prices when compared to their Chinese counterparts.
While competing with China in these fields may be feasible, establishing the necessary production capacity will require significant investments of time, capital, and political resolve.
These efforts must be strategically targeted at specific emerging industries, which diverges from the broad trade restrictions currently being pursued by the government.
The United States does maintain a strong software ecosystem, but the advantages it holds over China may be precarious, considering how easily new software innovations can be appropriated.
Open-source software can be downloaded, code can be stolen, and burgeoning U.S. AI models can be utilized to train Chinese developers’ counterparts.
Efforts to secure software through cybersecurity measures or export controls may slow down the diffusion of technology, but highly motivated actors may still find avenues to bypass these barriers.
On the other hand, hardware advantages may prove to be more durable; while hackers may download software blueprints, they cannot simply replicate the factory that produces a product.
Today, U.S. policymakers must confront the reality that America and China are closely competing for dominance in software and AI.
Nonetheless, Beijing currently holds significant advantages in supply chain infrastructure and hardware production capabilities, enabling a more diversified technology ecosystem.
This places China in an ideal position to synergize leading hardware with state-of-the-art software, fostering innovations that can accelerate the deployment of emerging technologies.
Collaborations, such as those seen with DeepSeek integrating its AI into robots and electric vehicles, allow Chinese companies to potentially drive paths to profitability and growth that may be less accessible for U.S. firms, which lack sufficient domestic hardware partners.
Additionally, China’s combined strength in software and hardware could offer a strategic edge in prospective military confrontations.
As demonstrated in the spirit of the Ukraine conflict, military prowess in the future may favor nations capable of producing advanced weaponry in mass quantities, precisely aimed.
Both Ukrainian and Russian militaries have prioritized the use of affordable, scalable drones, which when paired with sophisticated software, have emerged as potent instruments of warfare.
China is exceptionally equipped to meet the demands of these modern, high-stakes conflicts.
With investments in swarming algorithms and AI for strategic decision-making, as well as substantial capabilities in manufacture of drones and missiles, China is a formidable contender.
The same factories responsible for constructing EVs and robots can efficiently be repurposed for producing drones and munitions required in high-intensity conflicts.
China’s strategic realignment of funding from real estate to manufacturing has served to bolster its defense industrial base.
Of course, the United States has also embarked on initiatives to adapt its own arsenal towards more compact, affordable platforms.
The Biden administration has initiated the Replicator Initiative, aimed at enhancing drone production and deployment, and the Pentagon is formulating operational concepts involving large-scale drone swarms.
Meanwhile, some advisors around President Trump support a shift toward smaller, attritable weapons systems as opposed to large-scale platforms like the F-35.
Yet, whether the U.S. can successfully materialize such plans remains uncertain.
At present, U.S. defense contractors find themselves challenged to produce even conventional military equipment, such as artillery shells, at a scale necessary for warfare.
The consolidation within the defense industrial base has made national supply chains increasingly fragile, and in some cases, the Pentagon is reliant on China for obtaining components critical to various technologies.
Although leaders could invoke the Defense Production Act to boost the domestic production of military hardware, sustaining a conflict against a near-peer adversary like China poses challenges—especially when it comes to maintaining inventories of drones, missiles, and munitions.
Considering the trajectory of U.S.-China relations, the urgency of enhancing domestic industrial capabilities has become apparent among U.S. policymakers.
Yet current strategies to re-engineer supply chains or reorder the international trade system are far from comprehensive enough to tackle the scale of the problem.
If the U.S. does not make substantial strides to enhance its productive capacity, it runs the risk of finding itself substantially outmatched in future economic and military contests.
The necessity of expanding domestic industrial capacity is clear, yet the United States finds itself limited in viable options.
While some defense startups are taking measures to establish production facilities domestically and at scale, and major defense contractors continue to innovate and manufacture cutting-edge military hardware, neither current startups nor established defense firms can rival China’s industrial strength.
The federal government is poised to play an instrumental role in revamping the U.S. manufacturing landscape.
Rather than pursuing total self-sufficiency, the United States should collaborate with allies such as Germany, Japan, and South Korea to develop manufacturing capabilities that rival those of China.
The Trump administration might investigate how to capitalize on industrial complementarities to enhance competitiveness in emerging consumer and military technologies, alongside fortifying vital supply chains.
Additionally, the administration could prioritize establishing shared industrial standards with allies to promote modular product ecosystems, thereby easing manufacturing bottlenecks and diminishing obstacles to entry for new enterprises.
Further, Washington must invest in advanced technologies, such as industrial robots and 3D printing, where China currently leads.
While the trend toward industrial automation is anticipated to generate fewer jobs than traditional manufacturing, these modern facilities still hold the potential to provide new employment opportunities for American workers.
For the U.S. to continue thriving amidst these challenges, significant investments in human capital are essential.
Government entities at federal, state, and local levels can set the stage for Americans to excel in the new industrial landscape by partnering with corporations and educational organizations to enhance technological literacy and support skill development initiatives.
By cultivating a robust talent pipeline tailored to emerging professions in advanced manufacturing, Washington can bolster the U.S. capacity and security while allowing a greater number of Americans to engage in this expanding sector.
Even as Washington strives to preserve its dwindling software and AI advantages, those advantages may prove insufficient to prevail in a conflict over Taiwan.
Despite some doubts regarding the combat readiness of the Chinese military, it has evolved into an impressive fighting force.
In order to deter China effectively, the United States must adopt a strategic approach aimed at enhancing its hardware manufacturing capabilities.
Strengthening the U.S. position in emerging technologies will be crucial, as opposed to attempting to revert to outdated supply chains.
To achieve this, the U.S. should focus on investing in industrial automation while ensuring that the Pentagon functions as a dependable buyer of smaller systems.
Government policy needs to support the initiatives of U.S. defense startups as they work to establish a more competitive military force suited for the challenges of the twenty-first century.
image source from：https://nationalinterest.org/feature/america-must-rebuild-its-physical-economy
