U.S. President Donald Trump and China’s President Xi Jinping meet in the Oval Office of the White House, Sept. 24, 2026, in Washington. (AP Photo/Jacquelyn Martin)


Japan, the United States and Europe are increasingly pouring enormous subsidies into their own industries and stepping up efforts to support them. Excessive state intervention not only distorts competition among private companies but also risks encouraging the spread of protectionism and undermining the free trade system.


Advanced economies have traditionally placed importance on the market economy. Large-scale support for specific industries was generally limited to times of economic crisis, such as the U.S. bailout of major automakers following the global financial crisis. This restraint stemmed from the view that if state intervention hindered innovation driven by private-sector ingenuity, it could negatively impact economic growth.


But such sound reasoning has been pushed into the background in the face of the economic threat posed by China.


Under a national plan announced in 2015 with the goal of turning China into a manufacturing power, the administration of President Xi Jinping has poured enormous subsidies into state-owned enterprises and other companies. Over the past decade, China has dramatically increased its economic power.


The growing threat from China


China has pursued state capitalism, with the public and private sectors investing intensively in key industries. In doing so it has seized overwhelming global market shares in fields ranging from steel and shipbuilding to electric vehicles and renewable-energy equipment. Production exceeding domestic demand has been directed toward exports, dealing a serious blow to industries in Western countries.


China controls supply chains for rare earths, which are essential for manufacturing high-tech products, and it routinely engages in economic weaponization by halting exports to countries with which it is in diplomatic conflict.


Japan, the United States and Europe have increasingly objected to China’s disregard for World Trade Organization (WTO) rules and have begun adopting countermeasures on an “eye for an eye” basis.


This has coincided with the rapid development of dual-use technologies that have both military and civilian applications, such as artificial intelligence (AI) and semiconductors, and with a dramatic transformation of economic structures. Governments have become absorbed in industrial support measures as they seek to maintain their competitiveness.









Prime Minister Sanae Takaichi, center, speaks at a joint meeting of the Council on Economic and Fiscal Policy and the Council for Japan Growth Strategy at the prime minister’s office on July 21, 2026. Her administration plans to mobilize more than 370 trillion yen (some $2.36 trillion) in public- and private-sector investment in 17 fields, including AI and semiconductors, through fiscal 2040. (Mainichi/Akihiro Hirata)


In the United States, which is competing with China for economic and military supremacy, the Donald Trump administration is openly protecting domestic industries through steep tariffs and subsidies. It has gone so far as to invest in individual companies such as semiconductor giant Intel Corp. and direct their management. Japan and Europe are likewise rushing to favor their domestic industries by deploying subsidies across a broad range of fields.


The administration of Prime Minister Sanae Takaichi plans to carry out more than 370 trillion yen (about $2.36 trillion) in public-private investment across 17 fields, including AI and semiconductors, by fiscal 2040. Government support for Rapidus Corp., a state-backed company seeking to manufacture cutting-edge semiconductors, has reached 2.9 trillion yen (around $18.49 billion).


According to the Organization for Economic Cooperation and Development, the world’s major manufacturing companies received approximately $108 billion, or about 17 trillion yen, in subsidies in 2024. That was the second-highest level on record, behind only 2009, when corporate bailouts spread in the aftermath of the global financial crisis. The recent surge in subsidies during normal economic conditions demonstrates the worldwide expansion of state capitalism.


A senior official at Japan’s Ministry of Economy, Trade and Industry (METI) commented, “We need to correct the situation of excessive reliance on overseas sources, including China, for the supply of core technologies and critical minerals, and make the economy more resilient.” This view is shared by officials in Japan, the United States and Europe. But if economic security is used as a cover for unchecked expansion of protectionism, it will only reduce trade and lead to the deterioration of the global economy.


Negative chain reaction must be avoided


State support tends to be concentrated among large companies. There are accordingly concerns that industrial renewal will stall and technological innovation will cease to emerge. An American scholar who won the Nobel Prize in economics has warned that arbitrary policy decisions by political leaders distort the allocation of capital, leading to lower economic efficiency and higher prices.


In its analysis of China’s case, the International Monetary Fund concluded that the inappropriate state allocation of resources may have lowered productivity and economic growth.


If other countries follow the United States and China in intensifying economic intervention, the world will descend into a negative chain reaction. With the WTO dysfunctional, what is needed is the reconstruction of the global trade order.


Naoko Munakata, a specially appointed professor at the University of Tokyo’s Graduate School of Public Policy who previously worked on trade negotiations at METI, suggests, “Using the Trans-Pacific Partnership framework as a foundation, Japan should work with Europe and Southeast Asia to form a reliable market and take the lead in creating new trade rules.”


For resource-poor Japan, preserving the free trade system should be the most important element of economic security. Japan should work with Europe and other partners to propose rules to curb excessive subsidies and economic weaponization, such as unjustified suspensions of rare-earth exports. Otherwise, there will be no stopping reckless conduct by either the United States or China.


History offers the bitter lesson that the fragmentation of the global economy caused by rampant protectionism contributed to the outbreak of World War II. Rather than allowing itself to be swept along by the trend toward state capitalism, Japan must set an example as a trading nation.