How a Sovereign Wealth Fund Could Reindustrialize America

Trump is off to a good start, but the nation needs a permanent tool for investment.

Too many technologies invented in the United States, such as battery production or advanced chip fabrication, have been lost to foreign competitors. Other strategic sectors, such as critical minerals processing, have been starved of domestic investment for decades and all but disappeared from the United States. The problem is not American businesses, or American workers, or even (entirely) American overregulation. It is that winning in sectors like these requires enormous financing to scale production, which other countries support with public funds, but the United States does not in any coherent way. Yet the national security and macroeconomic costs of losing these sectors have now become apparent, and the Trump administration has begun taking aggressive actions to boost investment in strategic sectors and address the weaknesses in America’s (defense) industrial base.

On February 3, just a few days into his second term, President Trump issued an executive order calling for the creation of a U.S. sovereign wealth fund. The usual rationale for a sovereign wealth fund—investing foreign currency surpluses generated from exports—does not apply in a country with large, chronic trade deficits and more than $30 trillion of debt. But if used to finance scale production across a broad portfolio of strategic sectors, the fund could be an essential vehicle for promoting reindustrialization and economic growth.

As I wrote in the Techno-Industrial Policy Playbook, private sector investment hurdle rates (the minimum returns sought in an investment) are often well in excess of both firms’ cost of capital and the expected returns in capital-intensive strategic sectors—particularly those sectors subsidized by other countries’ industrial policies. Government interventions are therefore necessary to “crowd in” private capital, either through providing extra leverage for private investments or de-risking projects to make lower returns attractive to investors.

This challenge is especially acute for hard-tech startups navigating the “valley of death,” the period between proving a technology and scaling up production. The United States maintains a robust venture capital ecosystem (supported by a number of policies incentivizing R&D and intellectual property development) for tech startups. There are also a plethora of financing options for mature companies, ranging from private equity and private credit to conventional commercial lending and bond markets. But companies building their first production facilities are often too capital-intensive for venture equity, yet not mature enough—in the sense of lacking an existing asset base or reliable income streams—to access other forms of financing. Even more established companies struggle with these chicken-and-egg dynamics: without adequate production facilities, they cannot secure long-term contracts; without long-term contracts, they cannot (cost-effectively) finance the construction of such facilities.

The Trump administration clearly recognizes this problem and has begun taking decisive actions. On July 10, the Department of Defense announced a $400 million direct investment in MP Materials, a rare earth minerals mining and processing company, along with a long-term contract establishing a price floor and other incentives and a subsequent $150 million loan. In addition, recent trade deals with Japan and Korea include investment commitments of $550 billion and $350 billion, respectively. Although the details of these commitments are not fully clear, early indications suggest they involve financing available for projects jointly undertaken by American and Japanese or Korean companies.

These moves are significant and show that the Trump administration is serious about addressing the investment challenges facing America’s industrial base through measures beyond tariffs. Given the breadth of these challenges, however, one-off deals are unlikely to be sufficient, and the administration should consider more systematic investment approaches. MP Materials offers a case in point. Its predecessor company, Molycorp, struggled to raise the funds needed to scale operations in a capital-intensive sector subject to intense Chinese competition. Commodity price volatility (in relatively illiquid markets dominated by Chinese players) drove it into bankruptcy in 2015, and its mine sat idle for a number of years. Smaller government contracts and subsidies during the first Trump and Biden administrations allowed operations to resume in the early 2020s. Following the recent DoD investment, MP Materials announced the construction of a new magnet facility and enhancements to its Mountain Pass mine. A few days later, Apple announced a $500 million partnership to source rare earth magnets from the company.

The MP Materials approach has its limitations, however. First, there are simply too many strategic investments that will be required to rebuild the U.S. industrial base, or even industrial sectors with clear defense applications, for this model to be effective at scale. Direct investments along these lines consume too much of the Pentagon’s budgetary as well as human resources per deal. Other structures could more efficiently leverage private capital and expertise, while allowing for easier replication across different projects and sectors.

In addition, ad hoc deals tend not to allow for transparent and competitive processes, which could eventually tarnish public and commercial perceptions of these projects. Although domestic rare earth mining necessarily offers few choices, other sectors are more diversified, and companies should be able to compete for investment through a coherent and understandable process. If the government is seen to be arbitrarily favoring incumbent monopolies or propping up “zombie” companies, such investment programs will not be sustainable, no matter how critical.

Similarly, it is important for these investments to be evaluated as a portfolio. Any single investment can fail due to factors beyond the control of any investor, which is why professional asset managers are evaluated on the basis of their portfolios, not any single position. But an individual deal like MP Materials is not part of any official portfolio, creating unnecessary political risk for the larger strategic investment effort should it underperform. (That risk leads in turn to another, that the government might throw good money after bad, overcommitting resources to prop up a failing investment in order to avoid a public relations disaster, rather than intelligently managing a broader portfolio.)

Meanwhile, the investment commitments included in recent trade deals, while highly innovative, remain mostly undefined. They are also likely limited to joint venture projects with Japanese or Korean partners.

A sovereign wealth fund structure would address all of these concerns. The fund would create a portfolio of projects and avoid the perils of one-off investments, while ensuring accountability. It would have a mandate and governance structure created by Congress. Since such an institution cannot be created through a party-line “reconciliation” legislative process, it would necessarily have bipartisan credibility and durability. A fund structure could also take advantage of government leverage and financial structuring to command resources many times the level of the funding it receives via appropriations. Furthermore, once its asset base is created, it does not need to rely on future appropriations.

At the moment, the Trump administration seems to be considering two options for such a fund: (1) a new “sovereign wealth fund,” as envisioned by the earlier executive order, and (2) massively expanding the Pentagon’s Office of Strategic Capital (OSC), an existing vehicle for making loans and loan guarantees to support investments in America’s defense industrial base. Each option has its advantages and disadvantages.

On one hand, creating a new government institution is always a heavy lift politically, though the sovereign wealth fund concept already has significant bipartisan backing in Congress. On the other hand, a new fund would not be limited by legacy structures. It could be created with today’s strategic challenges in mind, and endowed with the appropriate capital, capabilities, and flexibility to meet these challenges—for instance, it could offer derivative solutions to mitigate critical mineral price volatility. It is also worth noting that the U.S. government maintains two development banks to support investments abroad (DFC and ExIm Bank), but none to support strategic domestic investment.

As for the second option, OSC received an additional $1.5 billion in funding and authorization to support up to $200 billion in gross obligations through the One Big Beautiful Bill Act passed earlier this year. Further appropriations could create a de facto sovereign wealth fund without requiring a new government entity. A downside here is that OSC does not have authorization to make equity investments or underwrite more innovative financial instruments and structures—hence only the loan component of the MP Materials deal was done under OSC. If the Trump administration chooses to make OSC its primary investment vehicle, it will need to expand the Office’s capabilities as well as its capital base. Housing such a large fund within DoD raises some additional questions. It may have an unnecessarily narrowing effect, as many of the investments needed to strengthen the defense industrial base do not fall into “defense” sectors strictly defined. At the same time, keeping the focus squarely on national security may in theory reduce the risks of politicization and polarization.

Whichever option the Trump administration chooses—and it is possible to choose both—policymakers must keep the larger goals in mind. As evidenced by the MP Materials deal, strategic investments are critical to any revival of American industry. Nevertheless, a systematic investment strategy so far remains a missing piece in the Trump administration’s overall agenda. Without robust investment capabilities, the other components of this agenda—tax, trade, and deregulation—could very well disappoint, as they have in the past. A strong investment strategy, however, could tie the rest of the administration’s policies together, amplify their effects, and significantly enhance America’s ability to address its national security and economic challenges.