I know Prestowitz.
One theory I have is that “free trade” does indeed beat controlled trade all things being equal. This is especially true if a larger free trade power is competing against a smaller one (US vs. Japan). But if you have relative equals-—or one nation that is much larger (say, China) especially with a quasi-totalitarian government that can off-lay the negative impact of controlled trade on its population over a very long period of time (50-100 years), then everything changes.
The “free” society is eventually hollowed out before the negative impacts of “controlled” trade cause the totalitarian structure to crumble. Now, with the USSR, it was not trying to export products to compete directly with American goods. Quite the contrary, it was just trying to keep its own head above water, and diverting as much as 50% to its military. China is not doing that, and has not, done that.
China, unlike the USSR, is engaged in a Cold War but a war of trade, not military expansion. We should at the VERY least label many of our industries (autos, textiles, computers, aircraft) as “military necessities” and treat them as such, restricting patent transfers and ensuring that these industries are maintained. Even if true free traders like George Gilder or Thomas Sowell are correct, and we develop other industries to replace the industrial core, you cannot fight a war with disc drives and movies.
I agree with most of what you say, but I think that even in the case of the smaller power of Japan we had a real problem. Because the reality is that it wasn’t the large power of America competing with Japan, it was MITI and the keiretsus targeting individual American firms with no one helping them. Big brother America was mostly leaving them to their fate, the machine tool industry being one example, and the side with the power was the ministry of trade and the bank/industrial combines.
I especially agree that more industries have strategic importance that is dangerous to ignore. When my father was stationed at the Pentagon in the late ‘50s early ‘60s there was an office whose sole job was keeping tabs on companies in strategic industries, to make sure that they didn’t get purchased by foreign powers or get put out of business. The concept of institutional memory and the need to be able to innovate and improve in these industries was well understood. I have often wondered if we still have an office like that. I tend to doubt it.