Ending
decades of relative decline in US manufacturing is not something that can be reversed
easily or in a short space of time. Putting American manufacturing back on par with
where it was before the “China Shock” would reduce global trade tensions and reverse
the decline in US productivity growth – but it might also take 10 years. If one
of the Trump administration’s goals is to break the US’ critical trade dependencies,
securing supplies from like-minded allies would stand a far higher chance of success.
Reversing
decades of decline in U.S. manufacturing will be a long and difficult process,
potentially taking a decade to regain pre–“China
Shock” levels. Although the Trump administration’s industrial policy—through
the Infrastructure Investment and Jobs Act, CHIPS and Science Act, and
Inflation Reduction Act—has spurred a surge in manufacturing investment,
structural challenges remain.
China’s
manufacturing value-added, at $4.7
trillion, is now 62%
larger than that of the U.S., highlighting the scale of the
task. To close the gap, the U.S. would need a 40% rise in manufacturing output, 5 million additional workers,
and $1–1.5 trillion in new
capital. However, high
regulatory costs, labor shortages, and tariff-related distortions
pose major hurdles.
While
early evidence shows success—such as semiconductor investment jumping to $90 billion in 2024—sustained
progress will depend on policy continuity and international cooperation. In the
near term, diversifying
supply chains with allied nations may offer a more achievable
route to reducing strategic dependencies than full-scale manufacturing
self-sufficiency.
The rise of China to pre-eminence in world manufacturing has
become an existential challenge for the United States. Tariffs in the first Trump
administration and the increasing use of industrial policy since then, such as the
Infrastructure Investment and Jobs Act, the CHIPS and Science Act, and the Inflation
Reduction Act, mark a ratcheting up of US efforts to re-industrialize its economy.
As of 2023, China's manufacturing value-added was US$4.7 trillion
whilst America's was US$2.9 trillion. China accounted for 29% of the world total
of US$16.2 trillion, whilst the United States accounted for just 18%. Thus, China's
manufacturing output in value terms is about 62% larger than the US, despite having
an economy which is 36% smaller. The undervaluation of the renminbi, which trades
at about 50% of its purchasing power parity value, means that nominal dollar comparisons
probably significantly understate China's manufacturing dominance relative to the
United States.
When viewed through the prism of the US goods trade deficit,
which stands at about US$1.2 trillion, the task the Trump administration has set
itself becomes clear. Four broad sectors account for about 80% of the US' overall
trade deficit: pharmaceuticals; vehicles other than railway or tramway rolling stock;
electrical machinery and equipment; and nuclear reactors, boilers, machinery, and
mechanical appliances. Although these sectors are broad, they incorporate relatively
high value-added products of strategic importance. China runs its largest trade
surplus in three of the four sectors, with pharmaceuticals being the exception.
If the Trump administration's aim is to break the long-running
trade deficit and critical trade dependencies, it is imperative to understand the
resources that will be needed to attain this goal. On paper, to return the US economy
to a situation where it is manufacturing a similar total value of goods to that
which it is consuming requires a 40% increase in manufacturing value-added; a reallocation
of about 3% of the employed workforce, or 5 million people, from either existing
employment or into the workforce; and perhaps a US$1-1.5 trillion increase in the
capital stock associated with high value-added manufacturing. There are significant
obstacles to achieving any of these.
The growth in regulation and the associated cost of compliance
have been a significant headwind for US industry in the past decade. According to
the US National Association of Manufacturers, it now costs the sector US$349 billion
per year to comply with federal regulations on health and safety, the environment,
tax, and homeland security. This equals a staggering US$29,000 per worker, but because
of the fixed nature of many of these costs, the cost per worker is around US$50,000
for smaller companies employing less than 50 workers.
For context, the average wage in US manufacturing is about US$100,000
a year and valued-added per worker is US$228,000. This means more than 12% of the
value being created by a manufacturing worker is being eaten up by compliance costs.
The absolute cost of compliance in the US would cover the cost of employing two
workers in China, or, to look at it from another angle, compliance costs per worker
in the US are about the same as value-added per worker in China.
While there are just under 13 million people employed in US
manufacturing, there are also 500,000 unfilled vacancies. If we consider that about
2 million Americans enter the workforce each year for the next 10 years, then just
replacing the retiring manufacturing workforce requires 14% of the new workers to
enter manufacturing as a career. To add a net 5 million workers, which we estimate
to be the requirement for an additional US$1.2 trillion of manufacturing value-added,
would mean that an additional 25% of new labor force entrants
would have to enter manufacturing.
Meanwhile, there is considerable uncertainty around our 5 million
increase in the workforce estimate. On the one hand, it is presumptuous to assume
that a work force can be expanded by 40% rapidly without a loss of average productivity.
On the other hand, increased levels of automation, robotics, and AI have the potential
to make the capital stock more efficient and enhance labor
productivity. However, in either eventuality, the workforce will have to change
substantially in nature, either by size or by expertise and probably both.
Some have argued that the Trump 2.0 tariff regime will act as
a further catalyst to boost domestic manufacturing and level the playing field for
American companies, but it will likely come at a cost too. There are at least three
ways in which the tariffs could backfire. Firstly, US companies will have to work
harder to sell abroad, as Trump's tariff whiplash severely dented the "American
brand." Secondly, many of the tariffs will hit intermediate goods that are
inputs into US produced manufactured products. These will become more expensive,
damaging their competitiveness in third-party markets.
Most importantly, if the US' re-industrialization effort falls
short of its goals or takes many years to achieve, the security of supply chains
will require the co-operation of like-minded and/or geographically proximate countries.
As things stand, deeper integration between would-be partners is made problematic
both as a result of the direct impact of trade barriers and their indirect impact
on trust and the willingness to engage with the US.
There is considerable supportive evidence that US industrial
policy is having an impact on investment numbers. Real private investment in manufacturing
structures is now running at more than double the rate in the 2017-2021 period.
It is important to note that real investment in electronics has been particularly
strong – largely as a result of the CHIPS Act. According to the Peterson Institute
of International Economics, semiconductor manufacturing investment in the US soared
to US$90 billion in 2024 from an average of US$7 billion per year in the decade
to 2021.
Anecdotally, there have been plenty of announced projects that
would support the idea that the CHIPS Act is proving successful and it seems likely
the macro data will support this by showing equipment investment, production growth,
net import contraction, and employment growth. All these, however, assume the incentives
and substance behind the CHIPS Act remain in place.
Ending decades of relative decline in US manufacturing is not
something that can be reversed easily or in a short space of time. It has taken
China decades to achieve its current position of manufacturing pre-eminence. The
clustering effects, infrastructure requirements, and economies of scale all lead
to momentum which tends to reinforce itself through innovation and customer inertia.
When the momentum has been down – as it has been in the US – it takes time and concerted
effort to reverse it.
If the goal of the Trump administration is to reverse the decline
in US manufacturing and put it back on par with where it was before the "China
Shock," then the pure economic arithmetic looks challenging but plausible over
perhaps 10 years. A less ambitious goal of immunizing the US from Chinese economic
coercion by securing supplies from like-minded countries would stand a far higher
chance of success in a timeframe that makes sense given the current geopolitical
situation.