Will industrial policy restore American manufacturing leadership?

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.

Regulation and compliance costs

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.

Labor shortages and the skills gap

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.

The tariff regime

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.

The evidence so far

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.

Conclusion

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.

Download the full report here.

© The Hinrich Foundation. See our website Terms and conditions for our copyright and reprint policy. All statements of fact and the views, conclusions and recommendations expressed in this publication are the sole responsibility of the author(s).