How did the US lose its position as a global manufacturing powerhouse, and what can Trump's tariffs achieve?

An analysis by The Wall Street Journal points out that Trump claims his tariff plan will restore the strength of American manufacturing, but economists are skeptical of this claim, as history also shows.

In the 1950s, about 35% of private sector jobs in the U.S. were in manufacturing. Today, there are 12.8 million manufacturing jobs in the U.S., accounting for 9.4% of private sector employment.

Trump stated that his broad tariff policy aims to bring manufacturing back to the U.S. Economists expressed skepticism, believing that tariffs are unlikely to achieve this goal and are concerned that the damage caused will outweigh any potential benefits.

To understand whether manufacturing can return to the U.S., it is first necessary to understand how the U.S. lost its global manufacturing leadership.

The Rise of American Manufacturing

The U.S. became a global manufacturing powerhouse due to multiple factors working together.

In the early 20th century, the U.S. was the first to adopt interchangeable parts and organized factories for mass production. Susan Helper, an economist at Case Western Reserve University, pointed out that World War II greatly boosted the U.S. manufacturing capacity while severely damaging competitors in other countries.

After the war, more Americans entered the middle class, driving a surge in demand for durable goods like cars and appliances for newly purchased homes. At that time, the U.S. was the largest buyer of domestically produced goods.

Many products were considered high-tech at the time, such as dishwashers, televisions, and jet planes, often innovations that emerged during wartime.

Choosing to manufacture these products in the U.S. rather than elsewhere was because maintaining technological leadership required close collaboration between research teams and factories.

In addition, the rise of secondary education in the early 20th century gave the U.S. the most educated workforce in the world, providing support for the development of manufacturing.

The Service Sector Takes Over

After the 1950s, the role of manufacturing in the U.S. economy began to decline. Part of the reason was that Americans became wealthier and shifted more of their consumption expenditure to service sectors like tourism, dining, and healthcare.

"When you become wealthier, you can only buy so many cars, then you start consuming services," explained Helper.

Jobs also shifted, with more people working for service sector companies like hotels, banks, law firms, and hospitals. Despite economic recessions and recoveries, from the mid-1960s to the early 1980s, overall manufacturing employment remained stable while service sector employment continued to grow.

Beneath the surface, many non-durable goods (such as clothing) that Americans bought were being produced in different locations. A large amount of production shifted to southern states where labor costs were lower.

Meanwhile, developing regions with lower labor costs, such as Latin America and Asia, began increasing production of non-durable goods. The U.S. started importing more of these products. Over time, this trend spread to lightweight durable goods like blenders.

The Chinese Impact

Starting in the 1980s, the situation began to change. U.S. manufacturers of non-durable goods found it increasingly difficult to compete with low-wage countries. This trend became even more apparent in the 1990s, partly due to the North American Free Trade Agreement reducing tariffs on Mexican goods.

Job losses also occurred. Susan Houseman, an economist at the Fort Wayne John Chapman Employment Institute, noted that as developing countries like South Korea built up their own steel industries, global overcapacity emerged, and U.S. steel companies began losing significant numbers of jobs.

However, compared to the changes in the 1980s and 1990s, the impact after China joined the World Trade Organization in 2001 was far greater. China opened its market to foreign investment and gained access to the global market.

Gordon Hanson, an economist at Harvard University, said: "Suddenly, we faced a low-wage country with massive production capacity, which was a major shift."

The U.S. had previously faced import competition from other countries, but none had populations much larger than its own. Moreover, China's rise was much faster than that of Japan and others.

In 1999, China's total exports were only one-tenth of those of the U.S., even less than Sweden's. But by 2008, China had surpassed the U.S. to become the world's largest exporter of goods.

Manufacturers of low-technology products, especially, were hit hard, such as furniture and small household appliance makers. Hanson documented alongside David Autor and David Dorn how the influx of cheap Chinese goods devastated manufacturing communities in the South and Midwest of the U.S., leaving workers in difficult situations.

They called this phenomenon the "China shock," a term that has since become widely known.

The Current Situation

As Chinese-made goods became more prevalent, the U.S. became more proficient in the service sector.

Many of these services cannot be traded globally, such as someone from London not easily going to San Diego for dental care. However, some services, such as software and other intellectual property-related content, can be traded globally.

For example, in 2023, the U.S. exported $24 billion worth of advertising services. Currently, the U.S. annual service export total exceeds $1 trillion, far surpassing any other country.

In addition, due to many companies shifting ownership of intellectual property developed in the U.S. (such as patents and trademarks) overseas to avoid taxes, the U.S. service export data is significantly underestimated. Ireland is one of the main locations for these shifts in intellectual property and is therefore statistically ranked as the fourth-largest service exporting country in the world.

In a new study, Hanson and Enrico Moretti found that in 1980, manufacturing accounted for 39% of high-paying jobs in the U.S. (adjusted for education and other factors). By 2021, this proportion had dropped to 20%. During the same period, the proportion of high-paying jobs in finance, professional services, and legal fields rose from 8% to 26%.

Can Manufacturing Return?

Economists have long opposed the widespread use of tariffs, and this stance remains unchanged.

They believe that the increase in prices of goods and services brought about by tariffs will suppress consumer and business spending - including spending on domestically produced goods. This will offset any benefits from increased domestic production and additional government revenue.

In other words, although some manufacturers may benefit, the situation for most Americans will worsen.

Hanson noted that even if manufacturing employment grows by 30%, the proportion of manufacturing jobs in the private sector would only reach around 12%, far below previous levels.

Houseman pointed out that manufacturing jobs can drive more employment in ways that other industries cannot. She is part of a growing group of economists who believe that the U.S. should indeed produce more critical products domestically, even though this comes at a cost. It should be done in a more targeted way rather than through comprehensive tariff imposition.

She gave the example of increasing domestic production of high-tech products like semiconductors, which is not only about creating jobs but also concerns economic and military security.

But this logic does not apply to many low-cost goods.

"Are we really going to start producing T-shirts ourselves again?" Houseman said. "Is that really that important?"

Original Source: https://www.toutiao.com/article/7493381013767258660/

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