The Decline of American Manufacturing: Is it Due to International Trade or Productivity Gains?

The decline in American manufacturing is often blamed on international trade, particularly with China, but research indicates that the primary reasons are productivity improvements and shifts in economic structure. Trump's tariff policies have not effectively boosted manufacturing recovery and have instead raised costs. AI and automation technologies present new opportunities for the manufacturing sector, and investment plans from TSMC and Apple are anticipated to drive transformation. The pharmaceutical manufacturing sector is facing challenges due to trade deficits, and bringing manufacturing back to the U.S. takes time. Polls indicate that Americans are split on tariff policies.

Long-term Trends in Manufacturing Jobs

According to a report by The Economist, in 1950, nearly one-third of the U.S. workforce was engaged in manufacturing jobs, but by 2025, this proportion has dropped to about one in twelve. This change is not a sudden event but aligns with the general pattern of economic development. Historical data from the Groningen Growth and Development Centre in the Netherlands shows that as a country becomes wealthier, the workforce shifts from agriculture to industry and eventually to services, with manufacturing employment showing an inverted U-shaped trend.

Research indicates that the main reason for the decline in manufacturing employment is increased productivity. A study by Michael Hicks and Srikant Devaraj at Ball State University in Indiana estimates that between 2000 and 2010, 88% of the decline in U.S. manufacturing employment can be attributed to productivity improvements, with only 13% related to trade.

The China Impact 1.0 and Global Supply Chain Restructuring

Since China joined the World Trade Organization (WTO) in 2001, it has rapidly become a global manufacturing hub. According to Cathay Bank's "U.S.-China 2025 Annual Economic Report," this phenomenon, known as "China Impact 1.0," led to the closure of some factories in advanced economies and the loss of middle-class manufacturing jobs. In recent years, China has further climbed up the value chain, becoming the world's largest producer of electric vehicles.

However, after the U.S. imposed tariffs on Chinese goods, supply chains have been adjusted. Cathay Bank notes that the proportion of U.S. imports from China fell from 22% in 2017 to 13% by 2024, with some production shifting to countries like Mexico and Vietnam.

Extensive Tariff Policies and Challenges to Manufacturing Recovery

The extensive tariff policies implemented by the Trump administration aimed to encourage companies to relocate production lines back to the U.S. However, MIT Technology Review points out that these high and poorly designed tariffs have actually increased the cost of key raw materials, suppressing manufacturing investment. Building new factories and supply chains typically requires years or even decades of stable investment, and the immediate cost increases and market uncertainty brought by tariffs have dampened investment willingness.

According to data from the Kansas City Fed, the manufacturing activity index fell to -4 in April 2025, remaining at zero or below for over two consecutive years. The new orders index also continues to be negative, indicating weak demand. The employment index has been negative for three consecutive months, reflecting a weak manufacturing job market.

Additionally, manufacturing surveys from the New York Fed, Richmond Fed, and Philadelphia Fed also show declining confidence among manufacturers, with significantly weaker expectations for shipments and orders over the next six months.

New Opportunities with AI and Automation

Despite the challenges of tariffs and supply chain restructuring, breakthroughs in artificial intelligence (AI) and automation technology bring new hope to U.S. manufacturing. MIT Technology Review reports that these new technologies are beginning to be deployed, and in the future, they are expected to enhance the competitiveness of U.S. manufacturers in low-wage economies.

Large investment plans are also driving the transformation of manufacturing. According to Cathay Bank, TSMC has committed to investing $100 billion to build five wafer fabrication plants in the U.S., and Apple plans to invest $500 billion to expand domestic manufacturing and R&D operations. These investments are expected to gradually show results in the coming years.

Case Study: Pharmaceutical Manufacturing

The pharmaceutical industry is another area affected by international trade. According to research by The Motley Fool, the U.S. has a $115.5 billion trade imbalance in pharmaceuticals, mainly from Ireland, Switzerland, Singapore, India, and Germany. Although the U.S. is the world's largest importer and the second-largest exporter of pharmaceuticals, the deficit continues to widen. Building new pharmaceutical manufacturing facilities typically takes five to ten years and costs up to $2 billion, indicating that even with policy support, the return of manufacturing is not a short-term outcome.

Public Perception and Policy Controversy

According to an ABC News poll, despite economists generally being skeptical of tariff measures, 59% of Americans still believe tariffs will help create manufacturing jobs. Among Republican supporters, 90% hold this view, and 60% of independent voters also support it. However, 68% of Democratic voters believe tariffs will harm manufacturing jobs, and 90% think tariffs will drive up inflation.

References

• Did international trade really kill American manufacturing?
• Sweeping tariffs could threaten the US manufacturing rebound
• Kansas City Fed Manufacturing Activity Index Declines in April; Expectations Diminish - Haver Analytics
• Monthly Advance Report on Durable Goods Manufacturers' Shipments Inventories and Orders - Press Releases
• China remains defiant as White House floats softening steep tariffs in brutal trade war
• Pharmaceutical tariffs: Which countries does the U.S. import the most from? | The Motley Fool
• U.S.-China 2025 Annual Economic Report
• Nearly two-thirds of Americans disapprove of Trump tariffs, with inflation a broad concern: POLL