PRESIDENT DONALD TRUMP has promised to revitalise American manufacturing. His sweeping tariffs are meant to coax firms into reshoring their operations, turning America into an industrial superpower. Mr Trump’s message is appealing because it taps into nostalgia for an era when blue-collar workers could earn middle-class wages toiling on an assembly line. In 1950 nearly one in three American workers were employed in manufacturing, compared with one in 12 today. But the president’s efforts to restore America to its former industrial glory represent a fight against powerful long-term economic forces.
The decline of manufacturing jobs in rich countries has worried policymakers for decades. Manufacturing has historically been seen as an engine of economic growth because it enjoys high levels of productivity and generates spillover effects in other sectors of the economy. Such jobs are often romanticised as offering decent wages to low- and middle-skilled workers. Without these jobs, it is argued, workers have no choice but to accept lower-paying service-sector jobs, leading to a “hollowing out” of the middle class and higher levels of income inequality.
But disappearing factory jobs are an inevitable part of economic development. Historical data from the Groningen Growth and Development Centre, a Dutch research group, show that manufacturing employment tends to follow an inverted-U pattern. During the industrialisation stage, employment shifts from agriculture to industry. As countries get richer, employment shifts once again from industry to services and manufacturing jobs decline (see chart).
Why have rich countries like America deindustrialised? In Mr Trump’s telling, the blame can be placed squarely on international trade. When China and other developing economies were integrated into the global trading system, many firms moved their operations overseas to take advantage of lower costs. According to his administration, this led to the “offshoring of our manufacturing base”, and allowed China to achieve “global dominance in key manufacturing industries”.
There is no doubt that America did see lots of offshoring to China. But most economists agree that the decline in manufacturing jobs is mainly the result of rising productivity. New technologies have boosted output per worker, pushing down the relative price of manufactured goods. One study by Michael Hicks and Srikant Devaraj at Ball State University in Indiana estimated that 88% of the decline in manufacturing jobs in America between 2000 and 2010 can be attributed to productivity improvements. Trade accounted for only 13%.
Changing consumption patterns are also a factor. When incomes rise in poor countries, individuals tend to spend less on food and more on manufactured goods, a phenomenon known as Engel’s law. When incomes rise in rich countries, consumption shifts away from manufactured goods towards services. In 1950 goods accounted for around 60% of American consumption; today they represent just a third of spending with services accounting for two-thirds.
Deindustrialisation is therefore not a symptom of America’s economic decline, but part of getting richer. Trying to resurrect factory work makes little sense when service jobs are more productive and higher paid. The rise of artificial intelligence will accelerate the trend. Mr Trump’s focus on a bygone era is a dead end that will make America less productive and less rich.■