President Trump is using tariffs as a tool for reviving US-based manufacturing facilities, but many economists do not see this happening.
Companies with manufacturing facilities in the US stated that international orders have declined. This resulted in plans for major budget reductions and layoffs. In March, China suspended soybean imports from 3 US companies due to contamination concerns. The Asian country has also halted Boeing aircraft imports, a severe hit to the US’s largest exporter.
The US can’t industrialize overnight
Trump’s argument is that having companies with manufacturing facilities will make America great again. Theoretically, this could work, but it will take decades, according to economist Ha Joon Chang.
However, if enough Americans believe in Trump’s vision and are willing to pay the high price of inflation and tariffs, and if companies relocate to the States, would it work? Chang stated that the US doesn’t only need factories; it needs workers with the right skills, universities that support research and development, and infrastructure.
The cost of manufacturing goods in the US is high, according to economist Will Shih. He said, “It’s still four, five times more expensive to do something in the United States.” Wired reported that several US businesses explored making products domestically, but they found out that it’s too expensive and difficult to source raw materials, plus the lack of skilled workers.
Instead of bringing production back to America, the trade war diverted imports from China to other low-wage countries like Vietnam and the Philippines.
In a recent CNBC survey, 61% of respondents said that it’s more cost-effective to move the supply chain to a low-tariffed country than to relocate to the US. The same percentage answered ‘Yes’ when asked if they feel Trump is bullying corporate America.
Manufacturing jobs will not come back
Industrializing America again through tariffs is a false promise, and trade isn’t the cause of the decline in manufacturing jobs in the US. Trump imposed tariffs on China during his first term, but that failed to attract companies and increase manufacturing jobs.
Trump’s tariffs clearly hurt agricultural regions, especially those exporting to China. Though the US government rolled out $23 billion in farm subsidies, this support only partly offset the damage caused by China’s retaliatory measures.
Interestingly, even though the tariffs did not revive manufacturing or protect agriculture effectively, they were politically successful. Voters became more supportive of the Republican Party and Donald Trump, seeing the policies as a form of solidarity with struggling local industries.
In a recent academic paper, economists from Harvard University explained how countries move from agriculture and manufacturing to service jobs as they get richer. The paper stated:
“World trade in goods expanded rapidly during the 1990s and 2000s, which contributed to a large decline in manufacturing employment in the United States… and Europe.”
Manufacturing jobs moved from richer countries to Southeast Asian countries like China and other parts of East and Southeast Asia. As the US and Europe become richer, technology advances while service work rises.
The paper further explained that rising import tariffs have a positive impact on the service sector, particularly business services. The economists wrote that:
“In all cases, the main employment incidence of these tariffs and subsidies appears to accrue to the service sector rather than to the directly-targeted manufacturing and agriculture sectors.”
Up to 81% of CNBC’s survey respondents stated that they would depend on automation rather than hiring people. Automation company Formic stated that customers increased their reliance on robots by 17% between January and February of this year. Manufacturing jobs will not come back because automation, robotics, and artificial intelligence provide a cost-effective alternative.
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