The economic cost of a U.S. manufacturing renaissance

In recent years, the debate over reindustrialization in the United States has centered on the promise of reviving domestic manufacturing through protectionist measures – most notably tariffs on imported goods. Proponents argue that such policies will bring jobs back by shielding American producers from foreign competition. This approach would also address the demands coming from the Rust Belt, a region in the northeastern and midwestern U.S. that experienced substantial industrial contraction in the 20th century.

Yet, this narrative overlooks the fundamental economic tradeoffs: New manufacturing positions can only be created by diverting labor and resources from other, often higher value-added sectors, imposing hidden costs on consumers and investors alike.

Underlying this protectionist shift is a longstanding unease over bilateral trade deficits – an intellectual thread tracing back to mercantilist thought and early 20th-century critiques of unfettered trade. Critics treat a nation’s import surplus as a sign of weakness. But modern trade theory tells a different story: In international trade, deficits and surpluses are merely accounting reflections of specialization and capital flows, and neither inherently damages economic welfare.

In the 1950s, manufacturing accounted for approximately 25 percent of the U.S. gross domestic product (GDP). That share has steadily declined, stabilizing at around 10 percent since 2020. In contrast, the service sector has consistently grown, surpassing 13 percent of GDP and trending upward since 2006. Forcing a return to the 1950s economic structure will result in economic costs, not benefits.

Labor constraints and the economic costs of reindustrialization

The first major obstacle to a reindustrialization strategy in any economy with low unemployment rates is a tight labor market. Currently, the U.S. is not experiencing high unemployment; the rate remains closer to 4 percent than 5 percent. At the macroeconomic level, this implies that the labor market is operating near full capacity. New jobs in manufacturing would not be filled by the unemployed but would instead require drawing workers away from other sectors. In this context, any expansion in manufacturing must come at the expense of contraction elsewhere.

This tradeoff raises an unavoidable economic question: Given limited resources, which sectors generate the greatest value? In the 1950s – a period of high manufacturing employment – real GDP per capita averaged around $18,000. Conversely, between 2015 and 2024, an era of a low-manufacturing economy, real GDP per capita has averaged approximately $63,000. Not only is current income per capita more than three times higher than during the manufacturing-dominated era, but growth has also continued despite the relative decline of manufacturing. In this light, a push toward reindustrialization would entail reallocating labor from higher value-added sectors to those with comparatively lower productivity.

Labor market dynamics also present micro-level constraints. Not all workers are easily interchangeable across sectors. For instance, a financial advisor cannot be quickly or cost-effectively retrained to work in a manufacturing environment. The retraining required for large-scale labor reallocation would be prohibitively expensive, even if technically feasible. It is not realistic to assume that the said financial advisor will move and become a meatpacker (a job typically willingly done by immigrants). Furthermore, it is unclear why this transition would lead to a net economic benefit.

Immigration is the mechanism by which many countries address skill mismatches. In the U.S., the native-born labor force tends to supply mid-level skills, while immigrants disproportionately contribute both low- and high-skill labor. However, recent policy directions – particularly under the administration of President Donald Trump – have shown a reluctance to expand immigration. This stance further increases the economic costs of pursuing a manufacturing revival, as it restricts the inflow of the very workers needed to support such an effort.

The only way to expand manufacturing despite the tight labor market is through automation and robotics. Even corporations that advocate for manufacturing in the U.S. in sectors such as electric vehicles and semiconductors note that their American manufacturing strategies center on automation, not employing significant numbers of people.

The hidden costs of ‘creating’ manufacturing jobs

Since reindustrialization would only “create” manufacturing jobs by displacing employment in other sectors, its net effect on overall employment is negligible. In fact, the likely outcome would be a modern version of the Rust Belt, but with decreased economic welfare. The underlying reason is simple: Labor in the U.S. is significantly more expensive than in many of the countries from which it imports manufactured goods. The reason why labor is more expensive in the U.S. than in other less advanced economies is due to its higher productivity.  As labor produces more output per hour of work, higher pay is expected.

This cost differential has clear implications for consumer welfare. Consider a basic example: A washing machine imported from China might retail for $1,000. Producing the same item domestically, with higher U.S. labor costs, might raise the price to $1,200. Under a reindustrialization policy driven by tariffs or import restrictions, consumers would be forced to purchase the more expensive domestic alternative. The additional $200 paid for the same product represents a direct decrease in consumer purchasing power.

Labor in the U.S. is significantly more expensive than in many of the countries from which it imports manufactured goods.

 

This is not a trivial loss. The $200 now spent on a single appliance cannot be used to buy other goods or services, nor can it be saved or invested. Aggregated across millions of purchases, these hidden costs erode economic efficiency and reduce overall living standards. In this sense, reindustrialization does not make the U.S. consumer wealthier or more secure – it imposes a cost in the form of higher prices and foregone opportunities.

The washing machine example is not just hypothetical. When the Trump administration imposed tariffs on Chinese imports during its first term, the price of washing machines in the U.S. increased by an average of $90. While the tariffs led to the creation of approximately 1,800 jobs in the home appliance sector, the annual cost to consumers was estimated at $815,000 per job (after netting out tariff revenues). This figure reflects not only the higher retail prices but also the broader economic inefficiencies introduced by the policy. Notably, the government did not account for how many jobs may have been lost in other sectors as a result of increased consumer prices and reduced spending elsewhere, costs that remain invisible in official tallies of “job creation.”

Washing machines are also a focus of the current Trump administration, which stated in early April that its current policies aim to generate “better-paying American jobs making beautiful American-made cars, appliances and other goods.” The administration added that domestic manufacturing renewal should also focus on “advanced sectors like autos, shipbuilding, pharmaceuticals, transport equipment, technology products, machine tools,” but it did not specify if such sectors would hire people or make use of automation.

Trade deficits: The wrong premise

At its core, the push for reindustrialization is often grounded in the wrong economic premise: that bilateral trade deficits are inherently harmful. In reality, such deficits are a natural and expected outcome of the global division of labor. A bilateral trade deficit is no more economically damaging than a household’s “trade deficit” with its local grocery store. Consumers routinely purchase food instead of producing it themselves, freeing up time and resources to specialize in other productive activities. This specialization raises overall welfare. Attempting to eliminate a household’s trade deficit with the grocery store would not improve the household’s well-being; it would push them back to a Robinson Crusoe economy.

Just as both the consumer and the grocery store benefit from voluntary exchange, countries engaged in trade – regardless of the direction of the trade balance – derive mutual benefits. The nation running a trade surplus gains net financial inflows, enabling it to run trade deficits with other partners. Meanwhile, the country with the trade deficit benefits from access to imported goods and services at competitive prices. This is not a sign of economic weakness but rather of economic interdependence.

Moreover, trade patterns reflect differences in stages of development. In the 1950s, the postwar U.S. was in a manufacturing-intensive phase of growth. Continued economic progress has since shifted the structure of the U.S. economy toward other higher-value-added sectors, particularly professional and business services. By the 1980s, services were the primary realm of employment in the U.S., accounting for 60 percent of economic activity. And now, over 70 percent of nonfarm employees work in industries such as healthcare, education, professional and business services, leisure and hospitality. By contrast, many developing economies are currently in their manufacturing-intensive stage and export goods to more advanced and affluent economies.

Over time, as their income levels rise, the manufacturing-based countries will probably also transition toward service-oriented, innovation-driven growth. Trade allows each country to operate according to its comparative advantages at any given stage of development. International division of labor is a driving force behind global efficiency and prosperity.

This report was originally published here: https://www.gisreportsonline.com/r/cost-us-manufacturing-renaissance/