The illusion of manufacturing revival under Trump

US’s economic strength lies in services. Effort to artificially revive manufacturing through protectionism won’t pay off

At the heart of the policies of the Trump administration lies a singular, overarching goal: the great American manufacturing comeback. This vision seeks to resurrect the nation’s industrial heartland, believing it to be the key to broader economic, social, and political transformation. However, this pursuit, while appealing to a nostalgic image of American might, risks becoming a costly and damaging endeavour for the nation.

The allure of a manufacturing-centric America is undeniable. The image of bustling factories and industrial prowess is deeply ingrained in our perception of national strength. Yet, this vision is rooted in a bygone era, not the realities of the modern global economy. Today, advanced economies, including the US, are predominantly driven by the service sector. In America, services account for over 80 per cent of all non-farm jobs, while manufacturing comprises less than 10 per cent. America’s economic strength lies in its dominance of software, financial services, entertainment, and other intangible exports, sectors where the nation boasts a significant trade surplus.

This shift reflects a fundamental economic evolution. As societies grow wealthier and more educated, consumer spending gravitates towards services rather than physical goods. The profit margins and growth potential lie in the design, marketing, and sales of high-value services, not merely in the production of physical goods. In 1960, American consumers allocated over 50 per cent of their spending to goods; by 2010, this had fallen to just 33 per cent, with the lion’s share now directed towards services.

Not unique to US

The decline of manufacturing as a share of the overall economy is not unique to the US. Advanced industrial nations, including the UK, Canada, Germany, France, and Japan, have all witnessed similar trends over the past four to five decades. Japan, in particular, serves as a cautionary tale. Despite implementing policies that President Trump advocates — high tariffs, aggressive industrial policy, and a cultural veneration of manufacturing — Japan’s manufacturing sector steadily declined. Moreover, one could argue that these very policies hindered innovation and competitiveness, with government bureaucrats backing outdated technologies while shielding domestic industries from crucial global competition, ultimately contributing to decades of economic stagnation.

The Trump administration’s plan to revive manufacturing through protectionist measures and government intervention runs counter to basic economic principles. Free markets thrive on specialisation and competition, compelling individuals and nations to focus on their areas of greatest strength. Shielding American companies from global competition will not foster innovation; it will breed inefficiency and stagnation. The US has quietly become the dominant player in the service economy, generating a remarkable $1 trillion in service exports (US Bureau of Economic Analysis (BEA). Furthermore, professional and business service jobs in the US pay significantly more on average than manufacturing jobs.

The nostalgic yearning for a manufacturing-dominated past obscures the vibrant reality of America’s current economic strengths. The service sector is the engine of growth in the modern world, generating higher profits and providing a significant number of well-compensated jobs. The effort to artificially revive manufacturing through protectionism is akin to trying to swim against a powerful economic current.

While the US administration may couple tariffs with tax breaks and innovation support for domestic industries, the long history of capitalism demonstrates that genuine innovation is primarily driven by the pressures of competition, not by government incentives. Shielding American companies from the rigours of the global marketplace will likely lead to complacency and a lack of dynamism, the very antithesis of the intended outcome.

A more pragmatic and forward-looking approach would recognise the evolving nature of the global economy and focus on fostering innovation, education, and competitiveness within the burgeoning service sector, ensuring America’s continued economic leadership in the decades to come. Clinging to a manufacturing-centric fantasy risks not a great comeback, but a costly step backward.

Sandhu is Professor of Finance, Institute of Management Technology (IMT), Ghaziabad, and Deb is a Professor of Finance at IIM Sambalpur

Read full article : The illusion of manufacturing revival under Trump – The Hindu BusinessLine