Notably, the industries most closely tied to “national security”—today’s trendy excuse for new U.S. protectionism or subsidies—haven’t experienced significant historical declines and in most cases have expanded. This includes goods directly involved in national defense (e.g., tanks, missiles, and munitions), as well as those indirectly related, such as metals, electronics, motor vehicles, aerospace products, ships, medical equipment, energy, chemicals, and pharmaceuticals. Although certain subsectors’ output has risen and fallen over different periods (to be expected given business cycles, changing U.S. military operations, and other factors), the overall picture is one of stability and health, not decline.
These data refute the common myth that “unimportant” American industries have driven gains in U.S. manufacturing output—the “we make potato chips, not microchips” argument. The truth is, we make a lot of both.
The data also reveal a more complicated, and benign, picture of American manufacturing over the last few decades: a flexible and dynamic sector that is generally responsive to market forces. Surely, some industries have shrunk, but many others have expanded. Overall, we traded a portion of low‐tech or dying industries for a larger amount of higher‐tech, often‐thriving industries. (As wage data from the Bureau of Labor Statistics show, moreover, the latter also tend to pay better.)
It’s a story of disruption, not “deindustrialization.”
Disruption, of course, can still be painful for certain manufacturers and workers. But the sector’s flexibility also can prove critical in times of unexpected national emergency, and recent experience bears this out. According to a new U.S. International Trade Commission report on trade and domestic production of essential medical goods during the pandemic, for example, U.S. manufacturers and global supply chains responded quickly to boost supplies or make new drugs, medical devices, PPE, cleaning supplies, and other goods. Particularly resilient were the industries making pharmaceuticals, medical devices, N95 masks, and cleaning products (including hand sanitizer), but even in other areas where the U.S. had less pre‐existing production capacity, the ITC found that serious shortages were short‐lived, filled in quickly by imports and new U.S. production (either new companies or established ones changing their production lines to make high‐demand products). Only rubber gloves continued to be a concern going into 2021, primarily due to the limited availability of natural rubber (sourced primarily from Malaysia).
Overall, the ITC report shows a large and diverse U.S. medical goods market in which both domestic production and imports vary according to comparative advantages and worked in tandem to satisfy consumer demand—demand that skyrocketed in response to a once‐in‐a‐generation pandemic and was, by far, the biggest supply chain challenge. In short, the pandemic severely stressed the system, but the system ended up working pretty well, and U.S. manufacturers played a prominent role.
Anecdotal evidence backs up the ITC’s findings. Many U.S. companies shifted operations to produce high‐demand PPE during the pandemic, an example of the U.S. manufacturing sector’s pre‐existing industrial capacity and the aforementioned flexibility. Others were drawn into the market: online crafts retailer Etsy, for example, sold more than $600 million in face masks during 2Q and 3Q 2020 (12 million units in April alone), and “more than 110,000 sellers sold at least one mask between April and June.” Although short‐term gaps in U.S. PPE supply inevitably emerged (due to that astronomical demand, pre‐pandemic stockpiling mistakes, or other issues), they were filled in by foreign producers and the aforementioned stockpiles. As of August 2020, for example, NIOSH‐approved N95 masks were readily available for individual or bulk purchase on websites like Amazon.com. Several members of Congress have even gone so far as to write to President Biden this week complaining about a glut of U.S.-made PPE (which now the government obviously needs to buy or something)!
Surely, things weren’t—and still aren’t—perfect out there, and some gaps in supply could take months (if not longer) to get right. But the situation is hardly the doom and gloom that economic nationalists, preaching “deindustrialization,” predicted in the spring. That result is primarily due to the rapid adjustment of the U.S. manufacturing sector (and those dreaded global supply chains) to the new pandemic reality—an adjustment that the nationalists apparently never saw coming.
Summing It All Up
So the U.S. manufacturing sector’s declining share of GDP or shrinking workforce parallel similar trends around the world and tell us little about the sector’s overall health. Meanwhile, the most revealing data—on output, investment, and financial performance—show a large and dynamic industrial base that remains a global powerhouse. Some low‐wage, low‐tech, or dying industries have declined, but many others have grown (while others still have treaded water). That’s hardly “deindustrialization.” (And whether the U.S. government should nevertheless try to “reshore” those low‐tech industries is a question for another time.)
Now, just because things aren’t as dire as claimed doesn’t mean there aren’t plenty of policies that the U.S. government could implement to help make the manufacturing sector even stronger. I detail a lot of these at the end of my paper, but here’s a shortlist:
Unilateral liberalization of tariffs on industrial inputs. President Trump’s tariffs—and others like them—have been repeatedly found to harm the U.S. manufacturing sector and antagonize allies while providing little long‐term benefit to the protected domestic industries at issue. Eliminating import restrictions—and reforming the laws that let them be imposed so easily—would thus provide an immediate boost to the U.S. manufacturing sector.
New trade and investment agreements with U.S. allies. The U.S. government should liberalize trade and investment with allies by (1) expanding the National Technology and Industrial Base (a narrow agreement that allows member countries—currently the U.S., Canada, UK, and Australia—to pool critical resources and R&D) to include allies and innovative manufacturing nations, such as Finland, Germany, Japan, the Netherlands, South Korea, Singapore, Switzerland, or Sweden; and (2) considering new comprehensive free trade agreements with these and other countries.
Additional corporate tax reforms. The federal government and the states should further reduce corporate tax rates, which combined remain above the OECD average and are shouldered in large part by workers and consumers. The government should also expand and make permanent the 2017 Tax Cuts and Jobs Act’s temporary “full expensing” provision (“100 percent bonus depreciation”), which allows U.S. businesses to write off certain business investments immediately and fully. These reforms would benefit all companies, but would particularly boost the U.S. manufacturing sector. Researchshows, for example, that full expensing increases investment, jobs, and economic growth, and that a permanent and expanded version (covering structures like factories) would especially benefit U.S. manufacturers.
Improving human capital. To address immediate concerns regarding the dearth of qualified U.S. manufacturing workers in science, technology, engineering, and mathematics (STEM) fields, the government should significantly expand high‐skilled immigration, restrictions on which have been shown (1) to encourage multinational corporations to offshore jobs and R&D activities to their affiliates in more welcoming countries; and (2) to benefit potential U.S. adversaries, especially China, in terms of new jobs, new businesses, and new innovations.Longer term, private sector training and apprenticeship programs, such as the employer‐funded Federation for Advanced Manufacturing Education (FAME) program, can equip native workers for the future needs of advanced manufacturing industries and supplement federal, state, and local government educational policies.
Eliminating “never needed” regulations. According to the ITC, onerous federal regulations were among the biggest impediments to increased U.S. manufacturing of essential medical goods during the pandemic. At the same time, state and federal governments temporarily suspended hundreds of these regulations to boost domestic production, investment and adjustment, revealing in the process these “never needed” regulations discouraged economic growth and dynamism while providing little, if any, public benefit. Repealing or reforming these regulations would therefore not only boost economic growth generally but also American manufacturers directly—all to the benefit of economic “resiliency.”
As noted, the paper has plenty more on trade, national security, and economic resilience, if you’re interested. Enjoy.
Chart of the Week
West Virginia is just dominating its COVID vaccine rollout.