By the end of World War II, the United States was responsible for producing half of all manufactured goods worldwide. It shipped home appliances and cars to a growing middle class and the state of Pennsylvania alone produced more steel than Germany and Japan combined. However, manufacturing’s contribution to the US economy has declined significantly over the past 50 years, now accounting for only 12% of GDP. This decline can be attributed to the influx of cheap Chinese imports in the early 2000s, which resulted in the loss of nearly 6 million American jobs. Currently, US consumers purchase fewer domestically produced goods compared to consumers in Germany and Japan.
However, there are hopes for a manufacturing renaissance in the US due to a surge in factory construction. Since the passage of the Chips and Science Act and the Inflation Reduction Act in August 2022, over 100 construction projects, worth over $200 billion, have been announced, according to research conducted by the FT. This represents more than twice the capital spending commitments in 2021 and over 20 times those in 2019.
Despite this boom, some question its sustainability as it is partly driven by $369 billion in clean energy tax credits and subsidies that are set to expire in 10 years. There is concern that once these policies are no longer in effect, construction activity may decrease.
However, others believe that this construction boom signifies a significant shift in the industry. This surge in building challenges the conventional wisdom that big factories were a thing of the past in the United States. Scott Paul, president of the Alliance for American Manufacturing, states that these new factories are large-scale and create thousands of jobs. He believes that this represents a historic change in the manufacturing landscape.
President Joe Biden’s policies have encouraged foreign investment in semiconductor, electric vehicle, and clean energy plants. Moreover, the disruptions caused by the Covid-19 pandemic highlighted the risks of sourcing materials and parts from distant locations, prompting many US companies to reconsider their production strategies. Growing political risk in China and the effects of climate change on transportation further contribute to the consideration of shorter supply chains.
Since the Covid-19 outbreak, companies’ earnings reports have shown a tenfold increase in mentions of reshoring, onshoring, and nearshoring, according to the IMF. This indicates a reversal of globalization and a shift towards localized production, which has been driven by political factors and the loss of manufacturing jobs in liberal democracies.
One factor driving the localization of production is a global increase in trade restrictions. The Biden administration has imposed restrictions on investment in China’s tech sector, limited tax credits for green vehicles to those produced in the US, and maintained tariffs implemented by former President Donald Trump. These measures have contributed to a reduction in imports from China, according to Scott Paul.
While both Republicans and Democrats in the US support the expansion of manufacturing, there is a lack of consensus on how to achieve this goal. Some 2024 Republican presidential candidates have pledged to repeal the Inflation Reduction Act, despite the fact that a significant portion of the investment is concentrated in Republican states.
In addition to potential policy changes, there are other barriers to sustaining the manufacturing boom. Consultancy firm McKinsey has identified a shortage of critical minerals needed for clean energy, such as rare earth elements for electric motors. The tight labor market is also a concern, as there is a shortage of skilled workers in the industry. The Semiconductor Industry Association predicts that over half of the expected 115,000 new jobs by 2030 will go unfilled due to a lack of skills.
There is also a disconnect between the skills provided by community colleges and the needs of American factories. This is partly because domestic manufacturing, which is mainly carried out by small to medium-sized enterprises, lacks advanced processes. There is no provision in Biden’s legislation to address this issue.
The big question now is what kind of manufacturing will replace the old postwar model. Many businesses still use outdated equipment, resulting in low-tech, low-skill, low-wage, low-cost, low-productivity, and high-carbon emissions manufacturing. The goal is to build a new manufacturing system that is technologically advanced and environmentally sustainable, but it remains to be seen if this can be achieved.
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