Richard Vague advises Donald Trump to stop charging around and do some research.
The US has had a particularly woeful trade deficit since the 1980s, and this article will consider why that matters to the US, how it lost its trade dominance, and what can be done about the trade deficit now. It will explain the ineffectiveness of Donald Trump’s approach to trade and outline a path forward that would enhance America’s trade profile.
This article is written from the perspective of the United States, and those writing from other countries might well have different policy prescriptions. However, my aim is not for America to achieve a trade surplus. Instead, I simply hope for the US to reduce its trade deficit and the disadvantages associated with it—to explore practices and policies that could halt the decline in good-paying jobs and enhance the lives of American workers. These improvements do not necessitate imposing a trade deficit on another country; indeed, the most desirable and sustainable system is one where each country’s exports and imports are roughly balanced.
I generally advocate for free trade and a world without significant trade imbalances, but not as an inviolable article of faith. While I will argue here for at least some carefully measured role of tariffs in global trade, Trump’s flurry of changes and reversals—by one count over one hundred in the past two months—does not conform to that criterion.
Why is Trade success important?
A country’s trade balance matters for several reasons. For the United States, it is significant as it indicates whether it is winning or losing in the global battle for supremacy in the emerging industries that will shape the future. These industries include telecommunications, electric vehicles, artificial intelligence, solar power, robotics, drones, genetic engineering, supercomputing, and more.
While the US was paying inadequate attention China used its massive central government planning and investment to match or overtake it in many cutting-edge industries.
A country’s trade surplus or deficit is often largely attributed to policies such as tariffs; however, in many respects, it serves as a report card on the desirability of the products and services produced by that country. Do households across the globe prefer Fords, Chevrolets, and Teslas to BMWs, Toyotas, and BYDs? Do they favour phones from Apple over those from Samsung? Does a given country have an abundance of essential products such as oil or wheat? The more innovative, coveted, or cost-effective a country’s products and services are, the more likely it is to have a favourable trade (or current account) balance. As things stand today, the scales are increasingly tipped towards China, as global customers buy ever more of its BYDs, its Huawei communications products, and even its core iPhone components.
While the US was paying inadequate attention, China utilised its extensive central government planning and investment to match or surpass it in numerous cutting-edge industries. Together, China’s businesses and government are dedicated to making the necessary investments to succeed in this competition, while this commitment is not (yet?) evident in the United States.
The world has not truly seen a global battle for business leadership like this since America wrested manufacturing dominance from Britain 200 years ago in the industrial revolution—but make no mistake, the US is now engaged in a business leadership battle with China that will have profound economic consequences, including the ability to provide robust levels of wages and a reasonable share of wealth for its citizens.
For a cautionary tale of the consequences of losing a competitive position in these industries, we need look no further than Japan. The seemingly unassailable Sony Corporation and numerous other Japanese companies slipped in the 2000s, and Japan’s share of global GDP declined along with it, from a remarkable 18 percent of global GDP in 1994 to a mere 4 percent in 2025.
The trade balance also matters for the crucial and often overlooked reason that a trade surplus enables a country to grow its economy without increasing its debt, thereby enhancing its debt-to-GDP ratio. GDP consists of consumption spending, investment spending, government spending, and net exports; therefore, if net exports are positive, that boosts GDP (while negative net exports detract from GDP). In contrast, a trade deficit, as observed in the US, indicates that a country is accumulating private sector debts without an accompanying increase in GDP, resulting in a debt burden on households and companies that is not matched by a domestic economic gain.
It is an often-overlooked fact that economies simply do not grow without a corresponding increase in debt from some source—whether domestic or foreign. In fact, it is this debt growth that drives GDP growth. Therefore, if you purchase a BMW imported from Germany, that transaction contributes to Germany’s GDP, while the car loan you secure to facilitate that purchase adds to US private debt totals. Conversely, if a German buys a Tesla, this contributes to US GDP, but the debt incurred by the German purchaser increases Germany’s private debt. (I’ve oversimplified the reality of different car components coming from various countries to illustrate the point).
Over the past twenty years, Germany’s remarkably high export surplus has been fundamental to its consistently low levels of private (and public) debt. In this regard, Germany exemplifies the benefits of a trade surplus for growth. Its net exports have contributed to the country’s growth without increasing its private debt. A high level of net exports has also been crucial to GDP growth in China and several other countries. Spain is a recent and vivid example of this. Its private sector debt to GDP was a perilous 230 percent in 2009, which triggered its disastrous crash during the Global Financial Crisis. However, because it subsequently—and deliberately—transformed from a net importer to a net exporter, it has managed to grow its economy without excessively depending on private debt growth, and its private debt ratio has remarkably improved to 122 percent.
The opposite has generally occurred in the US, and its private debt ratio now stands at 143 percent compared to 99 percent in 1980, before its trade deficit began to balloon.
Increasing another country’s GDP while escalating your own country’s private sector debt significantly contributes to the loss of economic dominance—and yet, this results from a trade deficit that most people do not understand or are even unaware of, to the detriment of policymaking.
Trade success, then, matters on its own terms as a means to enhance the US’s GDP without increasing debt, and it also serves as a bellwether of global economic power and leadership.
How did America become a trade juggernaut?
Throughout its history, and particularly as it was becoming the world’s largest economy in the late 1800s, the United States emerged as one of the globe’s most prominent advocates and practitioners of tariffs.
At its founding, the US was (briefly) a vigorous advocate of free trade—and with very good reason. After the Revolutionary War, a resentful Britain excluded America’s merchants from access to lucrative markets. Robert Morris, a leading merchant and financier during the war, famously wrote that trade should be “as free as the air.” America’s merchants were shut out, and they wanted in.
However, in the nineteenth century, as its manufacturing sector became dominant, the US began to implement protective tariffs with the same vigour with which they had previously advocated free trade. These tariffs generally ranged from 30 to 50 per cent and reached as high as 60 per cent. America required tariffs because Britain, its chief rival, possessed superior manufacturing capability and offered better products at lower costs than American businesses could. Without tariffs, US manufacturers would likely have succumbed to that competition and repeatedly found themselves overwhelmed by the influx of better and cheaper British goods.
Tariffs proved so effective that the US rapidly became the world’s dominant manufacturer.
America responded by appropriating Britain’s manufacturing intellectual property and implementing these highly protective tariffs to afford its manufacturers a chance. As President James Monroe told Congress, the country needed to “cherish and sustain our manufactures.” President Abraham Lincoln vigorously advocated for protective tariffs as well. For some time, tariff management was one of the most critical activities at the highest levels of the US government, and President William McKinley reportedly carried notebooks detailing hundreds of different tariffs.
These tariffs proved so effective that the US swiftly became the world’s dominant manufacturer, boasting an economy that eclipsed Britain’s in the early 1860s and China’s around 1890, thus becoming the largest economy globally. By the onset of World War I in 1914, the US economy was as substantial as those of Britain, France, and Germany combined—a title accomplished while it maintained the world’s highest tariffs. Although economists frequently associate high tariffs with elevated inflation, the US experienced near-zero inflation during most of this period—even often negative—despite these high tariffs.
Unsurprisingly, trade and tariff policies provoked vigorous internal disagreement; for instance, in the years leading up to the Civil War, the industrial North supported tariffs, while the agricultural South opposed them.
The US began lowering tariffs in the 1910s, after it had become the world’s most efficient and dominant producer; in other words, at the point when US manufacturing was so superior that free trade worked to its advantage. This occurred after the country had enacted an income tax to help support WWI and maintained that tax thereafter.
There was another crucial ingredient to America’s manufacturing and trade success aside from protective tariffs, and that was its industrial policy: the US government selected industries to support.
There was a significant interruption to this free trade policy during the Great Depression, and many have since attributed that depression to the Smoot-Hawley Tariff. However, that explanation does not withstand close scrutiny. To begin with, exports accounted for only 6 percent of GDP at that time, compared to 11 percent today. Trade was not a substantial enough factor to warrant blame for much, especially not for a massive depression. In 1929, US GDP was $105 billion, collapsing to nearly half that amount at $57 billion by 1933. Such a dramatic plunge is unimaginable today—by comparison, during the 2008 crisis, US GDP declined by only 2 percent. In 1929, exports were a mere $6 billion to start with, and fell by $4 billion, a sum that cannot account for the nearly $48 billion drop in GDP. Instead, the real culprit behind this catastrophic GDP collapse during the Great Depression was a $25 billion decline in private sector debt triggered by bank runs and the many bankers demanding immediate repayment of loans.
However, free trade re-emerged with great force after the Depression and World War II, as US manufacturing was then at its peak.
There was another crucial ingredient to America’s manufacturing and trade success, aside from protective tariffs, and that was its industrial policy: the US government selected industries to support and then vigorously did so. Some contend that the government shouldn’t “pick winners” by funding research and development, insisting that the private sector should drive innovation. However, that is decidedly, and quite simply, not the history of the US, which time and again has chosen to support select industries.
During the American Revolution, the US government supported the colonies’ modest manufacturing efforts, foreshadowing Alexander Hamilton’s 1791 “Report on the Subject of Manufactures,” which urged the US to embrace the Industrial Revolution.
In the early 1800s, state funding for the Erie Canal spurred economic transformation and development, as approximately 85 per cent of the cost of that canal was financed by the New York state government and local governments along the route. Consequently, the cost of transporting freight from Buffalo to New York City remarkably declined from £100 to £5 a ton, and transportation time dropped from twenty days to six. This success inspired others, and by 1860 over 3,600 miles of canal had been built in the US, more than 60 per cent of which was financed by state governments.
America’s most important industry of the 1800s was railways, and the US government significantly subsidised that industry, including its extensive land grants for the Illinois Central and epoch-defining Transcontinental railways. Abraham Lincoln ran for office in 1832 on a platform of publicly funded internal improvements, and later, as a lawyer, his largest client was the Illinois Central. Public financing of Samuel Morse’s telegraph line in 1844, the founding of the National Board of Health (precursor to the NIH) in the 1870s, and the construction of the Panama Canal in 1914 all underscore the government’s pivotal role in national progress.
In June 1941, in response to a proposal by MIT engineer Vannevar Bush, President Franklin Roosevelt established the Office of Scientific Research and Development. The results of its work — mass production of penicillin for battlefield wounded and proximity fuses that transformed anti-aircraft fire, to say nothing of the Manhattan Project that produced the atomic bomb— made a powerful case for government and university partnerships in research and inspired the National Science Foundation (NSF), which has since funded innovations too numerous to count.
The current administration is now de-funding parts of the very research infrastructure that has powered the innovation economy.
Massive government expenditures for the Cold War space and arms races further pushed technological boundaries; most notably in microchips, where government demand drove costs down from $32 per chip in 1961 to $1.25 by 1971. This enabled the rise of affordable computers. The Small Business Investment Act in 1958 established SBIC funds that helped meet the early capital needs of companies such as FedEx, Apple and Intel.
(Since I most often stand against wars, it is not lost on me that much of America’s manufacturing might and its government’s motivation to invest in R&D has historically been in service of its military establishment. The same is decidedly true of China today.)
The iPhone is arguably the most iconic and consequential artefact in the world today. At least twelve major technologies integrated within the iPhone stand out as features that are ‘enablers’, all of which were developed using technologies that emerged directly from, or were significantly enhanced by, large-scale government research efforts.
The pattern is clear and factually ironclad: government-backed research and infrastructure in partnership with private industry time and again have laid the groundwork for America’s industrial and technological leadership. For many of the most significant economic developments in US history, it wasn’t merely the marketplace that determined success, but rather the government working in concert with it. Government has financed the kind of intensive, long-term, and fundamental research and development (R&D) that most companies cannot afford to undertake because the payback is usually measured not in quarters or years, but in decades.
Yet the current administration is now doing the very opposite, de-funding parts of the very research infrastructure that has powered the innovation economy.
After World War II, American manufacturing dominance was so complete that an ideology of free trade worked decidedly to its advantage. Its companies embraced multi-national strategies and raced to export their products.
But America’s overconfidence in its manufacturing and trade superiority led to an unexpected foreign policy development—the US government began to give other countries trade benefits at the expense of its own industries in exchange for military alliances and support for its foreign policies, especially against communist countries during the Cold War.
The US’s spending on intensive, basic R&D has collapsed. Over the past five decades, federal research and development spending as a share of its GDP has plunged by two-thirds
This happened as American foreign policy makers began to enact what historian Alfred E. Eckes called a policy of ‘trade, not aid,’ essentially substituting trade concessions for federal spending, largely because this was ostensibly less expensive. This policy held that the US should build foreign alliances and status through free trade and open markets, and was based on the hubris that American labour needn’t fear competition. In an unpublished page for his memoirs, President Harry Truman wrote: ‘American labour now produces so much more than low-priced foreign labour in a given day’s work that our workingmen need no longer feel, as they were justified in feeling in the past, the competition of foreign forces.’ At about that time, a commission on trade headed by Daniel W. Bell, the former budget director of the Roosevelt administration, proposed to increase imports of manufactured goods even if that led to unemployment for thousands of American workers.
In this same short-sighted spirit, President Kennedy in 1963 called on the United States and its allies to open ‘our markets to the developing countries of Africa, Asia and Latin America,’ since, as he warned an AFL-CIO convention in Dallas, protecting US industry risked ‘driving potential trading partners into the arms of the Soviets.’
George Humphrey, Eisenhower’s Secretary of the Treasury, dissented. ‘We were protectionists by history,’ he said, ‘and have been living under a greatly lowered schedule of tariffs in a false sense of security because the world was not in competition. That has changed now and the great wave of competition from plants we had built for other nations is going to bring vast unemployment to our country.’ Yet he was one of the few.
In the 1960s and 1970s, the US frequently granted trade benefits in exchange for support of its foreign policy objectives. One significant exception was the short-term imposition of 100 percent tariffs by President Ronald Reagan on Japan in 1987, in retaliation for Tokyo’s failure to abide by a semiconductor trade agreement. Although this was a rare deviation, it proved effective, with Japan quickly agreeing to new trade terms. In more recent years, quotas to limit the number of imports of certain products have emerged as a valid and feasible alternative to tariffs.
But in large measure, foreign policy had prevailed over domestic enterprise.
Lost dominance
Perhaps it was inevitable, but from the 1970s on, as the US took its manufacturing dominance for granted, it gradually lost that dominance as its companies began to outsource millions of good-paying manufacturing jobs to boost their profits and abandoned many US workers to lower-paying jobs.
Asian manufacturers energetically filled this manufacturing breach. Products on US shelves transformed from “Made in America” to “Made in Japan” or “Made in Taiwan.” Japan, in particular, managed to co-opt and even enhance western technology, especially in automobiles. Japan developed a manufacturing juggernaut that appeared invincible but subsequently became entangled in a massive real estate crisis of its own making. This arrested its momentum and created space for others, especially China, to elbow their way into manufacturing supply chains.
By the early 2000s, following a US concession, China had been granted entry into the World Trade Organization on preferential terms, resulting in a surge in its economy. It produced cheaper and better-manufactured goods and increased its global manufacturing output share from 7 percent in 2000 to 29 percent today.
A crucial measure of a country’s manufacturing prowess is the Export Complexity Index (ECI), developed by MIT’s Observatory of Economic Complexity. The ECI assesses the sophistication of a country’s exports, awarding higher scores for advanced medical devices, specialised robotics, or complex computing equipment, in contrast to daiquiri umbrellas and rubber bands.
Historically, the US has excelled in sophisticated and complex exports, but recent data reveals a troubling trend: the US ECI score slipped from 1.66 in 1998 to 1.5 in 2023, while Japan and Germany’s scores climbed from 1.62 and 1.71, respectively, in 1998, to 2.07 and 1.79 in 2023. Most startling, China’s score has climbed from -0.43 in 1998 to 1.16 in 2023.
The production of advanced goods typically leads to high-skill, high-wage jobs and drives both short-term economic growth and long-term competitiveness. Yet creating these products requires extensive research and development, which many companies can’t afford alone. Historically in the US, government programs—especially at agencies such as the NIH, NSF, and DOD—have supported this basic research and laid the indispensable foundation for breakthroughs in advanced fields.
But the US’s expenditure on intensive and basic R&D has collapsed. Over the past five decades, federal research and development spending as a share of GDP has decreased by two-thirds—from around 1.86 percent in the mid-1960s to about 0.66 percent today. This decline has contributed to the fall in its ECI and poses a threat to its economic future. During roughly the same period, America’s global manufacturing share plummeted from around 45 percent in the 1950s to just 17 percent.
As early as the 1970s, US manufacturers, particularly Detroit’s Big Three automakers, were being battered by imports from Europe, especially Japan. These embattled American automakers correctly claimed that they were excluded from the Japanese automobile market due to various subtle forms of Japanese protectionism.
America’s manufacturing dominance had been squandered.
Why has Trump’s approach failed?
Tariffs have worked and can work, but only if used in a surgical, focused, and precise manner, just as Reagan did with his short-term tariff on Japan—with care to ensure that US manufacturers are prepared to assume the manufacture of products blocked through tariffs.
This has not been the Trump administration’s approach.
It does little good to impose a tariff intended to boost manufacturing domestically unless you’ve first made the investment to build up the relevant domestic manufacturing capability. To implement it otherwise is to put the cart before the horse. But that’s just what is now happening, and rarely has a cart been put so far ahead of a horse. This administration has proposed tariffs on an extensive roster of complex products when we are years away from being able to cost-effectively produce them in the US. So, these tariffs—if maintained—will simultaneously raise costs for households and drive manufacturing from China to other low-cost countries instead of the United States.
During his first term, Trump’s tariffs, intended to eliminate America’s trade deficit, did not succeed in achieving that.
Plans to re-shore manufacturing should prioritise the very areas named earlier—enterprises that will lead the world into the future—because they will yield the highest profit margins, the greatest growth potential, and the highest demand for technical expertise. Therefore, they will create the highest-paying jobs and drive significant economic growth. Most are also strategically crucial for defence. Yet these are the areas where American skills have atrophied most dramatically and will require the most time, as well as substantial government support, to rebuild or strengthen. As the US rebuilds that capability, selective tariffs focused precisely on relevant competitors in specific countries can be one component of a holistic re-shoring gameplan. This will take time and resources, and the current administration’s plan provides little of either. Meanwhile, it is reducing some of the very funding available to small and medium-sized enterprises to enhance manufacturing capabilities—investments they otherwise cannot afford. The administration should instead be redoubling that funding.
It should not be our priority to re-shore the manufacturing of low-value, low-margin products that yield only low-paying jobs, and thus we do not need tariffs on those types of items.
Nevertheless, the Trump administration has proclaimed across-the-board tariffs for almost all products in almost all countries, whether high-margin, low-margin, central or peripheral to America’s optimal economic path forward.
During his first term, Trump’s tariffs, aimed at eliminating America’s trade deficit, did not succeed in achieving this goal, and he left office without any improvement in America’s overall net trade deficit with China or the rest of the world. Will they now be effective in his second term? By the time this article is published, the tariff roster is likely to have changed again, but as it stands at this moment, the tariff conflict will soon cut off farmers from their most important export market, China—and will result in US households paying higher prices for a significant number of everyday goods. Tariffs are a form of tax, and when viewed this way, depending on the eventual levels and how much of these increases are passed on to households, these new tariffs could represent one of the highest tax increases in US history.
The widespread deployment and sudden reversal of tariffs brings to mind another issue: tariff policy often results in extensive corruption, as businesses that can curry favour with the government, by any means necessary, frequently manage to evade tariffs.
Even if the administration reverses everything to pre-2025 levels, it will have jarred the confidence of many American businesses.
This is not to say Trump’s concern about the trade deficit with China is invalid. As mentioned, the US is locked in an existential struggle with China for leadership in the industries that will define the future. But his administration has fallen short of its objectives because it has relied almost exclusively on tariffs, which are a fickle tool in a world where currencies float, trade retaliation by other countries comes quickly, and supply chains are complex. While tariffs have their place, they are only one small part of a bigger equation, and tariffs against China will not work as we want unless there is a commensurate government investment in restoring US manufacturing capability and muscle, especially in the most advanced forms of manufacturing.
Trump’s largest tariff pronouncement on the so-called Liberation Day of 2 April is one he has since partially reversed. On that day, he announced his plan for ‘reciprocal tariffs’ with countries around the world. Who could have objected? Reciprocal tariffs sounded fair. If some country imposed a 10 per cent tariff on America, wasn’t America justified in imposing a 10 per cent tariff back on it?
However, that’s not what happened at all. Instead, the tariffs imposed on many countries far exceeded those they had placed on the US. These ‘reciprocal’ rates did not correspond to the tariffs these countries imposed on the US, but were reciprocal in relation to their trade imbalances with other nations. For example, a 46 percent tariff was applied to Vietnam at a time when Vietnam’s tariff on the US was only 5 percent.
Even if the administration reverses everything to pre-2025 levels, it will have jolted and shaken the confidence of many American businesses, which will now proceed with much greater caution. Clearly, this caution will have a negative impact on American economic growth.
The move against Vietnam falls into a special category, as it undermined another aspect of America’s trade strategy. The US has been endeavouring to weaken China by relocating manufacturing from that country. However, since the US is not yet prepared to assume much of this manufacturing itself—and, arguably, should not seek to engage in low-end manufacturing—it has been successfully shifting production from China to countries like Vietnam. This strategy appeared to be succeeding, but is now likely dead due to the high tariff proposed for that country.
Furthermore, the current administration imposed higher tariffs concurrently on many countries around the world, which provokes a multi-front retaliation.
A path forward
If the current administration’s tariffs by themselves have not worked, what will? How can America improve its balance of trade?
The answer, as we have mentioned, is obvious but so widely overlooked that it might sound odd. The surest path to an improved national trade balance is not tariffs but innovation— breakthrough products that ensure that the world beats a path to America’s door. To improve its balance of trade, US businesses should make better and more advanced products and services. That has been their collective advantage for 200 years—so much so that their product and service superiority has almost been taken as a given.
In other words, it should invest massive amounts in inventing the future—by increasing funding to the NIH, the NSF, the R&D budget of the Department of Defence, and other hardcore research entities to develop newer and better forms of chips, batteries, genetic engineering, and myriad other crucial forms of high tech. Instead, the current administration is reducing the resources provided to these institutions and, in so doing, stifling the engine of America’s business creativity.
If a US business develops a spectacular new product but doesn’t manufacture some or most of its components in the United States, then it will have won only half the battle.
Meanwhile, a significant investment in the future is precisely what China has been undertaking, and that is precisely why it has made such remarkable progress in catching up to the US, often exceeding American businesses in its technological achievements. As one example among countless others, China’s car manufacturer BYD has now surpassed Tesla in both technological prowess and sales.
Crucially, breakthrough products are only part of the equation. If a US business develops a spectacular new product but doesn’t manufacture some or most of its components in the United States, then it will have won only half the battle.
As mentioned, business leaders and policymakers have falsely believed in previous decades that all the valuable intellectual capital resided in product design, and that the manufacturing and construction of the product involved repetitive work of little economic benefit or consequence. Consequently, there seemed to be little to lose by offshoring. However, for increasingly complex products such as high-end computing and telecommunications equipment, manufacturing constitutes a form of intellectual capital in its own right. Thus, even if we set aside wage differences, for a growing number of products developed in the United States but manufactured abroad, there is simply no possibility of re-shoring quickly because the intellectual capital and skills required to manufacture the product have been lost.
But there is hope. Advancements in automation, both actual and possible, now mean that the labour component of product cost is declining and, consequently, the differences in labour costs are narrowing or disappearing. With that, re-shoring has become increasingly feasible. Yet, many companies simply cannot afford the significant new manufacturing design, tooling, and training costs required to establish this more highly automated manufacturing.
As an illustration, a small electronics firm I know, which has a highly innovative and advanced product, currently conducts all its manufacturing in China because it is two-thirds cheaper to do so than in the United States. This is based on the assumption that a US manufacturer with the technical capability to handle the job could even be found. Nevertheless, this firm has applied for a Small Business Innovation Research (SBIR) grant sponsored by the NSF to develop a more automated and streamlined manufacturing process that could facilitate re-shoring. SBIR grants have long been vital in supplying small businesses with the funding necessary for R&D. Since 1983, the programme has awarded nearly 200,000 grants to companies, amounting to over $60 billion.
If this electronics firm receives that grant, it will be able to afford the engineering innovations that could both streamline the design—e.g., the use of fewer and less expensive materials, and simpler or fewer parts—and introduce greater robotics and automation in product assembly. This company could not afford to engineer these design changes without the grant. However, the SBIR budget is paltry in comparison to the national need, and this company has very little chance of receiving one. SBIR and other budgets are not nearly large enough to accomplish the re-shoring revolution Trump envisions, so increased government support will be necessary. Yet in the Age of DOGE, the most likely outcome is that these budgets will be cut instead.
Tariffs, in and of themselves, are neither good nor bad.
Note that increased manufacturing in the US is not an economic panacea. Globally, manufacturing is shrinking as a percent of GDP because of automation and the growth of the service sector. But manufacturing can and should be a vibrant part—though only one part—of economic progress.
Taking all of these things into account, here is the formula for success:
- First, carefully identify the advanced manufacturing areas where America is truly willing to make the investment to reshore manufacturing.
- Second, use large-scale federal funding to work with the private sector to build world-class capability in those areas—an effort that will take years.
- Third, use tariffs and quotas with surgical precision to offset the advantage of key foreign competitors in these targeted industries in select countries. Most often, this will mean China.
This raises a question: Why was the US seemingly unconcerned about the loss of middle-class manufacturing jobs over this nearly fifty-year period? Why has this issue gained prominence with Donald Trump and not earlier? In fact, the issue has been acknowledged from the outset, and there has never been a time when it wasn’t a concern for some within the country, primarily within the unions. It was simply one of those issues—like climate change or saving for retirement—that was far too easy to dismiss in the moment. My own career, which began in 1978, coincided almost perfectly with the decades during which this manufacturing decline occurred, and I participated in countless political forums and boardrooms where this very issue was discussed.
However, there were reasons why the loss of manufacturing jobs was easily dismissed. We have witnessed how it supported foreign policy objectives. Additionally, it was very much welcomed by corporate executives and stock market investors, as it reduced expenses and improved bottom-line results through the outsourcing of jobs to less developed countries, particularly those in Asia—initially to Japan and the smaller nations of Southeast Asia, and subsequently to China as that country made substantial government investments in enhancing its manufacturing capabilities. China skillfully added the stipulation that it retain control and acquire Western intellectual property in those agreements—something that outsourcers were more than willing to accept in exchange for significantly reduced costs.
Outsourcing became increasingly feasible due to advances in travel and communications. Additionally, it provided an effective means for these companies to bypass the negotiating power of unions, and there was an almost unavoidable need to outsource, given the stock market’s relentless penalties for those slow to realise the resultant cost savings.
Moreover, it was championed by the entrenched, orthodox economics profession, which praised unfettered free trade under their fragile assumption that it would foster economic vibrancy for all. They perceived free trade and the rejection of protectionism as the very antithesis of the disastrous communism/socialism of the USSR. For them, the decline of manufacturing jobs was balanced by robust job gains in the service sector.
These economists established this policy path within a vision of global trade and a small country policy prescription known as the Washington Consensus. It encompassed several broad policy recommendations, including free trade, avoidance of deficits (even if it necessitated austerity), lower taxes, unregulated interest and exchange rates, the privatisation of state enterprises, and the deregulation of business. There was little scope for divergence from these policies, as World Bank and IMF loans to these small nations were largely contingent upon adherence to them. This was despite the fact that the protected development of specialised industries represented the only chance for economic vibrancy for most of these small nations, and the US had largely attained its greatness due in part to its protectionist policies in the 19th century. Yet, all too often, the Washington Consensus ran counter to the interests of these small countries. Cynics might argue that these policies primarily served the interests of the US and other large, developed country companies that sold products in these nations and lent to their governments—since they facilitated the sale of these products and made the collection of these loans much easier.
It was during this time that both parties increasingly ignored the working class— Republicans because of their previous devotion to free markets (which conveniently worked to the benefit of their corporate constituents), and Democrats because they sought to expand their franchise among the disadvantaged and mistakenly took the middle class for granted.
There were notable exceptions. During the 1992 presidential campaign, renegade candidate Ross Perot decried the free-trade NAFTA agreement and predicted a “giant sucking sound” from all the jobs that the US would lose to Mexico as a result.
Given this neglect from both parties, independent working-class voters have oscillated between the two over time, vainly hoping that either would genuinely attend to their needs—including greater focus on issues of job loss and the lack of retraining and upskilling required due to this job loss. These frustrations and resentments have accumulated over decades, waiting to be harnessed and exploited by a fierce anti-elitist like Trump.
Trade serves as a vital barometer of economic health and merits our close attention. Tariffs, in and of themselves, are neither inherently good nor bad. During our time as the world’s leading manufacturer, we championed free trade. Now that we are not, it is less apparent that we should continue this practice. It appears more logical to employ tariffs in a surgical and strategic manner when they benefit us net—and to forgo them when they do not.
Given our size and resources, we will likely not need tariffs more frequently than we will need them. Moreover, the mere threat of tariffs may often suffice to achieve our aims, and quota policies can serve as a valid alternative to tariffs.
The key, instead, lies in our investment in advancement, something that is now at risk. America can rebuild its manufacturing and trade advantages if it reinstates and enhances that investment in advancement—and approaches this opportunity with the intelligence and dexterity that the moment demands.
