“Coming out of the Second World War, the US was the king of production,” says William B Bonvillian, a lecturer at Massachusetts Institute of Technology (MIT) and an expert in US innovation policy.
In fact, by 1945, more steel was produced in the state of Pennsylvania alone than in Germany and Japan combined. This belle epoch, the glory days of ‘Made in America’, ran well into the Cold War era too – but then something gave way.
By the turn of the millennium, the US’s global domination in mass-scale industrial production, technology and efficiency was lost. Long-standing issues culminated between 2000 and 2010, when the US lost one-third of its manufacturing jobs. “This was a very tough decade, a very dramatic shift,” explains Bonvillian. “Millions of jobs just disappeared.”
The fall of US manufacturing in numbers
The award-winning Netflix documentary ‘American Factory’ perfectly captures the aforementioned drama, that decade of manufacturing misery in the US.
Set in the rust belt state of Ohio, it highlights the devastation wrought to Moraine by the closure of the General Motors plant in 2008, the town’s economic lifeline.
How well do you really know your competitors?
Access the most comprehensive Company Profiles on the market, powered by GlobalData. Save hours of research. Gain competitive edge.
Your download email will arrive shortly
Not ready to buy yet? Download a free sample
We are confident about the unique quality of our Company Profiles. However, we want you to make the most beneficial decision for your business, so we offer a free sample that you can download by submitting the below formBy GlobalData
Unfortunately, Moraine’s story was all too common. Between 2000 and 2010, nearly six million jobs in US manufacturing were lost, with the sectors most prone to globalisation displacement, such as textiles and furniture, taking the biggest hit, according to research by Bonvillian and MIT’s Peter L Singer.
Other metrics tell the same story. The fixed capital investment of manufacturing (plant, equipment, information technology, and so on) actually declined in the 2000s – for the first time since data collection began in 1947.
Meanwhile, US manufacturing output grew only 0.5% per year between 2000 and 2007, and during the global financial crisis of 2007–09 fell by a huge 10.3%. Only in very recent years has manufacturing output returned to pre-recession levels. Similarly, US productivity growth in manufacturing also hit a nadir that decade, and remains at historically low levels.
These negative trends are confirmed by trade figures. In 2015, the US ran a trade deficit of $832bn in manufactured goods, while in 2017 the total included a $110bn deficit in advanced technology products – a figure that has grown since 2002. This is a shocking state of affairs, considering how many advanced technologies originate in the US.
Beyond such eye-watering figures, the US’s manufacturing shifts precipitated social change that altered US and global politics. “Most of the jobs that were lost were in the lower end of production, as opposed to higher skilled jobs,” says Bonvillian. “In other words, one of the main routes into the American middle class just got cut off.
“This affected not just the white working class. If anything, African Americans and Hispanics got hit worse. And Donald Trump’s politics came right out of that. He was the first US politician to understand that drama, to speak directly to the anxieties of what the American working class had gone through,” he adds.
Suzanne Berger, an US political scientist at MIT, and author of ‘Making in America’ agrees that Trump harnessed that drama for votes. “Jobs were killed by [China’s cheaper manufacturing goods],” she says. “Their cheaper imports. That struggle won the election for Trump, [because it was felt by working class Democrats and Republicans].”
The making of the US’s manufacturing decline
The downfall of US manufacturing did not occur overnight, nor has it been dealt a fatal blow. The US remains the second-largest manufacturing country in the world, but its global dominance has been well and truly lost.
Over the past 50 years, manufacturing’s share of gross domestic product in the US has shrunk from 27% to 12%, and the starting point of this decline began well before this time period.
US manufacturing entered the Second World War far ahead of the competition, and by its end it was running laps around them. However, in terms of research and development (R&D) across all sectors, the US only began doing things at scale during the war. “So when the conflict ended Washington decided to ‘keep the science’, since the nation was still lagging behind the likes of the UK and Germany,” explains Bonvillian.
In short, coming out of the Second World War, the whole focus for the US innovation system was on early-stage R&D, not manufacturing. “Production was the last thing we worried about, since we were the king. Nobody was remotely close to us,” adds Bonvillian.
By resting on its laurels, therefore, the US lost its lead. Meanwhile, post-war Germany and Japan were rapidly rebuilding their industrial bases to counter mass unemployment. This meant their innovation systems were focused on manufacturing, leading to the creation of Germany’s much-vaunted Fraunhofer model (industry and universities working hand in hand) and Japan’s quality production revolution. These were dramatic innovations in the production process, much of which were funded, ironically, by US post-war reconstruction money, such as the Marshall Plan.
“This imbalance explains why, for many decades now, the US has been innovating new technologies that get built elsewhere, beginning with Japan in the 1970s and 1980s, and then China later on,” says Bonvillian. “More recently, we have been trying to pick up the Fraunhofer model. But guess what? China did the exact same thing.
“So, what has been going on in the US for the last five years or so is a growing awareness of the problem and of the relationship between the production and R&D. Both are very creative stages and are better done together.”
That production and R&D work better in unison is evidenced by the fact that it is becoming increasingly common for US companies to move from ‘innovate in the US and produce abroad’ to ‘do both abroad’.
“We are seeing more US companies having to send their innovation teams to Shenzhen, for example, for months at a time to work on the product improvement. If this shift accelerates, it is a big risk to the US’s innovation capability,” contends Bonvillian.
Technological innovations have made the US the economic behemoth that it is. The move towards ‘innovate there, produce there’ could have very serious consequences for the whole US growth model.
These risks are especially salient in light of the US-China trade war, which has catalysed the need for US policymakers to redress the US’s manufacturing imbalance.
Breaking up the US factory
The fracture and internationalisation of US manufacturing rapidly accelerated with the global financial crash of the 1980s. In the first part of that decade, President Ronald Reagan oversaw a period of deep recession in which industrial sectors were hit particularly hard. The US factory had begun to hollow out.
“Financial markets put enormous pressure on large companies to get rid of their [US] workers and plants and move away from being vertically integrated companies in which everything took place within the company itself.” says Berger.
As a different financial system and type of lending emerged out of the recession and continued throughout the 1980s, investment into vertically integrated models started to diminish.
“Financial markets wanted to be able to invest in a particular part of an interest rate, and not invest in the vertically integrated model,” says Berger. “That put pressure on companies such as DuPont to break up these enterprises and to subcontract, outsource or offshore every part of the company that didn’t actually fall into the company’s core competence. This led to an extraordinary break-up, starting in the 1980s, of the large and competent American industrial manufacturers.”
A paper published in September 1990 written by Lois M Plunkert called ‘The 1980’s: a decade of job growth and industry shift’ put a bizarrely sunny twist on these negative trends – testimony to how out of touch many were with the early signs of the US’s manufacturing’s downfall.
Plunkert’s paper highlighted the movement of employment from the ‘goods-producing’ sector to the ‘service-producing sector’. It stated: “This continued shift of jobs into the service economy was not at the expense of manufacturing output.”
In reality, manufacturing was paying a brutal price. “[Before the decline], if you were making semiconductor wafers, the engineer who had drawn the circuits had to be next to the technician who actually was cutting out the circles that were going to be produced, and etched onto the wafers, the two men had to work together,” says Berger.
As technology adapted, it allowed for the engineer and technician to be stationed further apart. “Once you were able just to send a digital file from California to Taiwan, once you were able to break up the activities that previously had had to be conducted in proximity, you could basically execute that transformation that financial markets were demanding,” adds Berger.
This move away from being a one-stop US manufacturing shop arguably tipped a domino over in the chain of industrial decline, and next to fall was innovation through manufacturing.
The Apple effect on US manufacturing decline
As the supply chain of US manufacturing stretched (mostly to Asia), American factories lost some of their savvy when it came to innovating and creating on the ground. One US company that made a splash in innovative technology, however, and on a massive global scale, was Apple.
So mammoth was the impact of Apple that it influenced not just the future of handheld technology, but it also created a blueprint that other American companies – which were looking to disrupt through innovation – largely followed.
“[Around 2005,] Apple was the most valuable company in the US,” says Berger. “It did design in the US, it did distribution in the US, but it didn’t manufacture anything in the US. Everything was manufactured in China, so the question across industry was: ‘Why don’t we all follow that Apple model?’ That underpinned how people saw manufacturing.”
This fed into a stigma that surrounded the manufacturing industry and particularly jobs in the manufacturing industry – that it was unskilled labour that should perhaps be left to lower-wage, less-developed nations.
If Apple, the company that was dominating stock markets and largely considered to be heralding the dawning of a new era in innovation, was outsourcing its manufacturing, surely it was on to something?
Berger expands on that thought process: “That Apple model, in one way or another, underpinned how people saw manufacturing; the valuable activities could remain and would remain in the US. The rest of this commodity activity could happen anywhere else in the world, wherever low wages were. That was the desirable model.”
Undoubtedly, Apple and others saw success with this ideology. Yet Berger cautions that this created an absence of real innovation within the US manufacturing industry. “Those who still believed US manufacturing to be valuable argued that there was some proximity between innovation and production; if manufacturing disappeared from the US, we were not going to be able to continue to innovate,” she says.
With the absence of a foot on the gas pedal to grow manufacturing workforces – and to do so with innovative practices at its heart – the US was unknowingly put on the back foot.
Did China take US jobs?
The feasibility of reshoring factory jobs aside, Trump was in fact reacting to a very real issue. As already highlighted with the likes of DuPont and Apple, the heady combination of globalisation and economic progress has been a double-edged sword for the US economy (and all countries for that matter).
It is easy to forget that the reduction in global equality has occurred alongside a rise in inequality within advanced economies. In this natural transition from old to new economic growth, people in the old economy have been ‘left behind’, for one, as manufacturing jobs moved towards China and South East Asia.
On the other hand, advances in automation and robots have also hit US manufacturing employment. But to what extent? “US productivity numbers in manufacturing tell us that it wasn’t a sudden burst of robots that took most jobs away, it was other causes, and when you boil it down, it really was the rise of the Chinese economy,” contends Bonvillian.
Not only has China charged ahead of the US in terms of the production process, but it has also done so increasingly with innovation in the past decade. As the below charts illustrate, the country’s investment levels in R&D and the Fraunhofer model have been radically higher than the US. China’s trajectory is very impressive.
“Beijing has realised that its days as the low-cost competitor are numbered, and that it is going to need to be incredibly efficient and at the cutting edge of engineering advances,” says Bonvillian. “So China’s pushing very hard on innovation in production. Much like Germany and Japan too.”
Washington’s increasingly fierce and acrimonious competition with China is being played out in numerous sub-sectors of manufacturing, especially semiconductors (which are used in a vast plethora of electronic devices). “That is a sector that developed in the US and that the US historically has led – and is still a major export sector for the country – but China is throwing an ocean of money to try to dominate it, because it is such a core technology,” says Bonvillian.
Bringing jobs home is not the answer
For all of Trump’s bluster, he had little success in bringing factories home. In this regard, Covid-19 has been more impactful, since it has highlighted the vulnerability of long supply chains. However, this will not necessarily bring back the millions of lost US manufacturing jobs.
“A lot of optimism has emerged surrounding the US manufacturing renaissance, fuelled by the concept of reshoring,” says a 2020 report from Deloitte. “While reshoring is a real phenomenon, a common misconception is that it represents a return of previously offshored operations to US soil. In practicality, reshoring may include returning operations to Mexico. This offers greater access to the US market but allows companies to maintain advantageous operating cost structures.”
Bonvillian agrees. “I doubt we are going to bring a lot of factories back,” he says. “The real question is what can we do in the future that will make US manufacturing more efficient and productive? Trump was focused on tariffs, but Biden has a real focus on manufacturing because of his own family roots in the industrial town of Scranton, Pennsylvania, and his connection with Delaware, one the largest chemical processing sectors in the US.”
As things stand, major legislation is pending in the US Congress that would unlock $100bn in funding to 11 new technology areas in the US (that would take in areas from AI to quantum computing and advanced materials).
“I think there is a growing awareness here of the technology challenge that the US is facing, and that manufacturing needs to be part of that,” says Bonvillian. “So one piece of that legislation is a whole focus on the production side and the scale upside.
“In China, if you build a semiconductor plant the government will, in effect, subsidise the creation of that plant. So there is a level of industrial intervention that has never been thought of in the US, but now there is bipartisan support that, at least in critical areas of the economy, we need to start doing the same.”
How this industrial policy will be financed remains to be seen.
A manufacturing job? How unbecoming
Another deeply rooted issue for US manufacturing has been the growing stigma and prejudice about its value. The result: a gaping skills gap.
Berger highlights the correlation between the shift towards global financial markets and the shift towards ‘expert’ opinion.
“The belief spread among economists and policymakers that manufacturing really wasn’t important,” she says. “[They believed] it was going to be just like agriculture – in the 1900s, we had needed to have 40% of the population on the farm in order to feed the rest of us. Today, we feed less than 2% of the population. So the belief was that manufacturing was going to be just like agriculture, we just didn’t need that much of it.”
Alongside this came a shift in career aspirations. “Why would a parent want their children to work in a factory where jobs were being lost all the time?” asks Bonvillian.
Meanwhile, the white-collar college dream only grew stronger, with the preference largely being for young people to go into what was considered to be the more academic fields of medicine, law, accounting and services.
Another nail in this coffin, according to Berger, is the fact that it wasn’t just investment into creating innovative education that was lacking, it was investment into technology in general. She explains that in her opinion this makes the skills gap a moot point.
“[A lot of US manufacturers] are not looking for skills, because they themselves have plants with very old equipment,” says Berger. “What they have to be able to do is teach people how to use their old equipment. They don’t have robots or things like 3D printing. They need somebody to come in and learn by ‘watching Joe’ (that is looking over the shoulder of some experienced worker). So I think we need to be focusing on technology acquisition by these firms.”
So the lack of desire to see young people go into manufacturing jobs adds to a lack of viable educational avenues into the sector, which is exacerbated by the lack of large-scale adoption of innovative technology. This ‘cycle of lack’ spells particularly bad news for US manufacturing within modern industry. A growing focus away from low-cost labour to strengthen supply chains and embracing innovation to up productivity spells trouble. This skills and technology gap will be felt more acutely as the world plots recovery from Covid-19.
Which president did the most to kill US manufacturing?
Turning a blind eye to manufacturing scale up and instead focusing upon winning the global industry 4.0 race has become all-consuming in US politics over the past few decades. Reagan appeared to usher in the beginnings of manufacturing’s downfall in the 1980s, while he was weathering the storms of recession, playing a heavy hand in ending the Cold War and lowering taxes for Americans.
In a similar way to Margaret Thatcher’s leadership at the same time in the UK, Reagan’s presidency saw a greater focus put on the success of financial and business services sectors.
Berger says: “[Alongside deregulation of financial markets] Reagan added to that a very strong dollar, which made it very hard to export. So the combination of those two were really pretty bad [for manufacturers].”
As a result, when George Bush senior stepped into office in 1989, he inherited a blossoming stock market. This success largely continued during his presidency with the S&P Stock Price Index (SP500) gaining nearly 60% in indexed growth between 1989 and 1993, albeit with a small dip during the 1990–91 recession.
Yet another trend that Bush senior inherited was the alarmingly fast-growing unemployment rate. Within this rate, manufacturing jobs continued to bleed out of the US. Ultimately, Bush senior’s choice to raise taxes alongside his failure to safeguard jobs saw his presidency last for only one term.
The US was looking for a white knight, a man of the people, someone who would understand the need for jobs. They decided that man was Bill Clinton. When elected in 1993, Clinton brought in welfare reform to tackle the growing unemployment in the US. It was largely successful, and by the time Clinton left office in 2001, unemployment sat below 4%, which hadn’t happened since the 1960s.
His success did see a significant slowdown in the decrease of manufacturing jobs, but they did still decrease.
Berger highlights that Clinton’s financial deregulation policies added fuel to the fires Reagan had started in the 1980s.
“Reagan’s deregulation of financial markets continued under Clinton,” she says. “So it was not that sharp move to neoliberal deregulation and policies, which started with Republicans and Reagan and Thatcher, but also continued in the Clinton administration. That had a profoundly negative impact on manufacturing in the US.”
During Clinton’s presidency, the internet and the wider use of computers changed almost every aspect of American life. Technology had begun to transform not just the US workplace, but the global workplace. This transformation was rippling throughout all sectors and for manufacturing it triggered a long-term pattern of being overlooked when it came to adopting new technology and investing in meaningful innovation.
Yet more importantly, the increased use of information technology exacerbated the globalisation of manufacturing. Alongside this, the race to the bottom added pressure to manufacture cheaply, which pushed wages down. This fed into the desire to outsource manufacturing.
Whatever gains in manufacturing jobs Clinton had managed to claw back were ultimately lost under George W Bush, who took office in 2001. Manufacturing jobs saw a seismic fall under his presidency.
In the years following, this loss of jobs has been chalked up to a lot of the aforementioned issues for US manufacturing – the rise of Asia, the offshoring of jobs, globalisation, innovation and rapid digital transformation.
Enter the Obama administration
Following the 2008 global recession, Barack Obama took power with a unenviable task to putting the US on the road to recovery. He cited restoring US manufacturing as a key mandate for his presidency. This remained a priority during his run for re-election, when he made a campaign pledge to create one million new manufacturing jobs.
Obama did see some success in creating manufacturing jobs, but he felt short of his one million target and instead manufacturing jobs rose by 590,000 in his second term. Near the end of Obama’s presidency, in 2016, a question put to Obama during a town hall by Eric Cottonham, a representative from Carrier, defined his impact on the country’s manufacturing sector.
Cottonham asked: “I’m trying to find out, what do we have left? All of our jobs are leaving. I see here, you are doing a lot of things, but in Indianapolis, there is nothing there for us. So what is next? What can we look forward to in the future as far as jobs and employment? All of our jobs have left or are in the process of leaving.”
Obama countered that manufacturing jobs had risen during his term, at a rate not seen since the 1990s. He went on to point to the auto industry as an example of a sub-sector that saw a boost in sales and hiring activity. “We actually make more stuff and have a bigger manufacturing base today than we have had in most of our history. Part of the problem has been jobs going overseas,” Obama explained.
He went on to highlight that he had been making efforts to raise wages and environmental standards through trade deals to try and diminish the competitors countries’ ability to undercut the US.
Another issue Obama raised was the heightened level of productivity in the US despite the decreasing level of jobs. More optimistically, Obama highlighted the rising reshoring trend as promising for manufacturers. “For those folks who have lost their jobs right now because a plant went down to Mexico, [reshoring trends] won’t make you feel better,” he said. “So we have to make sure that folks are trained for the jobs that are coming in now.”
This intention pointed again to the importance of the skills gap in the US and its heavy-handed impact on the country’s ability to take advantage of all the opportunities that reshoring presented.
Did Trump make US manufacturing great again?
While Obama understood the pressures and problems underlying US manufacturing, it was Trump who raised the profile of this national conversation.
However, since the onset of the manufacturing decline under Reagan, every single Republican president has seen a decrease in average annual manufacturing employment.
Berger explains: “Republicans are verbally supportive. Trump was running around telling people they were going to keep their jobs and that they shouldn’t sell their homes. That was three months before General Motors closed.”
Furthermore, Democrats can point to a better record on manufacturing unemployment.
Berger expands on her theory as to why Democrats are better for manufacturing. “Republicans really basically have been opposed to anything that looked like support for industrial policy, or support for manufacturing, aside from the ‘keep America great by closing the borders’ sort of policy. I think that the Democrats – because of having a strong union, component in the democratic constituency – have been somewhat more supportive.”
This pattern, alongside a heavy focus on manufacturing in the first half of Joe Biden’s presidency, gives many in the US manufacturing industry hope for some improvement.
Berger believes that tuning into this hope and delivering tangible improvements to US manufacturing will likely become more and more significant to future political votes in the US.
“President Biden is emphasising manufacturing heavily and I think the general recognition among Democrats is that we need to win back large parts of the old Democratic constituency,” she says.
Biden backs industry with bills
When elected, Biden brought with him a mandate to rejuvenate the US’s flailing manufacturing sector. Since then, manufacturing in the US has been in a state of expansion, between 2020 and 2022, with the Institute for Supply Management reporting that activity reached a 37-year high in March 2021.
Biden has signed through a number of bills and programmes aimed at strengthening the sector, from his $1tn infrastructure plan that held a key objective of renovating and bolstering supply chains – which was passed in November 2021 – to his Additive Manufacturing (AM) Forward programme, which was announced in May 2022. The AM Forward programme is a partnership between Biden’s government and several large US manufacturers. Biden’s readiness to collaborate with manufacturers has reinstated some positivity for the sector following Trump’s more stringent approach.
Alongside this, Biden signed the Chips and Science Act bill on 9 August 2022, which will see a $52bn investment into boosting a domestic semiconductor industry. This looks set to continue the US’s divergence from reliance on China, indicating Biden’s continuing intent to follow a more protectionist strategy.
US manufacturing isn’t dead yet
A closer look at the crime scene shows that US manufacturing was not killed, but it has endured grievous bodily harm. The American factory has lost its edge. Reclaiming this must be one of the country’s economic and geopolitical priorities.
What can be gleaned from the pattern of deterioration in the sector is that a lot of the worst blows – particularly to jobs – were dealt during the mandates of Republican governments. Biden’s Democrat credentials, his focus on manufacturing, and his desire to claw back the support of voters in the Rust Belt states lost to Trump in 2016, offer some hope.
However, Biden, like Obama, inherited an economy in the waves of an aftershock. The recovery from Covid-19, Asia’s manufacturing dominance, ongoing trade wars and the unforgiving pace of innovation set by industry 4.0 are all hefty obstacles to overcome. Yet Biden’s tenacious bills and savvy investments, particularly in the semiconductor industry, could be a lifeline for the industry that keeps the sector in expansion.
As Biden approaches mid-term elections, it remains to be seen if his efforts to redeem the relationship between US manufacturers and the White House have been successful in terms of votes, yet the continuing expansion of industry is a promising indicator. However, with the serious and plaguing problems of a labour shortage, shifting supply chains and a competitive post-Covid economy, it may be too early to crown the US manufacturing industry as ‘great again’.
To read Investment Monitor’s article on ‘Who killed British manufacturing?’, click here.