How the U.S. Lost Its Place as the World’s Manufacturing Powerhouse

In the 1950s, around 35% of private-sector jobs in the U.S. were in manufacturing. Fast forward to today, and only 12.8 million manufacturing jobs remain, which accounts for a mere 9.4% of those private-sector jobs. Although former President Trump initiated a sweeping tariff regime aimed at revitalizing American manufacturing, economists remain skeptical about its effectiveness, worrying that the accompanying economic damage could outweigh any benefits. Understanding the reasons behind the decline of U.S. manufacturing is crucial to evaluating whether its restoration is feasible.

The Rise of U.S. Manufacturing

The United States emerged as a global manufacturing leader due to a unique combination of factors. In the early 1900s, the U.S. was a pioneer in adopting interchangeable parts and organizing mass production processes. The devastation of World War II significantly boosted U.S. manufacturing capacity while simultaneously decimating many of its global competitors, as noted by Case Western Reserve University economist Susan Helper.

In the post-war era, the expansion of the American middle class led to increased spending on durable goods, such as cars and household appliances. The U.S. became its own largest customer for manufactured items, many of which were high-tech for their time—like televisions and aircraft—encouraged by innovations developed during the war. Additionally, a surge in high school education contributed to the development of a highly skilled workforce, making America the most educated nation in the world for skilled labor.

Services Take the Wheel

However, from the 1950s onwards, manufacturing’s significance began to diminish. Out of growing affluence, Americans began to shift their spending toward services—travel, dining, and healthcare—prompting job shifts in the economy. “You get richer, you can only buy so many cars, and you start buying services,” explained Helper. Consequently, service-sector jobs surged while manufacturing employment plateaued from the mid-1960s through the early 1980s.

In addition to rising labor costs, trends began shifting manufacturing operations southward to cheaper labor markets within the U.S., while developing nations like Mexico and countries in Asia started ramping up their production capacity for nondurable goods. As a result, Americans began importing more and more products that had previously been produced domestically.

The China Shock

The 1980s marked a significant turning point for American manufacturing. Opportunities waned, particularly for manufacturers of nondurable goods, faced with fierce competition from countries with lower labor costs. The North American Free Trade Agreement (NAFTA) further accentuated the issue by reducing tariffs on Mexican goods, leading to additional job losses in areas such as steel production, where countries like South Korea began supplying excess capacity to the global market.

The real disruption, however, occurred in 2001 when China joined the World Trade Organization, paving the way for unprecedented foreign investment and access to global markets. “All of a sudden we have substantial production capacity in a low-wage country, and that was a major shift,” remarked Harvard University economist Gordon Hanson. The flood of cheaper Chinese goods left American manufacturers struggling to compete, culminating in what became known as the “China Shock.” Research from Hanson and colleagues documented the negative impacts on manufacturing communities, particularly in the South and Midwest, leading to job losses and economic hardship for many workers.

Where We Are Now

As China ramped up its manufacturing capabilities, the United States transitioned further into a service-based economy. The U.S. became a leader in service exports, such as software and advertising, exporting over $1 trillion in services in 2023—far exceeding any other nation. Furthermore, many American firms relocated their intellectual property overseas for tax advantages, skewing the numbers on service exports. In a striking contrast, a study revealed that while manufacturing jobs made up 39% of high-wage employment in 1980, that figure plummeted to just 20% by 2021. Meanwhile, high-paying positions in finance and professional services surged from 8% to 26% of high-wage employment during the same timeframe.

Can Manufacturing Come Back?

The majority of economists typically oppose the widespread use of tariffs, believing that the heightened consumer prices would likely curtail spending on both domestic and foreign goods, leaving the American populace worse off. Notably, even a 30% increase in manufacturing jobs would still leave manufacturing’s share of private employment at a mere 12%, which is far below its historical levels.

Yet, some economists advocate for increased investment in domestic manufacturing—not through blanket tariffs, but in targeted initiatives, particularly for high-tech goods like semiconductors that have strategic economic and military implications. The question remains, however: how vital is it for the U.S. to revive manufacturing for low-cost goods like T-shirts?

As the debate continues, it is clear that understanding the multifaceted changes in the U.S. manufacturing landscape—from the post-war boom to the rise of globalization—is essential in charting a feasible path forward for American manufacturing.