Surgical solutions for US manufacturing revival

[WORLD] The debate over US manufacturing’s decline has been reignited by President Trump’s aggressive tariff policies, which target Chinese imports as the primary culprit. While there is truth to the claim that Chinese exports have reshaped—and in many cases, hollowed out—American industrial capacity, the prescription of sweeping tariffs is a blunt tool for a nuanced ailment. The real challenge lies not just in protecting US factories, but in addressing the systemic imbalances that have made China’s overcapacity and America’s overconsumption two sides of the same coin.

The Rise and Fall of US Manufacturing Dominance

The story of US manufacturing’s decline is long, complex, and deeply entwined with global economic shifts. In the aftermath of World War II, the US stood as the undisputed leader in global manufacturing, accounting for more than half of all goods produced worldwide by 1948. The Bretton Woods system, established in 1944, laid the foundations for the post-war international economic order, but also set the stage for America’s eventual loss of manufacturing supremacy. As Europe and Japan rebuilt, and as the US shifted its focus from production to early-stage R&D, the global balance began to tip.

By the turn of the millennium, US manufacturing’s share of GDP had shrunk from 27% to 12%, and the sector lost a third of its jobs between 2000 and 2010. The introduction of NAFTA in 1994 and China’s accession to the World Trade Organization in 2001 accelerated this decline, as US manufacturers faced new competition from lower-cost producers abroad. The result: the ratio of US manufacturing exports to imports plummeted from 65% to 45% between 2001 and 2021, and America’s share of global manufacturing value-added dropped from 25% to 16%.

The Double-Edged Sword of Tariffs and Trade

President Trump’s response to this decline has been to impose steep tariffs on imports, particularly from China. In April 2025, tariffs on Chinese goods were briefly slashed from 145% to 30% as part of a 90-day truce, but sectoral tariffs on autos, steel, and aluminum remain in place. While these measures have provided short-term relief to some domestic industries—steel manufacturing, for example, has seen new investments and job creation—they have also raised production costs across the board, disrupted supply chains, and led to retaliatory measures from trading partners.

The impact on US manufacturing has been mixed. While certain sectors have benefited from reduced foreign competition, others—notably the auto industry—have faced higher input costs and declining sales. Meanwhile, US manufacturing output fell more than expected in April 2025, with a sharp decline in motor vehicle production signaling ongoing challenges for the sector. Economists warn that tariffs alone are unlikely to bring factories back to the US, given elevated production and labor costs.

On the other side of the Pacific, Chinese manufacturers are feeling the pinch. As US tariffs take hold, factories are pausing production, laying off workers, and seeking new markets. The reduction in orders has hit employment hard, with Goldman Sachs estimating that between 10 and 20 million Chinese workers are tied to export businesses serving the US market. The World Trade Organization forecasts a 77% drop in Chinese exports to the US in 2025, with other markets expected to pick up some of the slack.

The Real Culprit: Structural Imbalances and Demographic Decline

The deeper issue underlying the US-China trade imbalance is not just about tariffs or trade agreements, but about structural and demographic factors that have shaped both economies. China’s decades-long fertility-control policies have left the country with a shrinking and aging population, which in turn has reduced domestic consumption and left the economy reliant on manufacturing surpluses to provide jobs. Household consumption in China has fallen from 53% of GDP in 1983 to just 39% today, compared to nearly 70% in the US.

This weak domestic demand has forced China to rely on exports to sustain growth, creating a manufacturing overcapacity that is now a global problem. The US, with its large consumer market and the dollar’s role as the world’s primary reserve currency, has become the natural counterweight to China’s overcapacity. This relationship, once dubbed “Chimerica,” has become increasingly unsustainable, as it perpetuates imbalances in both countries.

China’s attempts to boost fertility and domestic consumption have so far failed, as low household incomes and high costs of living make it difficult for families to have more children. Meanwhile, the US faces its own challenges: while tariffs may provide temporary protection for certain industries, they do little to address the underlying issues of high production costs, labor shortages, and the need for advanced manufacturing innovation.

What We Think

Tariffs are a blunt instrument for a problem that demands precision. While President Trump is right to highlight the impact of Chinese exports on US manufacturing, his approach risks further destabilizing the global trading system without addressing the root causes of the imbalance. The real challenge is not just to protect US factories, but to rebalance the global economy by addressing overcapacity in China and underinvestment in advanced manufacturing at home. This will require targeted policies—such as investment in innovation, workforce training, and resilient supply chains—rather than sweeping tariffs. In the end, the solution lies not in a chainsaw, but in a scalpel: surgical interventions that address the deeper structural and demographic issues at play.