What happened to American manufacturing is not unusual

De-industrialization has followed a similar course in every developed country

President Trump’s chaotic implementation of new tariffs has roiled markets and wrecked decades of international cooperation and free trade agreements. At the heart of these actions, and one of the motivating forces of his political movement, is the belief that the de-industrialization of the U.S. economy can somehow be reversed by protectionist trade policies.

Unfortunately, this is not going to work. Manufacturing’s share of the U.S. economy has been falling since the 1940s. While the decline has slowed in the past decade, the shift has already devastated communities across the country that were previously dependent on manufacturing activity.

But protectionist policies won’t bring back the jobs that have been lost. The decline of the manufacturing sector isn’t a specific thing that happened just in the United States. It has happened in every developed country so far. The chart below shows how three main sectors of the economy evolve as economies become richer:

• Agriculture’s share of the economy drops as output increases

• Manufacturing’s share increases initially, but once an economy’s productivity exceeds around $40,000 (2017 USD), it begins to fall

• The services sector’s share increases continuously throughout the economy’s growth, becoming dominant after manufacturing’s decline

Importantly, these trends appear similar across all developed countries’ economies regardless of their specific timeline of economic development. In the U.S., the manufacturing sector’s peak occurred in the 1940s. In South Korea, it was around 1990. China’s manufacturing sector is currently in the process of leveling off.

Some refer to the process of how employment shifts between these three sectors as “tertiarization”, since economies invariably become dominated by the production of services, i.e. the tertiary sector. In a wealthier economy, demand shifts toward services such as healthcare, education, entertainment and leisure. Remaining manufacturing shifts away from labor-intensive goods and more towards products that require more specialized skills and technologies.

Since tertiarization appears to be an unavoidable part of an economic progress, attempting to turn back the clock with trade restrictions is unlikely to produce the desired results. Instead, economists recommend public investment in declining communities. A recent report from Tim Bartik at the Upjohn Institute suggests that the most impactful policies for struggling manufacturing-heavy communities include:

• Customized services for small and medium businesses, including manufacturing extension services and job training services

• Public spending on education, from preschool and K-12 to colleges and universities, as well as vocational education and job training programs for workers

• Public investment in infrastructure and increasing land supply for business and housing development

Less effective policies include broad tax cuts for business, targeted business attraction incentives and attempts to reduce workers’ wages. One of the best ways to fund investment in distressed communities is with broad-based tax increases, while one of the worst ways is to cut K-12 education spending.

Data and code available here.