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

To understand whether restoring manufacturing to the U.S. is possible, it helps to first understand how the U.S. lost its place as the world’s manufacturing powerhouse.

The rise of U.S. manufacturing

America’s rise to becoming a global manufacturing juggernaut was driven by a confluence of factors.

In the early 1900s, the U.S. pioneered the use of interchangeable parts and organizing factors for mass production. World War II prompted a massive increase in manufacturing capacity, while also devastating competitors, points out Case Western Reserve University economist Susan Helper.

In the postwar years, more Americans joined the middle class, driving jumps in spending on long-lasting durable goods, like the cars and appliances for their newly purchased homes. America was America’s best customer for manufactured goods.

Many of these goods were high tech for the time, such as dishwashers, televisions and jets, often brought about by the host of innovations developed during the war. Making them in America, as opposed to some other country, made sense because staying on the leading edge required research and development teams working closely with the factory floor.

It helped, too, that thanks to the high-school education movement that began in the early 20th century, the U.S. had the most educated workforce in the world.

Services take the wheel

After the 1950s, manufacturing’s role in the U.S. economy began to slip. Some of this came about merely because Americans were becoming more affluent, and devoting more of their spending to services, such as travel, restaurants and medical care.

“You get richer, you can only buy so many cars, and you start buying services,” explained Helper.

The jobs followed the spending, with more people going to work for service-sector employers such as hotels, banks, law firms and hospitals. There were ups and downs with recessions and recoveries, but from the mid-1960s through the early 1980s, manufacturing employment essentially leveled off, as services jobs grew and grew.

Under the hood, there were also shifts in where many of the nondurable goods Americans bought, such as clothing, were made. A lot of production shifted to states in the South, where labor costs were lower.

Around this time, less developed parts of the world, where labor costs were much lower, began dialing up manufacturing of nondurable goods in Latin America and Asia. The U.S. started importing more and more of those items. Over time, the same thing happened with light durable items, such as blenders.

China shock

In the 1980s, things began to change. American manufacturers of nondurable goods had an increasingly difficult time competing with countries where labor costs were lower. That intensified in the 1990s, in part as a result of the North American Free Trade Agreement lowering duties on Mexican goods.

There were also job losses at steel producers after developing countries such as South Korea built up their steel industries and left the world awash in excess capacity, points out Susan Houseman, an economist at the W.E. Upjohn Institute for Employment Research.

But what happened in the 1980s and 1990s pales in comparison to what happened after China joined the World Trade Organization in 2001, opening its country to foreign investment and gaining access to global markets. 

“All of a sudden we have substantial production capacity in a low-wage country, and that was a major shift,” said Harvard University economist Gordon Hanson.

The U.S. had faced import competition from other countries before, but never one that dwarfed its population. And it came on the scene much faster than places like Japan had. In 1999, the value of Chinese goods exports came to only about a tenth of U.S.’s—less than Sweden’s. In 2008, it would surpass the U.S. as the world’s top exporter of goods.

Manufacturers of low-tech items such as furniture and small household appliances, in particular, suffered. Hanson, with David Autor and David Dorn, documented how the influx of inexpensive Chinese goods afflicted manufacturing communities in the South and Midwest, hurting workers. They called it the China Shock, and the name has stuck.

Where we are now

As China produced more and more stuff, America became even more adept at producing services.

Many of these can’t be traded globally: Somebody in London can’t easily go to a dentist in San Diego. But some, like software and other intellectual property items, can. In 2023, the U.S. exported $24 billion in advertising services, for example. 

The U.S. now exports in excess of $1 trillion-worth of services—far more than any other country. Moreover, America’s services exports are undercounted as a result of companies moving overseas the rights to intellectual property developed in the U.S.—like patents and trademarks—for tax purposes. (Ireland, a prime destination for those rights, is counted as the world’s fourth-largest services exporter.)

In new research, Hanson and Enrico Moretti find that in 1980 manufacturing accounted for 39% of the U.S. jobs where workers earned high wages (after adjusting for factors such as education). By 2021 that had dropped to 20%. Over the same period, the share of high-paying jobs in the finance, professional and legal industries jumped from 8% to 26%.

Can manufacturing come back?

As a group, economists have been arguing against the wide use of tariffs for hundreds of years, and that is not about to change. As they see it, the higher prices that consumers and businesses pay will end up cutting into spending on other goods and services—including ones made in the U.S. This would more than swallow up any benefits from increased domestic production and government revenues, so while some manufacturers might benefit, most Americans would be worse off. 

Even a 30% increase in manufacturing jobs would only bring manufacturing’s share of private employment up to about 12%, notes Hanson—far lower than it once was.

Upjohn’s Houseman points out that manufacturing jobs generate other jobs in ways that others don’t. And she is part of a growing number of economists who argue that the U.S. should invest in making more of some things here, even though there are costs to doing that—but in a more targeted way than through the broad application of tariffs. 

Increasing domestic production of high-tech goods such as semiconductors is an example, not just for the jobs that might create, she said, but for economic and military security reasons. That argument doesn’t hold for many low-cost goods.

“Do we want to start producing our own T-shirts again?” Houseman said. “How important is that?”

Write to Justin Lahart at Justin.Lahart@wsj.com

Trump’s Tariffs

News and analysis on the tariffs and their impact, selected by the editors

WSJ Answers Tariff Questions

For Help in Trade War, Wall Street Turns to One of Its Own

The ‘This Tariff Isn’t Our Fault’ Charge

Tariffs Will Hammer Solo Stove. Its Amish-Made Rival Is Ready.

U.S., China Head Toward Economic War

Can Tariff Offensive Deliver New American Jobs?

Why Trump Blinked on Tariffs

Trade War’s First Victim: Michigan’s Economy

Trump’s Trade Math Ignores Major Export: American Services