In the United States, every $1 of domestic manufacturing value-add is estimated to generate $3.60 of value-add across other sectors of the economy as per the findings of the Manufacturers Alliance for Productivity and Innovation. This data about the multiplier effect of manufacturing highlights the significant role played by manufacturing in driving national growth and development. US manufacturing, however, has suffered some setbacks in the past two decades, evidenced through:
The loss of 4.9 million manufacturing jobs between 2000 and 2015 owing to factors such as production offshoring to China and Mexico and increased automation, and a decline in the number of private manufacturing establishments from 404,758 to 340,615 for the same period, as per data from the U.S. Bureau of Labor Statistics.
China’s overtaking the United States in 2006 to become the second-largest exporter of manufactured goods, with China proceeding to become the top exporter in 2015, while the United States moved down to the third position, as per data from the World Trade Organization.
President Donald Trump’s pledge to revive US manufacturing can be viewed as an effort to reverse these trends and reinforce the United States’ positioning as a global manufacturing powerhouse— although each of Trump’s proposed policies come with potential risks and benefits attached. Understanding the interplay of these risks and benefits becomes important to assess the potential growth trajectory of US manufacturing.
Trump’s recent withdrawal from the Trans-Pacific Partnership (TPP), a free-trade deal between 12 member nations (including the United States) effectively signaled the deal’s collapse. On the one hand, the TPP withdrawal minimizes the risk of relocation of US manufacturing jobs to low-wage TPP member countries such as Malaysia and Vietnam, where hourly minimum wages are less than $1.25 in comparison to US’s federal minimum wage of $7.25. On the other hand, the TPP would have helped strengthen the United States’ limited free-trade relations with Asia-Pacific, boost manufacturing exports, and possibly recapture a share in global manufacturing exports, which it has lost to China (China was not a TPP member). Moreover, a withdrawal at this stage, following more than five years of negotiations, stands to affect the United States’s credibility when pursuing other trade deals, especially with TPP members.
The intent to renegotiate the North American Free Trade Agreement (NAFTA) was recently submitted by the Trump administration to the US Congress, with negotiations likely to start in August of this year. There is still of lot of uncertainty regarding renegotiation topics. However, what is clear is that United States will be entering the renegotiations with a view to improve trade deal terms for US industries and workers. Should the outcome of renegotiations be unfavorable to the United States, Trump had earlier stated that the country would withdraw from NAFTA. In the event of withdrawal, US exports to Mexico and Canada would cease to enjoy duty-free treatment and most favored nation (MFN) tariffs would be imposed on US exports. As a result, these exports would become more expensive, thereby dampening demand for US manufactured exports, with the simple mean of Mexico’s and Canada’s MFN tariff rates on manufactured products respectively standing at 5.8% (2014) and 2.5% (2015) as per World Bank data. In the event of withdrawal, however, imports coming in from Mexico and Canada would become subject to the US’s MFN tariff rates, thereby raising import prices. Higher prices are likely to drive import substitution, thereby supporting local industry growth.
One positive development on the trade front has been the willingness of the United States and the United Kingdom to strike a free-trade deal. Such a trade deal would essentially see the trade integration of the world’s largest (US) and fifth-largest (UK) economies, thereby supporting US manufacturing export growth. Moreover, given the limited disparity in minimum wages between the United States and the United Kingdom, the risk of relocation of production and labor is minimized. The United States would, however, have to wait until the United Kingdom exits the European Union to begin formal trade negotiations, with negotiations only expected to start in 2019 or later.
Moving on to Trump’s proposed fiscal policies, a planned reduction in the federal tax rate from 35% to 15% will certainly be a relief to US businesses, especially given that the country’s combined corporate tax rate is amongst the highest globally. The United States’ combined corporate tax rate of 39.5% is the third-highest in the world, as per findings from the Tax Foundation. A reduction in the corporate tax rate would translate into higher profits for manufacturing, thus allowing firms to make greater investments in building capital and driving R&D. Such a tax cut nonetheless comes attached with the risk of a widening US budget deficit.
In light of ongoing policy developments, Frost & Sullivan has assessed Trump’s proposed trade, fiscal, and environmental policies, and evaluated the interplay of associated risks and benefits through a data-driven model. Analysis findings reveal that although United States’ manufacturing value add is expected to expand over the next 4 years, the pace of growth is likely to be lesser. Manufacturing value-add is expected to experience a compound annual growth rate (CAGR) of 2.7% in 2017–2020 in comparison to a CAGR of 2.2% for the 2013–2016 period, with an increase in value from an estimated $2202.30 billion in 2016 to $2413.68 billion by 2020.
[1] Manufacturing value add refers to the net output of the manufacturing sector, arrived at by summing the value of ouputs and subtracting the value of intermediate inputs. The indicator is therefore not associated with the error of double-counting.
