US manufacturing ended last year with a thud, capping a rough year for the sector. To recap, manufacturers shed 63,000 jobs, according to the latest data from the US Bureau of Labor Statistics. It was not just labor that was hurting. The Institute for Supply Management’s manufacturing index clocked in at 47.9 last month, marking the 10th consecutive month of contraction as new orders were especially weak and costs at historically elevated levels.
Then there is the US Federal Reserve’s Beige Book of regional economic conditions and surveys from the regional Fed banks, which have repeatedly documented cases of manufacturers delaying hiring and investment amid weak market conditions, rising costs, shrinking profit margins and persistent uncertainty. As for the “hard” data, manufacturing capacity and output, while incomplete, sagged through fall.
Overall, the evidence revealed a sector that is stagnant at best, and a long way from the manufacturing renaissance US President Donald Trump promised when he took office for a second time a year ago. No wonder administration officials have pivoted from predicting a factory boom last year to now saying it would happen this year and beyond.
Call me skeptical.
Better tax, regulatory and monetary policies should indeed provide a tailwind for manufacturing, but the sector would probably continue to struggle. If so, Trump’s tariffs would be a big reason.
The most basic problem is that modern US manufacturing depends on international trade. As documented by the National Association of Manufacturers, 91 percent of manufacturers use imports to make things in the US, and these inputs constituted about half of all US goods imported each year. Advanced industries such as semiconductors, aerospace and medical devices are particularly reliant on complex global supply chains and cutting-edge components from around the world.
Manufacturers in the US export more than US$1.6 trillion in goods each year, or about a quarter of their output, and are a major destination for billions of dollars in annual foreign direct investment. Producers involved in goods trade (imports and/or exports) are large and growing employers — home to about 80 percent of all US manufacturing workers.
In short, it is a sector that is still very large and increasingly very global — or at least it was.
Trump’s broad and indiscriminate tariffs confound domestic manufacturing operations in myriad ways. Most obviously, they increase production costs — even when firms buy from the US. Tariffs on steel, aluminum and copper drove prices in the US for these critical materials to significant premiums over global benchmarks. Tariffs on parts and equipment raise the same issues.
Buying local often is not an option. The National Association of Manufacturers estimated that firms running at full capacity could supply only 84 percent of domestic producers’ input needs, meaning at least 16 percent must be imported. The numbers are much higher for certain commodities such as aluminum that are primarily sourced from abroad.
The association’s calculation assumed that alternate inputs exist, but they routinely do not. Roughly half of US goods imports in 2024 were between related parties, with especially high concentrations in transportation equipment, chemicals, computer and electronic products, and machinery.
The prevalence of these intra-firm transactions means that multinational producers in the US are often stuck paying hefty new taxes on components and equipment shipped from their own facilities abroad for further processing there — an intricate and efficient global supply chain that cannot be rejiggered overnight (if at all).
Tariffs have ensured that domestic producers pay significantly more than their foreign competitors for the same inputs — a dynamic that makes US investments less attractive and US goods harder to sell locally and overseas (and ironically dampening tariff protection for downstream US manufacturers). Foreign retaliation against US exports, which was more muted than expected last year, but is still occurring, amplifies these headwinds.
The second problem stems not from the level of tariff rates, but how they have been implemented. Manufacturers might be able to adjust to a permanent, uniform and one-time increase in tariffs, but what they face instead is an ever-changing mishmash of opaque and complicated import taxes enacted by executive fiat.
Last year, the US tariff code was amended 50 times, a non-pandemic record and far above the pre-Trump standard. These changes, along with constant tariff threats, caused an unprecedented increase in trade policy uncertainty, which weighed on manufacturers’ hiring, capital expenditures, supply chain and sales plans even when tariffs were not actually implemented.
Complexity has imposed additional costs. By the end of last year, 20 different tariff measures applied to significant volumes of US imports, up from just three in 2017. These unilateral taxes vary by product and country, as well as by how they “stack” atop one another, with some imports facing multiple taxes and others only one. New rules also apply for certain metals content, trade deals, product exclusions and other special factors.
Calculating the correct tariff on a single product has therefore gone from a relatively stable and straightforward process to one that even certified customs brokers cannot grasp, with big penalties for errors and huge costs, regardless.
As Bloomberg News documented, tariff complexity has pushed US firms to scuttle major operational decisions until they have more clarity.
The tariffs’ variability also amplifies their macroeconomic costs, and Fed economists estimated that domestic manufacturers would pay US$39 billion to US$71 billion annually to comply with the new regime, representing time and money they cannot spend on their businesses.
The harms to manufacturers are consistent with research on past tariff episodes and help to explain why the sector struggled last year — and why things might not get much better this year.
Recent forecasts also suggested caution, with manufacturers and supply chain professionals predicting continued headwinds due to the costs, uncertainty and complexity of tariffs. And the US Supreme Court would not save them. If it invalidates Trump’s “emergency” tariffs in the coming days, administration officials have promised to invoke alternate authorities to recreate them.
Global supply chains took years to develop. They would take even longer to reorganize and would do so at great cost if, that is, they do not break altogether in the meantime.
Scott Lincicome is an economist with the Cato Institute. He specializes in domestic policy and international trade. This column reflects the personal views of the author and does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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