Donald Trump and his mini-me, JD Vance, are making a very bad economic bet when they push for higher tariffs to enable in Vance’s words “a great manufacturing comeback.”
Fareed Zakaria, the brilliant New York Times columnist on global affairs, beat me to the punch on making that point. In a recent column, he said, “Trump’s manufacturing dream is a mirage.” Zakaria made the macro point that the U.S. economy is dominated by the services sector, not the production of goods.
He is dead right, whereas Trump and Vance are dead wrong, as they are on so many facets of the economy.
In the U.S., 80% of the non-farm jobs are in the services sector. That holds true in Wisconsin where 2.4 million jobs out of a total of 3 million are in services, such as software, entertainment, finance and health care.
West Bend is a great example of how the U.S. economy has changed dramatically. West Bend used to have more than 5,000 manufacturing jobs during and after World War II; it now has fewer than 1,500. At the same time, service jobs have jumped. West Bend Mutual has 1,600 employees, and Delta Defense has more than 700.
In the U.S., only 8% of the jobs are in manufacturing. Wisconsin is the second most manufacturing intensive state. We have 480,000 jobs in goods production out of a total of 3 million in the workforce. That’s 16%. Wisconsin peaked at almost 600,000 goods production jobs years back.
What makes countries strong economically is competition brought on in part by free trade across borders. The U.S. is far and away the leader in the world in the sale of services.
Germany and Japan, which protect their local manufacturers, have become stagnant economies. The U.S. has led the world with GDP growth at 2.5% to 3%. Note that there has been a slight falloff in our growth since President Trump went nuts on tariffs on other countries, including on our best allies/trading partners like Canada and Mexico.
I will make a bet that neither Trump nor Vance have been in more factories than what you can count on one hand. They know not whereof they speak.
Having been in factories for the most of 70 years since I worked on the floor of grandfather D.C. Bambenek’s tire chain manufacturing company in Winona, Minnesota, and having majored in industrial administration, a combination of engineering and business, there are other factors beyond Zakaria’s analysis.
As with farming, manufacturing has become hyper-productive. Only 2% of the workforce works on farms and 8% in factories. With far less labor, production in agriculture and manufacturing have continued to jump sharply for decades.
How did that happen in our factories? Here are some of the advances:
- American managers were slow to figure out why the Japanese carmakers were eating their lunch back in the 1980s, but the competition compelled them to learn what Dr. Edward Demming had taught the Japanese about lean manufacturing. Using advanced statistical and problem-solving methods, our Asian competitors dramatically reduced costs from scrap and defects. Zero defects was their goal. It took several decades, but the American auto industry caught up. Cars now last 200,000 miles or more because of the quality disciplines they learned. Note that tariffs were not a factor.
- Nor was cheap labor the main determinant in winning or losing. All of the surviving carmakers worldwide have adopted advanced automation. Production went up, costs went down and fewer jobs were needed. Labor as a percentage of total car costs has gone down, down, down.
- Innovation and better quality now determine which cars sell and which cars don’t. Cameras that scope 360 degrees around a vehicle are just one example of such innovation. (My next car will certainly have that safety feature.)
- The introduction of artificial intelligence (AI) will accelerate the long trend towards better efficiency, quality and fewer workers per car. One example is the use of AI in vison inspection to weed out the few bad parts from the good.
Zakaria noted that back in 1973 that 25% of the workforce was in goods production. To his point, the advances cited above will further reduce jobs in manufacturing from the current 8% down toward the 2% achieved in farming.
What Trump and Vance have no clue about is that economies must keep reinventing themselves. Entrepreneurs rely upon ever-higher technologies and innovation to establish themselves in the marketplace.
Clairvoyant politicians are scarce, but leaders who can look down the road at what produces prosperity for a country have learned that these strategies are what works:
- Investments in research and development, including tax breaks for those expenditures.
- Education in STEM technologies and entrepreneurship.
- Anti-trust enforcement to prevent the big incumbents from squashing the innovative startups.
- A welcome mat for immigrants with high skill levels. The newcomers fill workforce shortages and are more likely to be entrepreneurs than the average citizen.
Long and short, the Trump/Vance obsession with tariffs on friends and enemies alike will drive up consumer prices and inflation and will do little to stimulate the economy and grow jobs in the manufacturing sector.
Further, their attacks on academic R&D and universities will slow U.S. growth and prosperity.
P.S. Zakaria notes that average wages are $44 per hour in the service sector and $35 per hour in manufacturing.
John Torinus is the chairman of Serigraph Inc. in West Bend.
