The hidden crisis threatening to sink Trump's manufacturing dream

Telegraph

6 hours ago

Donald Trump's trade policy has one critical goal.
'Under my leadership, we're going to take other countries' jobs. We're going to take their factories,' he told a rally in Georgia last year in the weeks leading up to his ultimate election victory.
Tariffs are his chosen tool, to tax imports out of the country and force the manufacturing industry back into America.
But unfortunately for Trump, economists have found a vital flaw in the plan. They fear the economy simply does not have the capacity to build and staff enough factories to make the dream of a manufacturing renaissance into a reality.
The critical gap, says Frances Donald, chief economist at RBC, is a lack of people.
'Despite the US administration's focus on providing jobs for Americans, America needs workers, not jobs,' she says.
US unemployment, at 4.6pc, is very low by historical standards, indicating there is not a vast pool of jobseekers from which manufacturers can find the workers to staff their assembly lines.
The population is ageing rapidly too, so the economy is losing more workers to retirement.
Donald calls this 'a Covid-style shortage of available labour'.
'The US has the highest share of those aged over the age of 65 that it has ever had – almost 22pc of the population is over the age of 65,' she says.
'This demographic shift has accelerated very dramatically in the past three years, so much so that every month America sees more retirements than it did the month before. There are three retirees in the US for every one unemployed new entrant coming into the labour market.'
Three-quarters of the working-age population are economically active – either in work or looking for work. That is the highest share since the financial crisis, again indicating there are not a large number of people set to jump at the possibility of employment in factories.
'As much as we hear the desire to reshore manufacturing activity into the US, there is no reshoring when America needs workers,' says Donald.
'It is not simply, 'What Americans would like to work in a factory?' It is that there are no Americans available to work in factories.'
Shay Luo at Kearney, a consultancy which tracks supply chains and reshoring, says most young workers are often simply not interested in taking on jobs in factories.
'It is not attractive to work in a manufacturing site. It takes a lot of hard work, it takes years to be perfect at those skill sets, the working environment is not good, and in retail, as a cashier or a shop assistant, you get paid way more, so it is more attractive for a lot of young people,' she says, noting a cultural shift in attitudes to work.
'Everyone nowadays wants to become a TikToker or an influencer. It is a real problem to attract talent and young people and graduates to come back to work in manufacturing.'
Even if a manufacturer does find the workers, they are prohibitively expensive compared to their foreign counterparts. It costs almost $103,000 (£76,500) to employ the average factory worker, according to the National Association of Manufacturers.
'This is far higher than in Asia or even most of Europe,' says James Knightley, an economist at ING.
'It makes sense to reshore high-value-added, highly-automated manufacturing to the US – technology and pharma related products mainly – where there are also national security concerns regarding supply chains and intellectual property,' says Knightley.
'But for most other consumer products and business components, the extra cost involved could be detrimental to the economy – even with 100pc tariffs it would still be cheaper to buy the foreign made item in many instances.'
Some companies have pledged to set up more factories in America.
Tech companies including Apple and IBM, pharmaceuticals giant Novartis, Vauxhall owner Stellantis and food conglomerate Kraft Heinz, are among those to have told the White House they will plough more into US manufacturing.
Paul Ashworth at Capital Economics fears the projects will not be a straightforward win for advocates of tariffs. Car factories, for instance, will face a 50pc tariff on most imports of steel and aluminium which they import, driving up the costs of operating in America.
On top of that, 'you have to be careful about taking some of these projects at face value', adds Ashworth.
He cites the example of iPhone manufacturer Foxconn which in 2018 pledged to invest $10bn in a new site in Wisconsin with the aim of employing 13,000 people.
Trump, in his first term as President, hailed the scheme as 'the Eighth Wonder of the World'. But the project was quickly scaled back and became the subject of mockery among Democrat politicians.
Other attempts to force or encourage investment into America appear to have been more successful.
TSMC, the giant Taiwanese semiconductor manufacturer, is building a vast plant in the Arizona desert, in part due to subsidies offered by the Biden administration.
The goal of the incentives was to reduce American reliance on foreign supply chains, bring high tech manufacturing back to the country and ensure China would not choke the global economy if it sought to seize Taiwan – aims which are not dissimilar to those of Biden's successor.
This type of project is welcome, securing vital supplies for America and bringing cutting-edge, productive and profitable work into the country.
On the other hand, it does not employ the vast numbers of production line staff which were evoked in Trump's campaign speeches.
It may also end up being something close to a one-off given the enormous swings in policy which make it tough for many companies to commit to such $165bn investment sprees.
Peter Berezin, chief global strategist at BCA Research, warns that chopping and changing subsidies and tariffs gives businesses little certainty, noting that investment intentions have plunged.
'You're not going to build a factory unless you have confidence it will be profitable for the next 20 years or so,' he says.
'What the Trump administration is saying is, go ahead and build that factory which will only be profitable if there are high tariffs – but we are not going to guarantee they will be high, because we are going to use the threat of tariffs to negotiate better trade deals.'
Hence companies will wait instead of investing to see where the trade war goes.
It is not just tariffs which might encourage companies to consider building factories in the US.
Amit Mehrotra at UBS says there is a thus-far unappreciated tax incentive in Trump's 'big, beautiful bill' currently heading through the legislature which will allow companies to fully expense not just their equipment, but also their new buildings against their tax bill.
'Tariffs are not really going to be the stick that incentivises near-shoring,' he says.
'Now there is a massive carrot out there that we are incredibly bullish on – that we think can really drive a renaissance of US manufacturing.'
That will not help summon up new workers, but it will at least slash the cost of investment.
Expect some high-tech, high-profile and high-value factories to come back to America – but do not get your hopes up for enough new jobs to renew the whole rust belt.