Dive Brief:
- Of the approximately $3 trillion in manufactured goods that the United States imports annually, about 25% are “Achilles’ heels” due to national security concerns, supply concentration and geography, according to a report by the McKinsey Global Institute.
- For these “exposed” products, domestic manufacturing would need to double on average to fully meet domestic demand. The ramp-up would be much larger in some cases, according to the report.
- Specialized skills, supporting infrastructure, sufficient energy and “shovel-ready projects” would also be required, the report said, along with a convincing business case.
Dive Insight:
Over the past 50 years, manufacturing has become an increasingly smaller share of the U.S. economy, according to the report. Although the U.S. is the world’s second largest manufacturer, it lost its top spot to China in 2000. In addition, U.S. factory value added fell from more than 21% as a share of its gross domestic product in the late 1970s to less than half that today, while employment has decreased from 22% of the workforce to 8%.
What to do about this remains contentious. However, many say that the U.S. should bolster or reshore more manufacturing capability in industries affecting national security or other vital interests, such as semiconductors and other advanced technologies.
Although current reshoring efforts are a start, the report found that “ramping up broad swaths” of U.S. manufacturing would be a “daunting prospect.” This is because running all of the country’s existing factories at peak capacity would only generate about $660 billion more in output — far short of the $1.2 trillion U.S. manufacturing trade deficit in 2025. Plus, critical industries such as electronics would remain exposed.
“Many thousands of new factories would need to be built. Workers with the right specific skills would need to be available at the right time and in the right places,” the report said. “All of this would require funding, and that would in turn depend on compelling and concrete business rationales... and would need to be considered in the context of the policy and regulatory environment.”
The U.S. imported about $1.3 trillion in “critical manufactured goods,” or goods that are “central to resilient supply chains and national security” in 2025, the report said. These included advanced semiconductors, pharmaceutical ingredients needed for life-saving drugs and high-capacity batteries, among other products.
In addition to being critical for the economy or national security, many of these goods are concentrated, meaning the U.S. relies on three or fewer countries to source them. Many are also “geopolitically distant,” i.e. physically distant and/or located in countries with which the U.S. has poor relations.
Electronics is the largest U.S. import sector and the most exposed when it comes to the three trade dependencies of criticality, concentration and geopolitical distance, the report said.
Broadly speaking, increasing domestic manufacturing of exposed goods would require creating new capacity or getting more production from existing capacity. Not only would a business case need to be made for both options, but there isn’t enough existing or “slack” capacity to fully make up the trade gap for most products, according to the report.
The report assigned a “ramp-up factor” to 350 manufacturing sectors to gauge how much additional domestic production would be needed to produce the amount currently imported. The 10 industries with the highest ramp-up factor were textiles, electronics, metals, “furniture and miscellaneous others,” chemicals, machinery, nonmetallic minerals, plastics and rubber, transportation equipment and food and beverages.
For example, the U.S. would have to more than double its domestic semiconductor production and quintuple its production of capital goods in electronics.Although there has been some increased domestic production in certain industries, such as semiconductors, chemicals and metals, a much higher degree of investment is needed, the report said.
“Ramping up production of exposed products requires more than a piecemeal approach,” the report said. “Producers basically need to go big with significant, persistent investment and hiring to create the kind of industrial capacity that would make the United States meaningfully less dependent on foreign suppliers.”
