By: Danny DeBois, Aidan Madigan-Curtis, Kate Dunbar, Kenza Wilks

Without more domestic manufacturing, tariffs are likely to result in lower margins and higher prices. In Part 1 of this series, we explore the structural pressures that make growing U.S. manufacturing so challenging.

This report is a collaboration between Bridgewater Associates and Eclipse, a leading industrial technology investment firm, focused on companies that transform physical industries critical to people’s lives. This research draws on a series of conversations with manufacturing professionals in Eclipse’s network, Eclipse’s expertise in industrial technology, and Bridgewater’s macroeconomic expertise. Aidan Madigan-Curtis, who co-authored this BDO*, is a Partner at Eclipse and a Bridgewater alumnus. Aidan invests across core, disruptive themes in today’s world, including geopolitical decoupling, supply chain dislocation, energy transition, manufacturing onshoring, and industrial autonomy. She also sits on 10 corporate boards spanning defense and industrial sectors and a broad array of technologies, including the Internet of Things, computer vision and AI, autonomy, and robotics.*

With the U.S.’s embrace of modern mercantilism, policy makers are increasingly trying to leverage economic policy to enhance national security and strength, as opposed to a laissez-faire approach of allowing free markets to drive economic growth. As such, revitalizing the domestic manufacturing base is a core priority of the Trump administration, given the importance of supply chain security, a robust defense industrial base, and the potential benefits to key constituencies like manufacturing workers.

Bringing back U.S. manufacturing will be a Herculean task — the U.S. economic system has been optimized to employ people in the highest-value-added industries, and much of what can be done more efficiently elsewhere has been outsourced. Reordering the entire system to produce more manufacturing will require significant shifts in labor and capital, and the accumulation of new knowledge and expertise.

The administration has enacted sweeping tariffs in pursuit of reviving domestic manufacturing. Whether these policies succeed in increasing U.S. manufacturing or simply result in higher costs that companies either absorb in margins or pass on to consumers will depend on: 1) existing U.S. manufacturing capacity for the goods being tariffed, 2) how much tariffs close the cost differential between producing abroad and producing in the U.S., and 3) how difficult and time-consuming it is to scale up new industrial capacity. In this report, we share our thinking on the possibility of reshoring manufacturing to the U.S. and how much of a difference tariffs can make. Our key takeaways:

• The U.S. starts from a place of limited but not nonexistent manufacturing capacity. Right now, the U.S. imports roughly 40% of the goods it consumes, both directly and indirectly through domestic manufacturers’ use of imported inputs, as it has become increasingly dependent on imports over the past several decades. Certain goods consumption in the U.S., like apparel, is almost entirely imported, as labor is a large share of the total cost, and these goods can be produced much more cheaply outside the U.S. Tariffs on these kinds of goods are especially likely to be passed on to the consumer, given the lack of any viable competition from domestic producers any time soon.
• The lack of sufficient scaled manufacturing capacity across tooling, electronics, semiconductor supply chains, and critical equipment inputs is a major barrier to scaling up manufacturing capacity in the near term. Even for goods where the U.S. does have some domestic manufacturing capacity (e.g., in autos, agricultural and defense equipment, and pharmaceutical manufacturing), there are major hurdles to scaling up production significantly in the near term, given the time it takes to build manufacturing capacity and the shortage of manufacturing labor, particularly workers with specialized skills. A rough estimate is that nearly 5 million additional workers would have been needed for manufacturing jobs to supply the increase in U.S. goods consumption that occurred over the past 20 years. As such, even for goods the U.S. has some ability to produce domestically, tariffs may not do much in the short term to increase domestic production market share, though they can potentially help in the long term.
• The U.S. faces significant challenges in terms of cost competitiveness. Globalization drove the offshoring of U.S. manufacturing toward economies with much cheaper production costs. In some cases, the cost differential is large enough that even 25% tariffs don’t close the gap — for example in India, where productivity-adjusted wages are 30% lower compared to the U.S. The dollar’s secular strength has also effectively raised the cost of goods produced in the U.S. relative to foreign-produced goods and acted as a headwind to U.S. manufacturing competitiveness.
• Broad tariffs can be counterproductive in some cases, where the necessary inputs to build manufacturing capacity — the “machines that build the machines,” as one of our interview subjects put it — are imported, and tariffs make it even costlier to manufacture domestically. Many of these inputs are only produced by a few companies in a small number of countries, with market share dominated by Europe and by China.
• One of the most durable ways to increase the viability of manufacturing in the U.S. is to increase the productivity of the manufacturing sector (which is likely to be only marginally impacted by tariffs) and thereby decrease the relative importance of higher labor costs. Productivity in the U.S. manufacturing sector has been stagnant for the past 15 years, but there are new technologies that have the power to be transformative. We discuss these technologies in greater detail in Part 2 of this report.

The table below breaks down U.S. consumer spending by type of good, and the share of that consumption from imports (either directly, or through domestically produced goods with imported inputs). We show imports as a share of producer value of all U.S. goods consumption, i.e., excluding any value add that the Bureau of Economic Analysis attributes to transportation costs or retailer margins — for that figure, the U.S. import share is 37%. Relatively low-value goods, like footwear and clothing, are heavily imported (80-90%). Food is the main sizable consumption item that the U.S. mostly produces at home. Many goods, such as new motor vehicles, household appliances, and pharmaceuticals, are significantly but not entirely imported (~50-60%) and have domestic manufacturing capability that could be scaled up.

Offshoring of manufacturing in the U.S. has been a multi-decade process, driven by a combination of falling shipping costs, rising labor cost differentials between the U.S. and foreign economies, and industrialization in emerging market economies. This process slowly began in the post-war era but accelerated in the 1990s and early 2000s, particularly with the inclusion of China into the WTO. As such, the number of manufacturing jobs in the U.S. has fallen precipitously, but the importance of manufacturing to U.S. economic growth has also declined, as the U.S. economy continued to develop a comparative advantage in sectors like high-value services and technology.

Below, we walk through the near-term and structural challenges to bringing back US manufacturing and the potential path forward.

Near-Term Challenges to Bringing Back Manufacturing

The biggest near-term challenge to bringing back manufacturing to the U.S. —and the reason why tariffs are more likely to result in a combination of higher prices and lower margins than in increased domestic producer market share — is that the U.S. simply does not have the labor and industrial capacity to produce many goods domestically and faces constraints on the ability to scale up production in the near term.

This is especially true of goods that the U.S. doesn’t produce much of, such as apparel. For goods the U.S. does produce, the picture is more mixed. The biggest near-term challenge would be scaling up production to meet U.S. demand — the U.S. manufacturing workforce has shrunk significantly over the past several decades, as employment has instead shifted more toward the services sector.

As one rough way of penciling out what would be required — nearly 5 million additional workers would be needed for manufacturing jobs if the U.S. manufacturing workforce had grown at the same rate U.S. goods consumption grew over the past 20 years. Finding those workers would likely prove very challenging, as many require specialized skills, and according to the National Association of Manufacturers’ Outlook Survey, nearly 50% of manufacturing firms list “Attracting and Retaining a Quality Workforce” as a primary business challenge.

In addition to the labor-related challenges with scaling up manufacturing capacity, constructing new heavy industrial manufacturing facilities can take anywhere between three to five years, and sometimes even longer for highly complex processes, such as semiconductor fabrication or pharmaceutical manufacturing.