China's Factories Didn't Hollow Out America's Middle Class

2025-05-09 03:12:30

(MENAFN- Asia Times) For years, I've been calling for the US to promote manufacturing . When Americans started getting excited about reindustrialization, I cheered . I was a big supporter of Joe Biden's industrial policy , and I even praised Donald Trump for smashing the pro-free-trade consensus in his first term.

Trump's tariffs haven't changed my mind about any of that. Yes, the tariffs are a disaster . But they're not a disaster because they promote manufacturing; indeed, they are deindustrializing America as we speak, by destroying American manufacturers' ability to leverage supply chains and export markets.

When America has finally realized the futility of Trump's approach, it will be time to turn once again to the task of reindustrialization - in fact, that task will be even more urgent, given the damage that Trump will have done.

And yet at the same time, I think there's a misguided narrative about globalization, manufacturing, and the American middle class that has taken hold across much of society. The story goes something like this:

You can see this narrative at work in Joe Nocera's recent much-discussed post in the Free Press:

And you can see the narrative at work in a recent series of tweets by Talmon Joseph Smith:

Like all such narratives, this one consists of layers of myth wrapped around a core of truth. But not all grand economic narratives are created equal - in this case, the layers of myth are thick and juicy, while the core of truth is thin and brittle.

Everyone knows about the China Shock paper and the collapse of manufacturing employment by about 3 million in the 2000s. That's the core of the story, and it's very real. But there are a lot of big, important economic facts that place that story in perspective, which most of the people talking about this topic seem not to know.

Ultimately, the trade-driven collapse in manufacturing was only a small part of the economic story of America over the last half century.

America is not actually that globalized

Pundits and politicians alike talk incessantly about the flood of cheap Chinese goods into America. But overall, this is a small percent of what we buy. The U.S. is actually an unusually closed-off economy; as a fraction of GDP, imports are much lower than in most rich countries, and lower even than China:

Source: World Bank

Trade deficits are an even smaller percentage of GDP. US imports of manufactured goods minus exports are equal to about 4% of GDP per year. Our trade deficit with China is about 1% of GDP .

In terms of imported components, America manufactures most of what it uses in production. China's exports to the US are actually more likely to be intermediate goods rather than the consumer goods we see on the shelves of Wal-Mart - another thing the typical narrative misses.

But even so, China makes only about 3.5% of the intermediate goods that American manufacturers need:

Source: Baldwin et al. (2023)

So if we eliminated trade deficits, would it reindustrialize America? Even assuming that we replaced the imports 1-for-1 with domestically made goods, the impact on manufacturing's share of US GDP would be fairly modest. Here's Paul Krugman :

So even under the optimal scenario, if we totally eliminated the US trade deficit, manufacturing would go from 10% of US GDP to 12.5% - about the same as its share in 2007, and still far less than Germany, Japan or China:

You can also see from this chart that other countries haven't necessarily done an amazing job of protecting their industrial bases, as Nocera claimed; the manufacturing share of GDP is drifting down everywhere.

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