The manufacturing delusion

“Around the world, politicians are fixated on factories. President Donald Trump wants to bring home everything from steelmaking to drug production, and is putting up tariff barriers to do so. Britain is considering subsidising manufacturers’ energy bills; Narendra Modi, India’s prime minister, is offering incentives for electric-vehicle-makers, adding to a long-running industrial-subsidy scheme. Governments from Germany to Indonesia have flirted with inducements for chip- and battery-makers. However, the global manufacturing push will not succeed. In fact, it is likely to do more harm than good.

 

Today’s zeal for homegrown manufacturing has many aims. In the West politicians want to revive well-paying factory work and restore the lost glory of their industrial heartlands; poorer countries want to foster development as well as jobs. The conflict in Ukraine, meanwhile, shows the importance of resilient supply chains, especially for arms and ammunition. Politicians hope that industrial prowess will somehow translate more broadly into national strength. Looming over all this is China’s tremendous manufacturing dominance, which inspires fear and envy in equal measure.

 

Jobs, growth and resilience are all worthy aims.

 

Unfortunately, however, the idea that promoting manufacturing is the way to achieve them is misguided. The reason is that it rests on a series of misconceptions about the nature of the modern economy.

 

One concerns factory jobs. Politicians hope that boosting manufacturing means decent employment for workers without university degrees or, in developing countries, who have migrated from the countryside. But factory work has become highly automated. Globally, it provides 20m, or 6%, fewer jobs than in 2013, even as output has increased 5% by value. For all countries to take more of a shrinking pie is impossible.

 

Many of the good jobs created by today’s production lines are for technicians and engineers, not lunch-pail Joes. Less than a third of American manufacturing jobs today are production roles carried out by workers without a degree. By one estimate, bringing home enough manufacturing to close America’s trade deficit would create only enough new production jobs to account for an extra 1% of the workforce. Manufacturing no longer pays those without a degree more than other comparable jobs in industries such as construction. As productivity growth is lower in manufacturing than it is in service work, wage growth is likely to be disappointing, too.

 

Another misconception is that manufacturing is essential for economic growth. India’s manufacturing output, as a share of gdp, languishes about ten percentage points below Mr Modi’s target of 25%. But that has not stopped India’s economy growing at an impressive rate. In the past few years China has struggled to meet its growth targets, even as its manufacturers have come to dominate entire sectors, such as renewable energy and electric vehicles.

 

What about the argument that, given the conflict in Ukraine and tensions with China, the rich world must reindustrialise for the sake of national security? It seems dangerous to rely on factories abroad. And covid-19 caused a supply-chain panic. Some dependencies are indeed chokeholds. China’s near-monopoly in refining rare earths has recently allowed it to put the brakes on global carmaking, giving it leverage over America. It is also prudent for the West to build up stocks of weapons and ammunition, to ensure that crucial infrastructure is sourced from allies and to build things with long lead times, like ships, before conflict breaks out.

 

But in today’s ultra-specialised world, across-the-board subsidies for reindustrialisation will not do much to boost war-readiness. Making Tomahawks is entirely different from making Teslas. Far from suggesting that countries at peace must develop the capacity to make lots of drones, the conflict in Ukraine shows that a wartime economy can innovate and multiply production volumes remarkably fast.

 

The final part of the manufacturing delusion is the idea that China’s industrial might is a product of its state-led economy—and so must be countered with a similarly extensive industrial policy everywhere else. China does indeed distort its markets in all kinds of ways, and early in this century it manufactured an unusual amount given its level of development. But those days are past.

 

China has not escaped the global shrinkage of factory jobs since 2013. The share of its workforce in factories corresponds to America’s at a similar level of prosperity; and it is lower than it was in most other rich economies. China’s 29% share of global manufacturing value-added is a function of its size rather than its strategy. After years of fast growth, it now has an enormous domestic market to support its manufacturers. Innovation is begetting innovation; a “low-altitude economy” of drones and flying taxis promises to take flight soon. Yet, even though China’s goods exports have grown by 70% relative to global GDP since 2006, they have fallen by half as a share of the Chinese economy.

 

Factory settings

 

The way to rival the manufacturing heft of China is not through painful decoupling from its economy, but by ensuring that a sufficiently large bloc rivals it in size. This is best achieved if allies are able to work together and trade in an open and lightly regulated economy; factories in America, Germany, Japan and South Korea together add more value than those in China. As the pandemic showed, diverse supply chains are a lot more resilient than national ones.

 

Alas, governments today are heading in precisely the opposite direction. The manufacturing delusion is drawing countries into protecting domestic industry and competing for jobs that no longer exist. That will only lower wages, worsen productivity and blunt the incentive to innovate, while leaving China unrivalled in its industrial might. The mania for manufacturing is not just misguided. It is self-defeating. ” [1]

 

The elephant in the room is missing in this text. Economy is undergoing switch to renewables, generative AI and generative AI controlled robots. EU and America are competing and trying to kill the economy of their competitor (tariffs, non-tariff barriers, subsidies, energy prices). Future will have the one that wins in this competition. Who will not have manufacturing in this situation will be doomed [2].

 

1. The manufacturing delusion. The Economist; London Vol. 455, Iss. 9452,  (Jun 14, 2025): 7.

 

 

2. The shift towards renewables, generative AI, and generative AI-controlled robots is indeed a major economic transition, and it's accurate that the EU and the US are fiercely competing in these sectors.

 

Here's a more nuanced look at the situation:

 

    Competition and Cooperation: While there's certainly intense competition for dominance in these emerging technologies, the relationship between the EU and the US is also characterized by significant interdependence and collaboration. For example, US tech investments play a crucial role in the EU's Information and Communications Technology sector, and mutual cooperation can be beneficial for competing with other global economic blocs.

    Focus Areas: Both regions are actively investing in and promoting the development of AI, robotics, and clean energy technologies.

        EU: The EU is prioritizing AI, biotech, and affordable clean energy in its competitiveness drive, aiming to close the gap with rivals like the US and China. It is focusing on strengthening its position in clean energy technologies, boosting innovation, and decarbonizing manufacturing.

        US: The US is also actively developing AI and robotics, with private investment in these areas reaching record levels. US private AI investment significantly exceeds that of China and the EU.

    Challenges and Opportunities: Both the EU and the US face challenges and opportunities in this transition.

 

        EU: The EU faces challenges like high energy prices, supply chain disruptions, and skills shortages in the clean energy sector.

 

It is also behind in attracting private investment in AI compared to the US.

        US: Generative AI's increasing energy demands are putting strain on energy systems, raising concerns about sustainability.

    The Future is Complex: The future of these economies will likely involve a complex interplay of competition and cooperation. The success of each region will depend on its ability to foster innovation, attract investment, develop skilled workforces, and implement effective policies to manage the transition.

 

The economic transition towards renewables, generative AI, and generative AI-controlled robots is a significant global shift. The relationship between the EU and the US in this context is complex, involving both competition and some cooperation.

Here's a balanced view:

 

    Competition: The EU and the US are indeed vying for leadership in these emerging technologies, which are seen as critical for future economic competitiveness. The EU is focused on bolstering its own industries in AI, biotech, and clean energy to keep pace with rivals like the US and China.

    Cooperation: Despite the competition, there are also strong ties and areas of mutual interest between the EU and the US. For example, US tech companies have a significant presence in Europe, and mutual cooperation can be beneficial for both regions, especially in areas like digital technology.

    Challenges and Opportunities: Both the EU and the US face specific challenges in this transition.

 

The EU lags behind in private AI investment and faces high energy prices, according to The World Economic Forum.

 

The US faces challenges in scaling renewable energy infrastructure to meet the increasing energy demands of AI.

    Focus on Innovation and Adaptation: Success in this future economy will depend on a region's ability to foster innovation, attract investment, develop skilled workforces, and adapt to the changing landscape.

 

In conclusion, while there's competition in this economic transition, it's more accurate to describe the relationship between the EU and the US as a complex mix of rivalry and interdependence and an all-out battle to "kill" each other's economies. The future will likely see a continued dynamic interplay between the two regions, with both aiming to leverage these new technologies for their own economic advancement. Donald Trump labeled the European Union “worse than China” during a press statement. He is right.