The Shape of Things To Come

Infrastructure is in place for domestic manufacturing to increase, with supply chains shortened. Will the boom continue, and could strategic placement of tariffs help?

By Anne-Frances Hutchinson

After 20 years of struggles and setbacks, things are finally looking up for U.S. manufacturers. Bolstered in large part by expansive federal infrastructure investments and lessening financial pressures, the overall industry outlook for 2025 predicts a 4.2% increase in overall revenues and 5.2% growth in capital expenditures. The rise in CapEx is a vote of confidence for the sector’s long-awaited recovery.

When approached as a long-term remedy for the impact of globalization on the manufacturing sector, the President’s “America First” agenda is likely to uplift domestic manufacturing, which will create more stateside infrastructure developers. Tariffs could lead to a surge in domestic investment and opportunities across the American manufacturing landscape, raising hundreds of billions in revenue. While many economists oppose this view, history shows that the long-term effects of tariffs can significantly boost manufacturing.

Consider the setting of import quotas on Japanese cars in during the Reagan years. Detroit’s automakers did not have the efficient production processes developed by Japan, and the competition posed an existential threat. At first, putting the brakes on auto imports raised prices by 5 to 10%, but it motivated Japanese car makers to invest heavily in production facilities in the U.S.; it wasn’t long before they brought their supply chain, design, and research and development to our shores and the innovations that reshaped the entire domestic auto industry. Over the four years of the quota program, the glut of foreign imports dropped, car prices fell, and American auto workers were back on the job.

Recent successes in onshoring also support the economic benefits of strategic tariffs. In 2017, the U.S. set a quota of 1.2 million units of foreign-made residential washing machines and imposed a 20% tariff on them. When the quota was reached the tariff rose to 50%. Initially, LG and Samsung opposed the move, but the advantages quickly became clear.

“Essentially, by incentivizing both LG Electronics and Samsung to open and then expand manufacturing facilities in the United States, the tariffs achieved the best of both worlds. They led to the creation of more U.S.-based competitors — with more jobs and more competition. And, they resulted in more domestic product innovation as well,” noted Industry Week’s Jeff Ferry. Prices sank back to pre-tariff levels in a matter of months.

Ferry added that domestic manufacturers GE and Whirlpool, who employ more than 40,000 workers, would benefit from the competition if they raise their game.

The 2018 trade war between the U.S. and China offers another positive example. The placement of duties on $250 billion of Chinese imports resulted in 1.9% decline in import prices by 2019.

New Administration, New Challenges

The $1.2 trillion Infrastructure Investment and Jobs Act (IIJA) has already funded 60,000 infrastructure projects, yet less than half of the monies have been spent. The fate of that balance now rests with the new administration.

It remains to be seen how infrastructure programs launched in the Biden administration will be slimmed down or cut entirely in the next four years. The IIJA and the Chips and Science Act (CHIPS Act) may hold, given their bipartisan support, but that can’t be assured.

Over the next several years, funding from IIJA, the CHIPS Act, and the IRA could theoretically inject multiple billions into the infrastructure value chain. “A byproduct of this legislative wave is the related private spending for manufacturing and cleantech, which to date totals over $988 billion,” estimated Global X ETFs.

While sources indicate that just the CHIPS Act investments have the potential to create roughly 115,000 construction and manufacturing jobs, on the campaign trail Trump signaled that CHIPS was a target for repeal.

Over 90% of the planned IRA-funded projects are in the manufacturing sector. Recently, a handful of Republican legislators have shown support for the IRA (despite casting zero votes for the act), in part because in its first two years the majority of these projects benefitted their congressional districts with the potential creation of over 77,000 jobs. Given the President’s expressed zeal for repealing cleantech legislation, that pushback may quickly become moot.

Moves for a manufacturing industry in flux

The best way for some manufacturers to deal with tariff uncertainty is to make a preemptive strike and beseech the government for exemptions. With dedicated champions on Capitol Hill, firms can lobby for exemptions, waivers, or complete removal. While risky, persuading the government to drop tariffs before they are imposed can be effective.

Section 301, an investigative trade tool created in 1974 by the Office of the U.S. Trade Representative, was revived by the first Trump administration to seek retaliation against countries imposing unfair trade blockades against the United States. On average in the manufacturing industry, the exemption rate is 3.5%; however, In 2019, one company was granted 62.5% of approvals for their exemptions. (The influence of personal relationships with the Oval Office was one of several factors contributing to that astonishing rate.)

There are several other approaches, including stockpiling goods that have yet to be assigned duties, moving their sourcing to countries where our tariffs don’t apply, and partial reshoring. “Not all tariffs can be avoided this way, and the alternative sources may have additional costs or considerations that make the total cost of sourcing from that location less economical,” stressed Chris Jones, Head of Supply Chain Research for S&P Global Market Intelligence. “The exodus from mainland China in the wake of the prior round of tariffs led imports from mainland China of products covered by tariffs to drop from 21.6% of imports in 2017 to 13.5% in the 12 months to August 31, 2024.”

In the coming months, manufacturers will no doubt be measuring risk against rewards, pitting fewer supply chain risks, faster lead times with less downtime, and quality control benefits against the risk of labor shortages, higher operating costs, and the complexity of supply chain reconfigurations. Trade imbalances are nothing new, and neither are tariffs. Optimism supported by robust investments in infrastructure and strategically applied tariffs stand to make the next several years some of the best for American manufacturers.