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Joe Biden and the future of US manufacturing

Investment Monitor assesses Donald Trump's record within the US manufacturing industry, and spells out the challenges that lie ahead for Joe Biden.

biden-usa-manufacturing
US President-elect Joe Biden will inherit a manufacturing industry facing challenges from Donald Trump’s tariff policy, the Covid-19 pandemic and the trade war with China. (Photo by Jim Watson/AFP via Getty Images)

The day Donald Trump-supporting rioters breached Capitol Hill security, US manufacturers made a statement that went way beyond mere condemnation.

The National Association of Manufacturers (NAM) – a group that represents 14,000 US manufacturing companies, the largest in the country – issued a letter that called on Vice-President Mike Pence to “seriously consider working with the cabinet to invoke the 25th Amendment”. The 25th Amendment is the part of the US constitution which, if invoked, calls for the immediate removal of the president. NAM urged Pence to do this, “to preserve democracy”.

This was a significant development given that the NAM is typically a Republican-leaning association. Regardless of how Trump’s presidency will end, it is ending, and within days President-elect Joe Biden and his administration will hold the reins. Will this spell good news for US manufacturing? To answer that question, Trump’s impact on the US manufacturing industry must be assessed.

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Trump: Tax, tension and tariffs

When asking those involved in US manufacturing to offer a report card on Trump’s administration, the ‘three Ts’ are often cited – trade tensions, taxes and tariffs. The corporate tax cuts handed out by Trump were generally thought to be a positive thing for the manufacturing industry. However, escalating trade tensions and heightened tariffs proved to be unpopular.

Rosemary Coates, founder and executive director of the Reshoring Institute and president and founder of Blue Silk Consulting, says: “In terms of the economy, manufacturing has been doing very well under Trump.” This is mirrored in the chart above, which shows a continuation of the upward trend of value added in manufacturing that began during Barack Obama’s presidency.

He said that the Chinese or somebody else were going to pay the tariffs. That is not true – the US consumer pays the tariffs. Robert Budway, Can Manufacturers Institute

On the strategies used by Trump, Coates says: “There was a lot of rhetoric about support for manufacturing early on [in Trump’s presidency]. One of the first things that Trump and Pence did was go to a manufacturer in Indiana, Carrier, that was planning to move its factory to Mexico. Through a series of bullying and encouragement to provide tax incentives they influenced Carrier to keep the manufacturing plant in Indiana – this was touted as a big win. That started the whole characterisation of keeping manufacturing here and really holding onto it by the ankles.”

This particular effort ultimately failed with the factory being moved to Mexico within a year, laying off approximately 500 US-based workers in the process. Coates continues: “The tax incentives didn’t do much. There was a lot of this evidentiary kind of bluster and talk and promotion and publicity, but then behind the scenes nothing happens, or it is a negative impact.”

US manufacturing jobs for US workers?

This idea of keeping manufacturing American and preserving jobs was something Trump pinned much of his campaign and presidency to. Despite this, outward foreign direct investment (FDI) in manufacturing actually peaked under Trump, with more than $900m being invested abroad in 2019.

Perhaps more positively for Trump, his 2017 Tax Reform Act saw manufacturers’ tax rates fall from approximately 30% to 21%, which is lower than the global average of 24%, according to the Tax Foundation.

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Coates states that although this move appeared positive on the surface, the US manufacturing industry didn’t necessarily reap the benefits.

“It gave us a more level playing field and maybe even some advantage by having a lower tax rate for manufacturers in the US,” she says. “However, instead of using the tax break to reinvest in industry – i.e. companies taking that saved money to reinvest in their capital infrastructure or various other ways of expanding manufacturing – almost nothing happened.

“It was just money in the pocket of the executives, essentially, or the stockholders.”

How did Trump’s tariff policy affect US manufacturing?

Alongside tax cuts, tariffs were introduced to the manufacturing industry under Trump, to a less-than-positive response.

Robert Budway, president of the Can Manufacturers Institute, believes that this created a trust issue with the Trump administration.

“The tariffs were really a bad deal,” he says. “They certainly created economic tensions within the industry, in terms of higher prices because of the tariffs, and it created a situation where the government was picking winners and losers in the packaging space. That is not what it should be doing.”

He also explains that the way tariffs were explained by the Trump administration left a lot to be desired. “It increased costs to the consumers. [Trump] really told a lie about it. He said that the Chinese or somebody else were going to pay the tariffs. That is not true – the US consumer pays the tariffs.”

James Chavez, president and CEO at SC Power Team, the economic development organisation of South Carolina’s 20 electric cooperatives, highlights the impact tariffs had on global investors.

“I think what we found was that companies were not willing to make legacy investments until they knew the path ahead and they could calculate the financial impact, positive or negative,” he says. “They just weren’t going to make those investments until they knew what it looked like and so decisions got put off.

“So, in 2018, we start to see a trend of domestic investment outpacing FDI.”

Trump’s trade impact

When it comes to trade deals, Abe Eshkanazi, CEO of the Association for Supply Chain Management in the US, explains the departing president’s impact.

“I think there has been an effort to clean up a lot of the multiple trade agreements and to address the challenges that we have had in complying with trade agreements and holding other companies accountable,” he says. “There was a significant push, but unfortunately it manifested itself in the US extricating ourselves from the trade agreements, as opposed to improving them.”

Of Trump’s focus on keeping supply chains in the US, Eshkanazi says: “We have created a gap in the market for others to combine their efforts. We have seen it now in Asia, and a number of countries that have combined together to say we need to assess the impact of global supply chains on our region. So they have come together, and I think [the US] needs to recognise [there] is still a global supply chain.”

To this day, Trump says of the China tax that China’s paying for it. It is a total intellectual disconnect, because there’s no truth to it. Rosemary Coates, Reshoring Institute

On a global level, one of the dominating stories across Trump’s presidency has been the rising trade tensions with China. Coates, an expert on China manufacturing, says: “We had Regulation 232 – the original tariffs on aluminium and steel – which was painful but not the big one. The big one was regulation 301 – China tariffs.”

Regulation 301 saw 25% tariffs applied to Chinese goods in the US, which came with claims that the Chinese would be paying any increased costs. Coates continues: “Most of us in the business or trade world were thinking: ‘What is he talking about?’ Those imported products get taxed at a rate and then that is rolled into the price – and ultimately, I pay that when I buy things. Even to this day, Trump says of the China tax that China is paying for it. It is a total intellectual disconnect, because there is no truth to it.”

What impact will Biden have on US manufacturing?

As Biden enters the White House, the US manufacturing industry faces a critical period. Covid-19 has battered large sections of the industry and Trump’s call for manufacturing jobs to stay in the US didn’t quite have the desired effect.

In fact, even after Biden takes on the presidency, manufacturing jobs are predicted to be one of the slowest-growing sectors with regards to employment, as shown in the chart above.

A key challenge for Biden will be emphasising how attractive jobs in manufacturing can be. Eshkanazi paints a clear picture of what’s required. “Gone are the days of physically intensive roles,” he says. “We are now looking for knowledge workers. The majority of manufacturing has moved towards that away from low-cost labour as a differentiator.”

Chavez clarifies that although job creation figures are down, Biden should prioritise protecting the jobs expected to be created in the US manufacturing industry.

“The number of net new jobs created every year has gotten smaller, but jobs that came have not dwindled, so those employers that invested are still here, and many of them are still growing.” he says. “We need to make sure that those employers are not leaving the US. They continue to grow with us, but the new opportunities that [we provide] have gotten smaller.”

Minding the US skills gap

A big part of protecting jobs within the manufacturing industry is ensuring that training and upskilling is an ongoing priority. Many feel that the US suffers from a long-acknowledged skills gap that goes back to before the days of Trump, and manufacturers are keen for this to be addressed.

Coates shares her theory on why this may be the case. “I think the skills gap is related to how much manufacturing went overseas for 20 years,” she explains. “As a result, we don’t have enough welders, we don’t have electricians, we need plumbers, we need all kinds of trades that were ignored for a long time.

“Instead of focusing on jobs, jobs, jobs, which is what our politicians always do, the real problem is, we have an education gap. We don’t have people to go into those jobs that have the right skills.”

Eshkanazi agrees, saying: “We are looking at a systemic issue on education. We don’t provide the appropriate safety nets for individuals that have been displaced as well. A focus on education or on re-entry of individuals into the workforce has to be part of our national policies and priorities.”

Budway highlights that it is not enough to focus just on job creation or education; he cites productivity and the further adoption of industry 4.0 as a priority.

“It is not about jobs alone, it is about productivity,” he says. “I would think, as a country and as a competitor, the US needs to be the most productive in terms of efficiency versus other countries. We need to devise a strategy regarding increasing productivity as much as possible.”

He adds that tax breaks could help manufacturers to do this, saying: “Whether that is tax credits for new machinery or even increased deductions and amortisation for machinery, [this would mean] companies could buy machinery to increase productivity, which then allows them to net those deductions. I think those are the kinds of financial tools that will help manufacturing in the long run.”

Why federal and state governments must work together

Of course, some states are more dependent on their manufacturing sectors than others, with the top and bottom five states for value added between 2005 and 2020 shown in the graph below.

When looking at manufacturing at a state level, Chavez highlights the importance of national and state-level entities working in synergy.

“Sometimes there will be a mandate that comes from the federal government, but it is an unfunded mandate and it doesn’t provide you with the financial resources to execute,” he says. “So then that falls on state or local governments to figure out how they will meet the mandate.”

This is something Chavez feels Biden is well placed to handle. “Having a Democratic house and a Democratic senate now bodes really well for him,” he says. “The NAM and similar associations will have to make sure that their voices are at the table so that we don’t go too far in another direction. That would create unrealistic mandates for other entities, such as utilities, because that has a ripple effect downstream.”

Manufacturers advise Biden on policy priorities

One key difference between Trump and Biden is how they are perceived. Trump is characterised as being brash and direct, whereas Biden is described as thoughtful and level-headed.

Biden’s presidency could therefore spell good news when it comes to easing trade tensions and attracting new FDI across sectors, according to some observers. Budway is one of them.

“We had a strongman here [in Trump], who encouraged FDI quite a bit, although some of it was a failure,” he says. “He always talked about how reversing the trade deficit was connected to FDI. We will see if Biden [maintains that train of thought], though I suspect he will. He needs to keep the economy growing to get re-elected in 2024.”

When asked for advice for the incoming president, the responses vary.

Investment in education needs to be at the forefront of every economic decision. Abe Eshkanazi, Association for Supply Chain Management

Eshkanazi says: “We need to provide the appropriate incentives for organisations to do the right thing, whether it be through tax credits, low-cost loans or talent development, and the areas that organisations need to invest in need to facilitate ways for them to do so and make it easy for them, without the bureaucratic red tape that often encompasses a lot of these issues.

“From my perspective, investment in education needs to be at the forefront of every economic decision. This is an investment in the future of our people, whether they are entering the workforce today, or they are entering through programmes. We need to be able to explain what the supply chain is to these individuals, and the wonderful opportunity that it provides to make an impact on the world, on their lives and on their careers.

“It is critical that we start to show role models, and to give examples of individuals that have done it. There is no greater impact on an individual, especially a young individual, than to see that somebody else has done it, who looks like them, who walks like them, who talks like them. Women specifically need more role models for young girls to see, so they say, ‘You know what, I can be that person, I can be a leader’.”

Coates believes that figures such as incoming first lady Dr Jill Biden and Vice-President-elect Kamala Harris will be powerful forces in the new administration.

“Dr Jill Biden is an educator,” she says. “She has a long history of teaching, and at a community college also. I am really encouraged by that, because I think she is going to emphasise the importance of this education and the development of skills that are going to feed into the economy.

“I am thrilled with Kamala Harris. I live in California and she was our attorney general. She was very well thought of over a number of years. Also, being elected vice-president and being a black female, it is just the coolest thing.”

Budway highlights the need for the US to further embrace advanced manufacturing. “Americans pride themselves on being innovative, he says. “So we need to employ the next generation of manufacturing techniques. I think policy is part of that in terms of artificial intelligence.”

A brighter future for US manufacturing?

As the world beings to heal from the impact of the Covid-19 pandemic, and the US begins its own healing process following a year of social and political turmoil, Biden has an unenviable task ahead of him.

The overall feeling when speaking with manufacturers is one of optimism, however. Coates says: “I have been following closely what Biden is saying, and at this point there are a lot of high-level indicators that are positive in terms of manufacturing. But as with all politicians, there is not much detail. There is a statement and strategy, but the details are yet to be worked out in a lot of these things. What I can tell you is what we are really hopeful about is that manufacturing is being recognised.”

This article is one of a series covering the inauguration of Joe Biden across the Monitor network, including City Monitor, Energy Monitor and Tech Monitor. For further coverage from the Investment Monitor writers on the challenges Biden faces in office, see also:

Biden won’t solve the US’s FDI woes
Will Biden punish Britain for Brexit?
Can Biden’s infrastructure plan meet high expectations?
Joe Biden’s Made in America rhetoric is about to meet the ongoing reality of globalisation (New Statesman)

Ruth Strachan

Ruth Strachan

Senior reporter

Ruth Strachan is a senior reporter at Investment Monitor, focusing on manufacturing, mining and commodities.