Issued today, 8 July 2025, by the Hinrich Foundation in Singapore, Stewart Paterson’s incisive report “Will Industrial Policy Restore American Manufacturing Leadership?” interrogates the ambitious, multifaceted campaign by the United States to regain its position as a global manufacturing leader. With characteristic analytical precision, Paterson offers a clear-eyed examination of the scale of the challenge, the strategies deployed thus far, and the hurdles that continue to obstruct meaningful progress. In doing so, he captures the essence of the American manufacturing conundrum: “The rise of China to pre-eminence in world manufacturing has become an existential challenge for the United States.”
This existential threat, as Paterson lays out in the introduction, is driven by both economic and geopolitical considerations. Economically, the persistent decline in US manufacturing output as a share of GDP has correlated with a worrying slowdown in productivity growth. “In the 10 years to 2005,” Paterson notes, “US non-farm productivity grew at 3% per year but by 2020, 10-year rolling productivity growth was down to just 1%.” While earlier waves of globalisation had positive productivity spillovers, the more recent decades—marked by industrial hollowing—have not.
Geopolitically, the United States finds itself dangerously dependent on China for critical components, from semiconductors to consumer electronics. This reliance, Paterson argues, “constrains US freedom of action both directly towards China and more generally in protecting its interests.” China’s manufacturing supremacy extends across high-value sectors, creating strategic vulnerabilities not only in defence but in the broader economy. The global centrality of Chinese supply chains enables Beijing to exert considerable influence on international trade, diplomacy, and technology—an uncomfortable reality for US policymakers.
The US response, particularly since the Trump administration’s trade wars and continuing into the Biden and Trump 2.0 administrations, has been to embrace industrial policy in a way unseen for decades. The Infrastructure Investment and Jobs Act (2021), the CHIPS and Science Act (2022), and the Inflation Reduction Act (2022) represent a concerted attempt to reshore key industries. These acts collectively “can be thought of as representing a serious effort to kickstart a renaissance in US manufacturing.” The CHIPS Act alone directed US$50 billion in subsidies and research funding to the semiconductor industry, along with US$170 billion for broader R&D.
Under Trump 2.0, the focus has shifted toward the supply side. Streamlining regulations, improving workforce training, and enhancing infrastructure permitting processes form the backbone of this new strategy. The Small Business Administration’s “Made in America” programme aims to reduce financing barriers and red tape for manufacturers, while the overhaul of the federal workforce training system is a bid to address a mounting skills gap.
Yet Paterson is keen to stress the magnitude of the task ahead. “If the objective of manufacturing growth in the United States is to match aggregate manufacturing output to aggregate manufacturing product demand, then the United States will need to grow manufacturing value-added by about 40% or US$1.2 trillion.” This would necessitate the addition of approximately five million manufacturing jobs—nearly a 40% increase in the current manufacturing workforce. While this may sound implausible, Paterson reminds us that such employment levels existed as recently as the year 2000, before the so-called “China Shock.”
Capital investment is another critical bottleneck. To achieve the targeted manufacturing output, the US would require a US$1–1.5 trillion increase in relevant capital stock over the next decade. Key sectors where America’s import dependence is most acute—machinery, electronics, transport equipment, and medical devices—would need intensive capital injection. Presently, these six sectors hold a total capital stock of US$1.9 trillion. Adding US$200 billion annually over five years could boost this by 50%, assuming supporting infrastructure is built alongside.
Labour productivity offers a potential upside. “In its current size and form, US manufacturing has a well above-average rate of labour productivity than the economy as a whole.” Value-added per manufacturing worker in 2024 was US$228,000, compared to an economy-wide average of US$173,000. Shifting more employment into manufacturing could therefore enhance GDP, assuming productivity levels remain constant.
By contrast, China’s labour advantage is waning. While China employs an estimated 20% of its workforce in manufacturing, value-added per worker is around US$32,000—about 14% of the US level. Although wages in Chinese manufacturing are just 12.5% of US equivalents, the productivity gap has narrowed, suggesting that “the economics are no longer overly compelling for [China’s] investability.” However, Paterson cautions that national averages obscure the specific advantages China retains in scale, supply chain integration, and industry clusters—advantages that the US cannot easily replicate.
Despite the surge in policy activism, Paterson identifies several obstacles that could derail America’s industrial revival. Regulatory compliance costs are a serious concern. Federal regulations cost US manufacturers US$349 billion annually, or US$29,000 per worker—and up to US$50,000 per worker for small firms. That figure, Paterson notes with striking clarity, “is about the same as value-added per worker in China.” These costs could offset the benefits of reshoring unless streamlined or compensated.
Labour supply also poses a dilemma. Even now, there are 500,000 unfilled manufacturing vacancies. A Deloitte study cited in the report projects 1.9 million unfilled manufacturing jobs by 2033 due to retirements and skill shortages. “To add a net 5 million workers would mean that an additional 25% of new labour force entrants would have to enter manufacturing,” Paterson writes. Significant retraining of the existing population, and perhaps immigration reform, would be necessary to meet this goal.
Another thorny issue is tariffs. While ostensibly a tool to level the playing field, tariffs may undermine export competitiveness and alienate potential allies. Paterson warns that “the ad-hoc and bellicose nature in which the tariffs have been announced, rolled back and re-announced has severely dented the ‘American brand.’” Moreover, many of the tariffs fall on intermediate goods, thereby raising input costs for US producers. In an interconnected world, effective industrial policy requires cooperation, particularly with Mexico, Canada, Germany, South Korea, and Japan—all of which can offer complementary strengths in labour, raw materials, or manufacturing expertise.
Despite these challenges, there are early signs of success. “Real private investment in manufacturing structures is now running at more than double the rate in the 2017–2021 period.” Semiconductor investment, buoyed by the CHIPS Act, surged from an average of US$7 billion per year to US$90 billion in 2024. However, equipment investment has yet to catch up, likely due to construction lead times. Nonetheless, Paterson expects that “over the next year or so, we should see an uptick in equipment investment.”
If these investments materialise and translate into sustained output, employment, and export growth, the current industrial policy might prove a watershed in reversing America’s manufacturing decline. But the path is long, and fraught with political, economic, and structural hurdles.
Paterson’s paper is neither boosterism nor fatalism. He presents a cautiously optimistic yet deeply realistic vision. “Ending decades of relative decline in US manufacturing is not something that can be reversed easily or in a short space of time.” A decade-long horizon is plausible if the goal is merely to balance manufacturing output with domestic demand. If, however, the aim is to achieve strategic autonomy or restore manufacturing employment to pre-China Shock levels, a broader, more inclusive approach is essential—one that mobilises capital, retrains labour, builds alliances, and reduces regulatory frictions.
