Government Incentives for Niche Sectors of Economy Leads to “Manufacturing Boom”

There is a “manufacturing boom” taking place in the U.S., if you had not noticed, and it is mostly due to incentives for solar and new energy technologies like EV batteries in the Inflation Reduction Act, and semiconductors in the CHIPS Act, the Wall Street Journal says.

On June 26, the Commerce Department reported May construction spending figures, with overall spending rising a seasonally adjusted 0.9% from a month earlier. An important piece of that was spending on the construction of manufacturing facilities. This was up 1% in May from April, or 76.3% from a year earlier, the WSJ reported. In the first quarter, Commerce Department figures show that spending on manufacturing structures came to nearly 0.5% of gross domestic product—the most since 1991.

What makes the surge in new facility construction – whether First Solar building a factory in Alabama, or Taiwan Semiconductor saying it will send more workers to its new Arizona site to speed up building its new chip fabrication center – is that it is happening only in a handful of sectors. And it is occurring when sentiment among manufacturers is low. The Institute for Supply Management said in June that its index of manufacturing activity slipped to 46 for the month from 46.9 in May. Anything under 50 represents a contraction in factory activity.

The “manufacturing boom” is all thanks to tax incentives and other measures – but it is only going to several types of companies: EV producers, EV battery makers, semiconductors, and solar and wind manufacturers.  Some wind and EV manufacturers continue to suffer from a lack of profitability, with Lordstown Motors of Ohio, makers of a battery-powered pickup truck, recently filing for bankruptcy protection.

What the “boom” does show is that if the U.S. wants to reindustrialize and reshore, government incentives will be needed along with tariffs to entice investors to put money to work in domestic production.  The CHIPS Act and the Inflation Reduction Act for solar is proving that right now.

“To reshore on a scale broad enough to eliminate our one trillion dollar trade deficit, you need a combination of tariffs and tax credits or incentives,” said Jeff Ferry, chief economist for CPA. “We should look at what sectors are capable of generating high-quality well-paid manufacturing jobs, what sectors are likely to see higher-than-average growth over the next decade or two, what sectors involve foundational technologies that are essential to downstream sectors, and what sectors are essential to national security or our people’s health. We should also make sure there are at least three or more companies in each sector, to avoid the criticism that this is picking winners. The government needs to think more like a venture capitalist and diversify its bets. Allow failures to hit the wall and successes to grow.”

The U.S. trade deficit in goods first broke through a trillion dollars in 2021 and remains on the path to stay that way again this year.

China is the bulk of that trade deficit, often matching the total deficit of Mexico and Vietnam combined, the No. 2 and No. 3 deficit source after China. Some $350 billion worth of tariffs were imposed on China in 2018, leading to some investment in U.S. production, as the International Trade Commission found in a report published in March. That report said that tariffs on steel and aluminum led to increases in investment in the U.S., including new steel mills by companies like Nucor.

CPA’s senior economist Andrew Heritage recently published a white paper on a new model tariff schedule showing how tariffs also lead to increases in domestic manufacturing capital expenditure.

See CPA’s report titled “Pro-Growth Tariffs: Modified Economic Model Shows Economic Growth”.

The CPA model proposes an increase in the tariff rate schedule for non-free trade agreement countries for manufactured goods by 35 percentage points and for agricultural and primary products by 15 percentage points, with the exception of minerals where the U.S. supply is limited by nature. The CPA Model Tariff Schedule would increase U.S. real GDP by 6.95% or $1.77 trillion, with the increase in growth driven by the increase in output in the domestic manufacturing sector. Imports decrease as consumption shifts to goods produced domestically.

“The U.S. is the world’s largest, most coveted consumer market. But for American companies to do well, we need to some insulation from cut-price, subsidized goods from low-wage countries that intentionally run large trade surpluses, undervalue their currency, and violate the labor and environmental standards that are routine in the U.S. and other advanced countries,” said Ferry. “We also need to make sure our incentive programs are available to new challengers, to keep the corporate giants on their toes.”