Trump’s industrial policy is more continuity than disruption

For all the drama over Donald Trump's flurry of pronouncements and executive orders since his return to the White House, there is more continuity than rupture when it comes to the industrial strategy of his predecessor, Joe Biden. In fact, there is now a broad consensus on the need to rebuild US industrial capabilities to protect national and economic security – a process that has already begun in semiconductors, critical minerals, defense, and energy.

Private-sector investment, perhaps the most important measure of these policies' success, has been significant: around $450 billion in semiconductors and $95 billion in clean-energy manufacturing since the Biden administration passed the CHIPS and Science Act and the Inflation Reduction Act (IRA) in August 2022. So far, the US government has leveraged $5-7 of private capital for every dollar it has spent through this legislation. Whether carrots (subsidies) or sticks (tariffs) are used to support these investments, they are gaining momentum.

Trump's early statements about rebuilding US manufacturing point to the use of both tools to stimulate investment. To be sure, subsidies are a better targeted strategy than tariffs, not least because sweeping import duties could dampen momentum by raising costs, particularly for intermediate goods. How heavily Trump will lean on tariffs remains to be seen. What is clear is that industrial policy will be part of his economic agenda, as it was for Biden.

In the case of energy – the issue on which the two administrations are perhaps furthest apart – it is too early to say how Trump's policies will play out, except that oil and gas production will rise substantially. There are legal challenges to clawing back subsidies (84% of the grants under the IRA were contractually obligated before Trump took office), and clean-energy tax credits have proved popular, particularly in Republican and swing states. The Trump administration favors some renewables (hydropower, nuclear, geothermal) over others (solar, wind). But given America's inadequate grid capacity and growing demand for energy, the economics of competitively priced clean power and consumer preferences will be the driving forces behind the country's energy mix.

Trump's ambitions for artificial intelligence (as illustrated by his support for Stargate, a privately funded AI infrastructure project) will require expanding energy sources – including renewables – to meet data-center and manufacturing demands. Tech companies have already realised this. Consider Microsoft's purchase last year of the Three Mile Island nuclear power plant, and the fact that in 2023 wind accounted for nearly 30% of energy generation in Texas, where data centers are multiplying.

America's lack of shipbuilding capacity is another growing concern. Commercial shipbuilding is almost nonexistent in the US, and the country has a terrible track record in meeting budgets and timelines for naval production. Rebuilding these capabilities will require a multipronged strategy that includes backing innovative startups and working with foreign companies – as is happening in the semiconductor industry – to create a competitive domestic industry. Tariffs on Chinese ships (which have dominated the sector in recent years) would not achieve this.

But the Trump administration shouldn't stop there. To become a global leader in frontier industries such as biomanufacturing and quantum computing, the United States needs engineering and science skills and public and private investment in manufacturing. Here, too, the US is competing head-to-head with other countries, especially China.

It took a quarter-century to build the global supply chains on which US manufacturing depends; they cannot and should not be dismantled or rebuilt overnight. America's reindustrialisation strategy must instead focus on manufacturing differently by improving productivity, sustainability, and resilience. That means incorporating redundancy and regionalised supply chains and working with allies and partners to align goals and policies. It also means focusing on manufacturing products that capitalise on America's enormous innovation capacity. A fresh crop of manufacturing startups and ecosystem partners in the US highlights this strength. And now these startups can scale up at home, owing to digitalisation, automation, and venture capital and other private capital's new industrial focus.

Realising this vision requires, first, investment in digital capabilities – a core component of any successful industrial strategy. Fewer than half of US manufacturing firms use specialised software or cloud computing, and the country trails far behind others in robotics adoption. Making better use of data, AI, and new production systems that include robotics and 3D printing would improve productivity, quality, safety, and yields. Digital connectivity also builds resilience in supply chains and helps reduce energy consumption, waste, and emissions by tracking and tracing inputs and outputs.

Revitalising the manufacturing workforce will also be critical. The US could face a shortage of nearly two million manufacturing workers by 2033. The best way to avert a shortfall is to upskill current workers, which would make them more productive and attract a new generation into the sector. This can be achieved alongside digitalisation, because companies that adopt new and advanced technologies also invest in skills upgrading.

Of course, manufacturing jobs represent a small share of US employment (under 10%, although with a large multiplier effect), and new ones will be created at a slower rate, partly because of AI and automation. But these jobs are tied to technologies and industries that underpin the country's economic prosperity. Such work can also be high-quality in terms of wages and benefits, which is more important for the US than increasing the quantity of jobs.

Rebuilding America's industrial base has become a central pillar of US economic policy. The challenge for Trump, as it was for Biden, is how to devise and implement a twenty-first century industrial strategy that crowds in private investment, emphasises carrots over sticks, and, ultimately, creates a globally competitive manufacturing sector. This is an agenda that Republicans and Democrats alike should get behind.

Elisabeth Reynolds, Professor of Practice at MIT, is a former Special Assistant to the President for Manufacturing and Economic Development at the National Economic Council (2021-22).

Disclaimer: This article first appeared on Project Syndicate, and is published by special syndication arrangement.