Goldman Sachs: Tariffs Won't Boost Manufacturing Productivity

Goldman Sachs analysts have cautioned that tariffs imposed by the U.S. are unlikely to significantly boost manufacturing productivity. The analysts argue that while tariffs may incentivize some reshoring of manufacturing jobs, they will not sufficiently lower supply chain and labor costs to drive a meaningful increase in productivity. Instead, the analysts suggest that increased automation and the adoption of artificial intelligence (AI) are the most likely drivers of a manufacturing productivity boost.

The U.S. has been experiencing a slowdown in manufacturing productivity, exacerbated by increased competition from China. This slowdown is part of a broader trend that has been ongoing for the past two decades, attributed to a pullback in investment following the global financial crisis and a slowdown in technological advancements. The U.S. Census Bureau data showing a decrease in new orders for manufactured durable goods and the Institute of Supply Management Manufacturing Purchasing Managers’ Index (PMI) falling since March further indicate this contraction.

President Donald Trump's tariff plans for China aim to help the U.S. regain manufacturing opportunities from its economic rival. However, Goldman Sachs analysts argue that tariffs are not a comprehensive solution for manufacturers. The note from the analysts states that production costs in other countries remain well below those in the U.S. for most products, even after accounting for tariffs. China is expected to continue growing its exports due to cost advantages and industrial policy support.

Instead of relying on tariffs, the U.S. should focus on automation, an area where it has lagged behind other manufacturing giants. According to a report, only 46% of U.S. manufacturers reported multiple use cases of AI in their plants, falling short of the global average and trailing behind China. Analyst Joseph Briggs highlighted that AI and automation could drive productivity growth in a cost-competitive manner, but this has not yet occurred on a meaningful scale.

The U.S. has historically not invested in factory automation due to the aftermath of the global financial crisis. However, the growing affordability and ubiquity of automation and AI present an opportunity for the U.S. to prioritize factory technology updates. Companies like MSP Manufacturing have already begun adapting to these technologies, with AI-powered software reducing production time significantly. MSP president and chief operating officer Johnny Goode noted that the software has been a game-changer, reducing production time from an hour and a half to just over 22 minutes per part.

Goldman Sachs analysts acknowledge that while automation offers the largest area for growth in manufacturing productivity, it is unlikely to solve the broader global manufacturing slowdown. The slowdown is historically unusual and is likely due to the maturation of the tech sector. Any hope for a global uptick in productivity would come from mass advancement and adoption of AI and robotics. However, the specifics of the future of AI and automation applications remain uncertain, making it difficult to predict whether a reversal of the domestic manufacturing slowdown is possible.

Advancements in technology could have a two-fold benefit for domestic manufacturing productivity, both in driving factory investments and in improving the technology installed in factories to automate tasks. However, without concrete evidence of these advancements, it is challenging to predict their impact on manufacturing productivity. Briggs emphasized the need to see these advancements in action before having confidence in their ability to drive significant productivity growth.