United States President Donald Trump’s escalating rhetoric on tariffs collides head-on with fundamental economic realities. Some view high tariffs as necessary to protect American manufacturing. Others, including many Canadians, are concerned about higher prices and a slowdown in economic growth. Which side is right?
A key reason Trump has stated for raising tariffs is to revive American manufacturing. Indeed, this sector has seen a decrease as a percentage of GDP. According to data from the U.S. Bureau of Labor Statistics, manufacturing made up 23 per cent of GDP in 1970. As of the first quarter of 2025, manufacturing stood at 9.7 per cent. This has been accompanied by gradual job losses.
While the decline may seem alarming, it is the expected result of structural changes in the U.S. economy. As economies mature, the contribution of economic sectors to a country’s GDP shifts. In less developed economies, the predominant industry is agriculture. As economies advance, manufacturing takes over as the leading industry. Further economic development gives rise to the service industry.
This is reflected in the statistics. Between 1997 and 2022, the American service sector grew from 71.8 per cent of GDP to 77.6 per cent. In the first quarter of 2025, service industries accounted for 83.7 per cent of that nation’s GDP. This was accompanied by a significant increase in service jobs.
The same trend can be observed in other developed countries. In Canada, manufacturing has dropped from 17.1 per cent of GDP in 1999 to 9.6 per cent in April 2025. Even manufacturing powerhouses such as Japan and Germany have seen a steady decline.
The net effect of the downturn in manufacturing and the growth of the service industry in the U.S. is the low unemployment rate of 4.1 per cent.
For context, economists consider a rate of five per cent to represent full employment. This is because unemployment can never reach zero per cent, as some employees will always be between jobs. An unemployment rate below five per cent is also undesirable from an economic perspective. It indicates that the growth of the economy is outpacing the growth of the labour market. This leads to higher wages, which add to the cost of production. The result is inflation.
Given the efficiencies of a service-oriented economy and the low unemployment in the U.S., redirecting resources back to a declining manufacturing sector could lead to misallocation of capital and labour, ultimately hindering overall economic growth rather than stimulating it.
Secondly, in America’s tight labour market, creating manufacturing jobs without significantly increasing immigration would cause severe labour shortages.
There are, of course, strategic considerations, such as industries related to vaccines, agriculture, steel, and other sensitive supplies. These sectors are tied to national security. Domestic production would minimize potential vulnerability caused by dependence on imports.
Yet, protecting these industries does not require sweeping tariffs. Canada demonstrated this by promoting domestic vaccine production after the COVID-19 pandemic. We achieved this not through tariffs, but a multi-pronged approach consisting of direct public investment in manufacturing and research, elimination of bureaucratic hurdles, and coordination among stakeholders.
An often-overlooked aspect of protective tariffs is that returning manufacturing to the U.S. will inevitably raise the cost of consumer goods, and burden domestic manufacturers. Modern production relies on integrated global supply chains. Tariffs will raise the cost of both imported finished goods and intermediary goods required for domestic production.
This was the case in the U.S.-China trade war that occurred between 2018 and 2020. The U.S. federal reserve estimated the additional costs for American manufacturers and consumers at $48-billion in 2019 alone. These cost implications must be carefully balanced with competing interests.
Lastly, there is a political cost. Raising tariffs will undermine relations with other countries, including allies. For Canada, sweeping U.S. tariffs create immediate economic headwinds and can strain diplomatic ties. Retaliatory measures are a likely response, which are harmful to both Canadian and U.S. industries. Beyond trade, political tensions will likely impact other areas of foreign relations. Countries will be reluctant to cooperate with the U.S. on a broad range of foreign policy issues.
There is evidence that embracing the service sector while investing in strategic manufacturing industries may be a more effective policy. This approach has the additional benefit of preserving relationships with other countries, including Canada, while promoting economic growth.
Farshid Keramat is a foreign policy analyst, university instructor, and author. He teaches political science at University Canada West.
The Hill Times