Will weaknesses in the US economy resist Trump’s strategy?

The strengths of the Amer­i­can econ­o­my are well known and wide­ly dis­cussed, par­tic­u­lar­ly when draw­ing atten­tion to Europe’s short­com­ings. Per capi­ta pro­duc­tiv­i­ty increased by 45% in the Unit­ed States from 2002 to the end of 2024, and by only 10% in Europe, which explains the dif­fer­ence in growth over the same peri­od in terms of Gross Domes­tic Prod­uct (GDP) in vol­ume: 65% in the Unit­ed States and 30% in Europe (in the euro zone). This gap is linked to the sig­nif­i­cant Research and Devel­op­ment effort in the Unit­ed States (total R&D reach­es 3.6% of GDP com­pared to 2.2% of GDP in the euro zone), the avail­abil­i­ty of sig­nif­i­cant funds to finance risky invest­ments (in 2024, funds raised in ven­ture cap­i­tal reached $250bn in the Unit­ed States, com­pared with $110bn in Chi­na and $22bn in Europe), and the high lev­el of invest­ment in new tech­nolo­gies (IT, soft­ware, arti­fi­cial intel­li­gence, etc.), which is close to 4% of GDP in the Unit­ed States com­pared with 2.3% of GDP in Europe.

But the numer­ous weak­ness­es of the US econ­o­my should not be over­looked. First­ly, the labour force is poor­ly qual­i­fied, as is clear­ly shown by the results of the OECD’s PIAAC sur­vey on adult skills (the over­all PIAAC score for the Unit­ed States is 251, com­pared with 267 for Ger­many, 276 for the Nether­lands and 285 for Japan). The low lev­el of skills among Amer­i­cans requires sig­nif­i­cant immi­gra­tion (14.5% of Amer­i­cans were born abroad at the end of 2024, com­pared to 11.5% in 2007 and 13% in 2018), in par­tic­u­lar because the pro­por­tion of high­ly qual­i­fied immi­grants is high (25.8% of immi­grants in 2023 have a high­er edu­ca­tion degree – Mas­ter’s or PhD – com­pared to 14.8% of the total population).

What’s more, the Unit­ed States is on a path of con­stant dein­dus­tri­al­i­sa­tion. The man­u­fac­tur­ing sec­tor’s share of GDP fell from 12.5% in 2007 to 10.3% at the end of 2024; the goods trade bal­ance is in deficit by $100bn dol­lars per month. We will use these devel­op­ments lat­er to char­ac­terise the com­par­a­tive advan­tages of the Unit­ed States.

The con­stant trade deficit has led to the accu­mu­la­tion of a very large net for­eign debt, which reached 80% of GDP in 2024. Fur­ther­more, the employ­ment rate for 15–64 year olds is low in the Unit­ed States (72%) com­pared to Ger­many (78%), Japan (80%) and Swe­den (77%). This dis­crep­an­cy is the result of the health prob­lems faced by many Amer­i­cans: 14% of Amer­i­can adults are unfit for work and 25% of Amer­i­cans have not seen a doc­tor for over a year due to the high cost of healthcare.

Final­ly, the infra­struc­ture (trans­port, elec­tron­ic, water sup­ply, school build­ings) is in poor con­di­tion in the Unit­ed States. For exam­ple, 45,000 bridges and 20% of roads are bad­ly dam­aged and 17% of Amer­i­cans do not have access to the Internet.

We have just seen the list of US eco­nom­ic strengths (high lev­el of research and devel­op­ment and invest­ment in new tech­nolo­gies) and weak­ness­es (dein­dus­tri­al­i­sa­tion, skills short­ages, health prob­lems and low employ­ment rate, as well as poor infra­struc­ture). In view of this list, it is nor­mal to con­clude that the Unit­ed States has com­par­a­tive advan­tages in the pro­duc­tion of sophis­ti­cat­ed ser­vices (tech­no­log­i­cal ser­vices, infor­ma­tion ser­vices, finan­cial ser­vices), but not in the pro­duc­tion of man­u­fac­tured goods.

Indeed, the low lev­el of skills among the work­ing pop­u­la­tion, the low weight of the man­u­fac­tur­ing indus­try in the econ­o­my and the trade deficit for goods reveal that the Unit­ed States does not have the labour force or the infra­struc­ture nec­es­sary for the devel­op­ment of indus­try. The con­trast is clear between the trade deficit for man­u­fac­tured goods ($1.6tn per year) and the trade sur­plus for ser­vices ($300bn per year). We must there­fore con­sid­er the opti­mal strat­e­gy for a coun­try that has com­par­a­tive advan­tages – that has the nec­es­sary fac­tors of pro­duc­tion – for the pro­duc­tion of sophis­ti­cat­ed ser­vices and not for the pro­duc­tion of man­u­fac­tured goods.

It is clear that, giv­en the nature of the Unit­ed States’ com­par­a­tive advan­tages, a pro­tec­tion­ist pol­i­cy is bad for the coun­try. Tax­ing imports of man­u­fac­tured goods from the rest of the World will not result in a sig­nif­i­cant relo­ca­tion of their pro­duc­tion, as the Unit­ed States has no com­par­a­tive advan­tage in the pro­duc­tion of these goods. It will sim­ply push up the prices of imports and the domes­tic prices of man­u­fac­tured goods. Pro­tec­tion­ism will there­fore lead to a loss of pur­chas­ing pow­er for Amer­i­can con­sumers, and to very lit­tle sub­sti­tu­tion of Amer­i­can domes­tic pro­duc­tion for imports.

It is clear that a pro­tec­tion­ist pol­i­cy, giv­en the nature of the Unit­ed States’ com­par­a­tive advan­tages, is an inef­fec­tive pol­i­cy for the coun­try. Tax­ing imports of man­u­fac­tured goods from the Rest of the World, since the Unit­ed States has no com­par­a­tive advan­tage in the pro­duc­tion of these goods, will not result in a sig­nif­i­cant relo­ca­tion of their pro­duc­tion and will sim­ply raise import prices and domes­tic prices of man­u­fac­tured goods. Pro­tec­tion­ism will there­fore lead to a loss of pur­chas­ing pow­er for Amer­i­can con­sumers, and to very lit­tle sub­sti­tu­tion of Amer­i­can domes­tic pro­duc­tion for imports.

An effec­tive strat­e­gy for the Unit­ed States would there­fore be to main­tain free trade in goods and ser­vices, which allows goods to be import­ed from the rest of the world with­out these imports being made more expen­sive by cus­toms duties, and to avoid trade retal­i­a­tion mea­sures by oth­er coun­tries, which ham­per exports of sophis­ti­cat­ed ser­vices (tech­no­log­i­cal, finan­cial, etc.) from the Unit­ed States.

Fur­ther­more, this strat­e­gy includes an eco­nom­ic pol­i­cy aimed at devel­op­ing the Unit­ed States’ lead over its com­peti­tors in finance and infor­ma­tion and com­mu­ni­ca­tion tech­nolo­gies. This strat­e­gy involves pub­lic aid for the devel­op­ment of arti­fi­cial intel­li­gence, or for devel­op­ing quan­tum com­put­ers. This pub­lic aid was intro­duced by Don­ald Trump, but in a con­text of trade war, which will lead oth­er coun­tries to restrict their imports of tech­no­log­i­cal prod­ucts from the Unit­ed States. This strat­e­gy (free trade and sup­port for US tech­no­log­i­cal advance­ment) would con­tin­ue to attract cap­i­tal and skilled labour to the Unit­ed States; the result­ing cap­i­tal inflows would eas­i­ly finance the goods trade deficit, while the ser­vices trade sur­plus would con­tin­ue to grow.

An eco­nom­ic strat­e­gy that does not cor­re­spond to a coun­try’s com­par­a­tive advan­tages is inevitably doomed to fail­ure. This is the case with Don­ald Trump’s pro­tec­tion­ist strat­e­gy, which will not lead to sig­nif­i­cant indus­tri­al relo­ca­tions to the Unit­ed States, giv­en the state of the skills of the labour force and the dete­ri­o­ra­tion of infra­struc­ture. Europe is wor­ried about a relo­ca­tion move­ment towards the Unit­ed States, but in real­i­ty, this is not hap­pen­ing (the man­u­fac­tur­ing indus­try’s share of the US GDP con­tin­ues to decrease) and will not hap­pen. Indeed, the real and legit­i­mate fear for Europe is the US dom­i­na­tion of tech­no­log­i­cal and finan­cial services.