Scott Lincicome
The US manufacturing sector has been on a nice run in 2026, and some Trump administration officials and protectionist pundits are crediting the president’s tariffs. In my new column for The Dispatch, I detail why we should doubt the pro-tariff story. In particular, both “soft” data (surveys) trumpeted by the administration and “hard” data on output, capacity, and utilization indicate that the sector’s recent growth is owed to other, nontariff factors and, if anything, would be even better without all the import taxes.
A few charts from the piece show why this is the case:
The Recent Rebound Predates the Tariffs—Both Overall and in Key Industries
The performance of the overall manufacturing sector, durable goods, and several important industries began improving months before the Trump administration’s tariffs took off in spring 2025:
Imports and Domestic Production Are Rising Together
If tariffs were driving the recent upswing, we’d expect to see signs of import substitution, yet imports and domestic production are moving together—and imports are growing faster now than during any post-pandemic period. This is particularly the case for capital goods, which are supporting—and being driven by—the United States’ massive AI buildout:
The Least-Protected Industries Are Growing the Fastest
Instead of high tariffs accompanying strong domestic output growth, the industries powering the recent US manufacturing expansion—computers/electronics and aerospace—are those facing the lowest tariffs:
… And the Same Goes for Capacity (If Not More So)
The negative relationship is even stronger when examining capacity: Low-tariff sectors are consistently adding capacity at a higher rate than high-tariff sectors, which are mostly stagnant or even contracting:
The Sectors’ Most Recent Gains Came as Tariffs (and Tariff-Related Uncertainty) Waned
Following Trump’s high and chaotic “Liberation Day” tariffs, manufacturing output stagnated. Yet growth resumed after the average effective tariff rate began to fall late last year and especially after the Supreme Court invalidated the “emergency” Liberation Day tariffs. Correlation isn’t causation, of course, but this is again the exact opposite of the story protectionists are telling.
Where Are the New Factories?
If tariffs were really driving new investment, we’d expect to see gains in factory construction spending (in real terms). Yet there’s no sign (yet) of a factory building boom:
Given these trends and others I discuss in the column, the following narrative emerges—and it’s far from the story protectionists are now peddling:
Faced with a large and unstable tariff shock and an even larger AI demand shock, American manufacturers didn’t build new factories and hire new workers en masse but instead deployed tariff mitigation strategies and boosted production at the factories they already had. Manufacturing growth was in advanced industries aided by tariff exemptions and accompanied by rising imports, while old, politically connected industries won heavy tariff protection yet still kept declining, perversely insulated from competitive pressures that might have motivated improvement. The negative correlation between tariffs and manufacturing growth isn’t concrete proof that tariffs caused industrial stagnation, but it’s a direct hit to the common protectionist claim of a tariff-fueled boom.
Two new academic papers arrived in my inbox as I was writing this piece, each confirming the above story:
A new paper from four Federal Reserve economists examined the 2025 tariffs and found that—thanks mainly to broad exemptions for the capital goods fueling the data-center buildout—the AI investment boom was strong enough to keep imports and output growing, despite the tariffs that were applied (particularly on consumer goods). Absent the AI investment boom, they find that Trump’s tariffs would’ve caused imports to fall by 10 percent, gross domestic product to contract by 0.7 percent, and prices to rise. A forthcoming paper in the Journal of Supply Chain Management examines five Federal Reserve regional manufacturing surveys and finds “compelling evidence that the 2025 tariffs compressed US manufacturers’ gross margins because prices paid for inputs increased more than prices received for outputs.” The authors add that “the 2025 tariffs also had a negative effect on US manufacturers’ new orders, employment, and capital investment,” with effects that were “significantly more negative on employment and capital investment than new orders.” The tariffs’ costs, in other words, outweighed their benefits.Protectionists can congratulate themselves for not killing the AI golden goose or overwhelming the 2025 corporate tax cuts (which were a genuine free-market victory). What they can’t do is bank on the surge lasting or take credit for the gains we’ve seen.
