As China continues to best the United States in manufacturing capabilities, tariffs may not be America’s best bet to boost factory productivity. Instead, the U.S. should look to AI and automation to gain an edge in manufacturing, Goldman Sachs analysts argue.
President Donald Trump aspires to return factory jobs to American shores by imposing steep tariffs on U.S. manufacturing rivals, but the taxes can only incentivize reshoring so much, analysts said in a note published Thursday. Instead, manufacturers should look to automation and the ever-more-accessible artificial intelligence as their best chance for boosting domestic manufacturing.
“A pickup in the pace of innovation—potentially from recent advances in robotics and generative AI—therefore remains the catalyst most likely to reverse the long-run stagnation in manufacturing productivity,” analyst Joseph Briggs and colleagues said in the note.
As China capitalizes on automation and cheaper labor to grow its export footprint, the Bank of America Institute has found mounting evidence of a recent U.S. manufacturing slowdown, including U.S. Census Bureau data showing new orders for manufactured durable goods decreasing 6.3% in April. The Institute of Supply Management Manufacturing Purchasing Managers’ Index (PMI) has fallen since March, also indicating a contraction.
The U.S.’s productivity woes are part of a larger manufacturing productivity slowdown happening over the last two decades as a result of investment pullback following the global financial crisis, as well as a slowdown in the burst of technological advancements of the early 2000s, according to Goldman Sachs.
Trump’s tariff plans for China—which the president has not disclosed, despite touting a new trade deal—aim to help the U.S. claw back manufacturing opportunities from its economic rival. But while they make consumers’ lives more expensive, they are not a panacea for manufacturers, the bank argued in its note.
“Tariffs are unlikely to result in much reshoring because production costs in other countries are well below the U.S.’ for most products (even after accounting for tariffs), and China will likely continue to grow its exports on the back of cost advantages and industrial policy support,” the note said.
The rise of the factory automation
Instead, analyst Briggs said, the U.S. should focus on another area in which it’s lagging: automation.
The U.S. has trailed other manufacturing giants in implementing AI into factory operations, according to a Boston Consulting Group (BCG) Henderson Institute report released earlier this month. Only 46% of U.S. respondents of BCG’s Global Manufacturing Survey of 1,000 manufacturers reported multiple use cases of AI in their plants, falling short of the 62% average and lagging behind China’s 77%.
“This is one of the key technologies that I think could drive productivity growth in a cost-competitive manner,” Briggs told Fortune. “And we just haven’t seen that occur on a meaningful scale yet.”
The U.S. did not previously invest in factory automation as a result of a “hangover” from the global financial crisis, Briggs said, but the U.S. now has a real shot at prioritizing factory technology updates, given the growing ubiquity and therefore affordability of automation and AI.
Companies such as aviation precision parts-maker MSP Manufacturing have already begun to adapt accordingly. MSP president and chief operating officer Johnny Goode recently learned of an AI-powered software able to program the machine building the precision parts, reducing production time from an hour and a half to seven minutes per part—plus 15 minutes necessary for a human operator to refine it.
“I was like, holy snap, this is going to be a game changer,” Goode told Fortune’s Jeremy Kahn this week. “Going from 90 minutes to 22 minutes is a big deal, and we’ve seen that get even better as we’ve learned to use the software more.”
Ending the manufacturing slowdown
Goldman Sachs analysts conceded that while automation provides the largest area for growth in manufacturing productivity in the U.S., it is unlikely to solve the broader manufacturing slowdown, which is global. The slowdown is “historically unusual,” Briggs said, with the maturation of the tech sector the likely culprit. Any hope for a global uptick in productivity would come from mass advancement and adoption of AI and robotics on a large scale.
“The main thing that would drive a large pickup in manufacturing productivity and manufacturing growth would be a sharp increase in the pace of innovation,” Briggs said. “And this type of inflection upwards and technological progress are very hard to predict.”
Advancement in tech could have a two-fold benefit for domestic manufacturing productivity, both in driving factory investments and in bettering technology to be installed in factories to automate tasks. But with the specifics of the future of AI and automation applications still unknown, it’s difficult to predict whether a reversal of a domestic manufacturing slowdown is truly possible.
“We just need to see it happen before we have a lot of confidence in that dynamic being a big driver,” Briggs said.
This story was originally featured on Fortune.com
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