Originally on Agglomerations, the Substack newsletter from the Economic Innovation Group.

By Jiaxin He and Sarah Eckhardt

Attracting and retaining talent will be critical in deciding whether the United States can stay ahead of China in the race to build out Artificial Intelligence technologies — an obvious lesson that now appears lost on American policymakers, but not on China.

Last August, the Chinese State Council announced��. One directive of this "AI+" initiative is to expand China's AI talent pool by encouraging enterprises to appeal to skilled workers using equity, stock options, and other incentives. The Chinese State Council has also����a new visa for foreign STEM graduates.

Meanwhile, support for the American AI workforce is conspicuously absent from the White House's recent��. And recent proposed and enacted changes to the H-1B visa program (for skilled immigrants) and OPT (Optional Practical Training, which eases a college student's path to employment after graduation) either make it harder for AI experts to remain in the United States or fail to help their prospects.

The booming AI sector in the United States has greatly benefited from immigrant founders and engineers.^[1] Without sustaining and enhancing America's AI talent advantage, we risk ceding ground to China in a competition with significant national security implications.

By the numbers

Estimates vary widely, but there are between about 50,000 and 200,000 AI jobs in the United States.^[2]

Workers employed in these jobs are in high demand, with postings accelerating by the day.^[3]

And as the sector becomes more and more important, the share of H-1B workers who work in AI has also climbed.

Using the most recently available FOIA data on H-1B approvals, we estimate that nearly a thousand workers who received H-1Bs in 2024 work in AI-related occupations,^[4] representing 1.12 percent of all approvals that year.

That figure may not sound huge, but this share far exceeds AI's presence in the broader American workforce, in which AI jobs account for only 0.06 percent of all jobs.^[5] (The AI share of H-1B approvals also does not include university researchers in AI, for which an uncapped, or theoretically unlimited, number of H-1Bs can be issued.)

These annual flows of H-1B workers into AI are starting to add up. Using the share of approved H-1B Labor Condition Applications (LCAs) — a prerequisite for filing an H-1B petition — we estimate that H-1B workers now represent 4.3 percent of the nation's total AI workforce.^[6]

Nearly four out of five new H-1B holders working in AI also completed their education in American universities, compared to 52 percent of H-1Bs overall. Losing many of these workers to China would undermine the domestic AI industry and could threaten American national security.

In the small but rapidly growing AI labor market, the addition of 1,000 high-skilled workers each year would have an outsized impact on American competitiveness. With reforms to the H-1B visa selection process, we could attract even more AI experts.

How to Triple the Number of AI Workers on H-1Bs

Had H-1Bs been selected by 91PORN's proposed��wage-ranking system in 2024, the number of AI workers admitted would have more than tripled, rising to 3,330.^[7] A shift of that magnitude would amount to a meaningful expansion of the American AI talent base.

H-1B workers in AI are already well compensated, earning a mean wage of $150,000 — 37 percent above the already high average wage of H-1B holders broadly. A wage-ranked selection system would boost their mean wage even higher to $169,000.

Beyond their direct contributions to AI development, each worker generates substantial fiscal returns: the average federal fiscal impact of current H-1B AI workers is $38,000 per worker, rising to $44,000 under a wage-ranking system.^[8]

Another way to clearly see the superiority of the wage-ranking model is to simulate what would have happened if it had already been adopted in the past. Under wage-ranking, the share of new H-1B visa recipients in AI would have been 3.9 percent in 2024 rather than 1.1 percent.^[9]

The current H-1B lottery-based system favors large tech firms and relies on easily-manipulated occupational classifications.^[10] By reflecting actual market demand signaled through wages, a ranking system would satisfy frontier AI startups' hunger for talent, generate positive fiscal impacts for the American people, and boost American innovation into the future.

Originally on Agglomerations, the Substack newsletter from the Economic Innovation Group.

By Kenan Fikri

What can geography reveal about the frontier of manufacturing in America?

The in this series documented U.S. manufacturing's stasis ever since the Great Recession of 2008 — low rates of job creation and job losses, low rates of job turnover, and low startup rates.

This post similarly peers under the surface of the sector to examine what geography and business dynamism, together, can tell us about the health of American manufacturing today.

The data paint the picture of new manufacturing activity — in the form of new establishments and new firms — avoiding hubs of established prowess and instead gravitating towards places with little history in manufacturing.

This tendency is not new. A fact of modern U.S. manufacturing appears to be that it trends towards deagglomeration.

What do these location choices reveal about the drivers of U.S. competitiveness today? Why is more manufacturing in an area associated with less manufacturing dynamism? And why does having a legacy in manufacturing seem to make it harder to build a future in it?

The answer to these questions might hold the key to American re-industrialization.

Deagglomeration nation

• High agglomeration areas where firms locate with both peers and suppliers
• Peer (horizontal) agglomeration areas where firms locate with others in similar industries and similar positions in the supply chain
• Supplier (vertical) agglomeration areas where firms locate within a particular supply chain
• Low agglomeration areas where firms locate with few peers or suppliers

��

High agglomeration counties remain home to the bulk of the nation's manufacturing firms and jobs, but they lost over 1,300 companies on net between 2020 and 2023. By contrast, low agglomeration (+424), peer (+38), and supplier (+74) agglomeration counties all added to their manufacturing bases on net.

In percentage terms, high agglomeration counties shed 0.7 percent of their manufacturing firms, while firm counts grew by 1 percent in low and peer agglomeration counties.^[3] Firm dynamics — the constant churn of openings and closings — are gradually pulling the sector's center of gravity out of traditional hubs.

Economic Geography 101, revisited

At first glance, this trend towards deagglomeration is surprising because fundamental precepts of economic geography around industry clustering and agglomeration — from to — were forged in a goods-producing world.

In these canonical frameworks, firms co-locate to take advantage of information flows and knowledge , tap deep pools of specialized labor, reduce transportation costs, and build relationships.

Part of the magic of agglomeration is that it should spur dynamism by its very nature. Mash up a critical mass of complementary people and firms, thinkers and doers, innovators and imitators and they will unlock progress.

If expertise is an advantage and new commercial opportunities are more perceptible with proximity, you'd expect new businesses to start where an industry already has a presence, too.

In the economists' jargon, agglomerations emerge because they offer firms increasing returns.

That is, until they don't, at which point they start offering diminishing returns .

Diminishing returns can set in with size. As agglomerations grow, so do congestion costs, which include traffic and high prices of land and labor.

Diminishing returns can also set in with time. As firms and industries , they tend to seek out more generic and less specialized locations, as they rely less on innovation and agglomeration-based advantages to stay competitive and more on driving down costs of production.

Agglomerations may grow less dynamic over time, too, as a sort of spatial industrial sclerosis develops and winning firms eventually grow older and bigger, workforces age, technologies get locked in, vested interests accrue, and entrepreneurial vim fades.

A map of attrition

Each dot represents a state, sized by manufacturing's share of the workforce. The y-axis represents the startup rate, or the share of all manufacturing firms in the state that started in the past year. The x-axis represents the death rate, or the share of all manufacturing firms that shuttered in the past year. Values are averaged for each decade. The 45-degree line represents balance, where each dying manufacturer is replaced by one new one. States above the line enjoy more manufacturing firm births than deaths; states below, the opposite.

The steady march of states below the 45 degree line shows how manufacturing has faded. The mainly vertical progression shows that American manufacturing has adjusted to economic change on the entry margin — that is to say that dynamism has fallen because the startup rate has collapsed while the rate of failing firms has remained largely unchanged. And the startup rate's collapse has had a profound impact on the states in which manufacturing constitutes a bigger share of the economy (larger points in the graph) by pushing them more deeply into that attrition territory.

As a result, manufacturing is deagglomerating because the only places still experiencing net entry are those with less of a manufacturing base to start. The sector's heartlands have lost the ability to launch more firms than they lose each year.

The finding holds for counties and at the establishment level too. Looking at even more recent QCEW data for the past three years, the number of new manufacturing establishments — which includes new firms and branch plants or new outposts of existing firms — increased by 4.3 percent in counties that had no specialization in the sector, compared to around 2 percent for counties moderately specialized in it and a decline of -0.1 percent for counties significantly specialized.^[4],(((These gaps cannot be explained by differences in population growth, which is much more even across the categories depicted.

We've become so familiar with new manufacturing establishments opening in empty fields that it's easy to overlook the shocking revelation in these figures.

Places with large and diversified manufacturing bases appear to be less conducive to startups and less attractive to expanding firms than places that represent a blank slate.

On the one hand, this tendency might attest to the comparative strengths of new locations unsaddled by a legacy in the sector. But on the other hand, it signals that something has gone deeply wrong in our agglomerations.

But what is it? What mix of factors have conspired to send American manufacturing agglomerations-first into the dynamism doldrums?

The sector has been battered by automation, off-shoring, and foreign competition, of course. But local factors, and how places respond to economic shocks and technological change, matter too.

To see the future of manufacturing in America, we need to look beyond today's companies and ask why new ones aren't waiting in the wings. We need to look past surface-level decline and into the dynamics of resilience and renewal at the local level.

The stakes are high, because until we have a better understanding of what holds manufacturing back in the places that embody our national expertise in the sector, the country risks continuing down a quixotic and futile path of implementing industrial policy without the industrial base.

Searching for startups

If there's one measure that best symbolizes renewal, it is startups. New firms with new technologies, products, or business models to replenish the stock of enterprises that inevitably thins through the course of economic churn and change.

Normalized by population, the country has only 1.5 young manufacturing firms per 10,000 people today — a figure that has been bumping along at all-time lows for 15 years and counting. Zooming out, that means for every 1 million Americans, there are only 150 manufacturing firms of any size or speciality that have launched within the past five years.

Bright spots

Those young firms, few as they may be, point to enduring advantages of making it in America, and they have helped bolster an embattled sector.

What is more, dozens of metropolitan areas are nurturing new manufacturers at much higher rates than the country overall.

These include:

• Major metropolitan engines such as Los Angeles, CA, and Miami, FL.
• Competitive manufacturing clusters such as Elkhart, IN, and Holland, MI
• Mid-sized micropolitans like Cookeville, TN, and Somerset, PA
• Emergent western production hubs such as Burley, ID, Evanston, WY, and St. George, UT
• Mid-sized advanced technology centers such as Boulder, CO, and Burlington, VT.

Those bright spots point to a real competitive advantage that explain how the country remains a technological and, yes, a manufacturing superpower. But they remain the exception. Most major metros and historic manufacturing clusters track the nation.

Limited startup activity reigns along much of the East Coast, large stretches of the Southeast, and even midwestern metropolitan areas such as Columbus, OH, Indianapolis, IN, and Pittsburgh, PA, with world-beating research universities and longstanding efforts to integrate leading edge innovation into legacy manufacturing bases. Boomtowns such as Atlanta, Dallas, Nashville, and Phoenix trail the nation on spawning new manufacturers, too.

Los Angeles is a particularly interesting case study. Its manufacturing sector remains more entrepreneurial than most other major cities. The region is garnering as it builds on its aerospace roots to become a center of defense-related "hard-tech." Alumni from SpaceX and other firms are launching new manufacturing startups in the classic spinout process that makes strong clusters (greased, in this case, by California's prohibition on noncompete agreements). Such entrepreneurial ferment is a key ingredient in dynamism.

Those advanced manufacturing startups attest to the area's strengths in risk capital, know-how, and talent. They prove that the location itself still has the power to inspire entrepreneurship.

And yet, the number of young manufacturers in metro Los Angeles fell to its lowest level in decades in 2023.

This larger sectoral trend in the region attests to the area's weaknesses, notably high costs across the board for both firms and workers.

What happens when congestion costs overpower the forces of agglomeration? People and businesses leave. Firms fail to start. The magnetic pull and inherent dynamism of a place like Los Angeles is dampened, leaving manufacturing in the nation's second metro area smaller and less innovative than it could be.

Virtuous restoration

The spread of manufacturing itself is not inherently negative. The sector is an engine of economic development and opportunity for the communities into which it enters. Manufacturers have a long of making location decisions to avoid having to compete with other firms for labor. Corners of the United States have real comparative advantages based on the costs of land, labor, and energy. New clusters may be forming in some of these low-agglomeration areas, too.

Deagglomeration is only a problem insofar as it is a symptom of the poor health of the nation's manufacturing heartlands. That is exactly the diagnosis presented here.

Industrial policy now captivates both parties. The federal government has pledged trillions in subsidies to big firms to make it in America. The Trump administration has tried to fundamentally reset the terms of trade with tariffs. Entrepreneurship has been almost completely neglected. The low- to no-cost work of dismantling barriers to commercializing innovations and growing new firms has been largely ignored. Fundamental questions about how to strengthen U.S. competitiveness — and the regional foundations of U.S. competitiveness — remain unanswered.

To put it plainly: The nation will fail to activate a manufacturing renaissance without revitalizing innovation and entrepreneurship within its established agglomerations.

Luckily, there's no shortage of ways to get started. Ban noncompete agreements so that nimble new firms can spin-out from lumbering old ones. Liberalize housing construction so that more talented people can afford to live in our most productive regions. Streamline regulations so that redeveloping brownfield sites can be cost- and time-competitive with building on greenfield ones.

And the best part of all is that local, state, and national leaders can all do their bit to make progress.

Geography and dynamism, together, help explain how manufacturing in America arrived in its current state. They also show how the sector can climb out of it.

Originally����on Agglomerations, the Substack newsletter from the Economic Innovation Group.

By Adam Ozimek, Benjamin Glasner, and Jiaxin He

From national security, to productivity growth and innovation, to qualitative ideas of what a "good job" is, manufacturing holds a special place in the minds of policymakers.��

Because the sector motivates so many policy objectives, it would seem we should know some basic facts, like how many manufacturing workers there really are. But while that sounds like a simple question, determining who counts as a manufacturing worker is actually a fraught empirical exercise with plenty of noise and gray space.

There are generally two ways to measure industry employment: surveying businesses and surveying workers. If you ask American businesses, there were around 12.5 million manufacturing workers in 2023. But if you ask workers, there were around 15 million—a difference of a whopping 2.5 million jobs.

Understanding the causes of this discrepancy is critical to approaching the topic of manufacturing's place in the American economy objectively. We discuss two methodological and reporting differences that mainly account for these "missing" 2.5 million manufacturing jobs and try to put them into the proper perspective.

1. Businesses report their industry to government statistical agencies at the "establishment" (location) level. Determining what constitutes a business "establishment" is ambiguous.
   
2. Workers often report their industry to agencies at the firm level or job level. Business categorizations have changed over time even while workers' jobs have not.
   

Grasping these factors and the discrepancies they generate helps to clarify the manufacturing jobs picture. While economists generally advise deferring to surveys of businesses, in this analysis we dig into why the disagreement occurs and argue that the higher, worker-reported numbers are meaningful as well. We think the "right answer" to how many manufacturing workers there are depends on the context and lay out here why sometimes the workers themselves are worth listening to.

How we count workers

To over-simplify just a bit, government statistical agencies ask businesses, "what kind of business are you and how many workers do you have?" and they ask workers, "what kind of business do you work at?"��

Business surveys, usually called "establishment surveys," are filled out by the company. Businesses are asked to indicate the primary work done at a particular location or "establishment." Sometimes these data are derived from a literal survey filed to a government statistical agency, and other times the agencies start with information from tax returns. In some cases, businesses are legally required to reply and so we end up capturing information on nearly the entire universe of non-farm employer businesses.��

Government agencies then use the information to categorize businesses into standardized codes using the North American Industry Classification System (NAICS). A handful of these codes are grouped into the wider category of "manufacturing."��

Agencies then track employment over time at these businesses and aggregate that to the industry and/or geography level. This is how we measure, for example, how many manufacturing jobs there were in the Tuscaloosa, Alabama, metro area in September 1997 (14,814^[1]) or how many worked in food manufacturing nationwide in September 2025 (1.771 million^[2]). This broad approach is used for a variety of establishment surveys, including the Quarterly Census of Employment and Wages (QCEW), the Current Employment Statistics (CES), County Business Patterns (CBP), and the survey we will focus on most, the Business Dynamics Statistics (BDS). This approach is how the headline payroll growth is estimated with the CES every month on "Jobs Day."

The other main approach to measuring employment is to survey individuals instead of businesses. One example is the Current Population Survey (CPS) which is used to measure the unemployment rate. The Decennial Census and American Community Survey (ACS) are also done this way.

The ACS, which we will focus on most, asks the name of an individual's employer and also asks this about it:��

"What kind of business or industry was this? Include the main activity, product, or service provided at the location where employed. (For example: elementary school, residential construction)."^[3]

The ACS then asks specifically if the employer is "mainly" in manufacturing, wholesale trade, retail trade, or other.

Figure 1: Actual ACS Questionnaire

Government statistical agencies categorize all of this information. Individual responses can then be aggregated to measure total industry employment.��

When the data disagree

It turns out workers and businesses don't always agree about the industry they are in. To see this, we can compare the number of workers in each sector in two datasets: the ACS (worker reported) and BDS (business reported).^[4]

In 2023, the ACS recorded 15.1 million manufacturing jobs, while the BDS recorded 12.3 million, or 2.8 million fewer.^[5]

As the chart below shows, manufacturing employment is 22.7 percent larger in the ACS than in the BDS in 2023, while in most other industries the discrepancy is flipped.

This divergence is not just about picking the two surveys that are farthest apart. Other business surveys are fairly close to BDS at around 12 to 13 million jobs. The CPS, another individual-level survey, is very close to ACS at about 15.1 million. What we see is a general discrepancy between survey types. If you ask workers, there are at least 2.2 million more people employed in manufacturing than if you ask businesses, regardless which survey you choose.��

If manufacturing employment were actually 22.7 percent bigger than we thought, that would have serious implications, perhaps weakening the widespread argument that manufacturing employment has been "hollowed out." To contextualize the discrepancy, the figure of 2.8 million manufacturing jobs is larger than the 2.5 million lost during the Great Recession, according to the Bureau of Labor Statistics' business survey.^[6] It's also larger than the 2 to 2.5 million estimated job losses from the China Shock.^[7] It would have made up for two-thirds of the 4.2 million total decline in manufacturing employment in business surveys from 2000 through 2023.

We can get even more detail on what missing manufacturing workers do from Emily Isenberg, Liana Landivar, and Esther Mezey (2013), who match ACS data to the Census Bureau's Longitudinal Employer Household Dynamics (LEHD) program, which covers the universe of firms and workers.^[9] They find that 23 percent of those identified in the LEHD as wholesale trade are counted as manufacturing in the ACS. The same is true for 28 percent of workers in management of companies, and 8 percent of workers in scientific, professional, and technical services.^[10]

What feels like manufacturing but isn't?��

Do these discrepancies matter? Business surveys are generally seen as the more reliable estimate, since business owners or staff specifically designated with the task are expected to be more accurate than a random employee in identifying an establishment's industry. The government statistical agencies also do a lot of work to make sure these numbers are correct.

As John Haltiwanger, Henry Hyatt, and James Spletzer write, "The LEHD industry measures are of high quality from the establishment-level programs at BLS and Census. These agencies have a strong incentive to track industry carefully as their detailed industry statistics are critical for the NIPAs and productivity statistics."^[11]

There is also plenty of evidence that individuals make mistakes in reporting their industry even at the sectoral level. For example, economists Matthew Dey, Susan Houseman, and Anne Polivka document that temp workers commonly self-report the wrong employer and end up in the wrong industry as a result.^[12]

There is even more evidence that there is disagreement between types of surveys. Isenberg, Landivar, and Mezey found the same workers in both the ACS and LEHD and showed that the industry matched only 75 percent of the time.^[13]

But there are a few reasons to believe there is valuable information in the ACS, and that these workers in important ways really are manufacturing workers.��

One reason is that many economists also think that the manufacturing sector is bigger than it seems.��

Consider what Andrew Bernard and Teresa Fort "factoryless goods producing firms" or FGPFs.^[14] These are businesses that are involved in the production of goods, but may not be doing the raw assembly of the goods themselves. This can include pre-production activities like research and development (R&D), market research, product design, and product engineering. It can also include post-production activities like marketing, sales, logistics, and customer service. As Bernard and Fort write, "FGPFs are manufacturing-like as they perform many of the tasks and activities found in manufacturing firms."��

In the U.S., Apple is the archetypal example of an FGPF. In the U.K., there is Dyson. Other examples include so-called "fabless" semiconductor companies like NVIDIA who design chips but don't make them.��

Not only are many factoryless businesses "manufacturing-like," many of them were once involved in production as well. Apple, for example, used to assemble computers at its Elk Grove, California, campus. Today there is no assembly at that location, but thousands of Apple employees work there on logistics, distribution, repair, and customer support.^[15]

The site of Harley-Davidson's first factory in Milwaukee also does no production today, but is home to their corporate headquarters. This includes Harley-Davidson University, where employee training is done.��

When a business stops producing goods at a specific establishment, that location stops "identifying" as manufacturing on business surveys. using one of those business surveys (of the type that includes the universe of businesses) showed that 40 percent of the lost manufacturing jobs from the China Shock were actually this type of phenomenon. ^[16] For these businesses, competition with Chinese imports didn't mean closing up shop. It just meant a shift away from production towards R&D, marketing, and other activities. In the Harley-Davidson example, all Harley-Davidson workers, in some sense, have a job in manufacturing, but according to establishment surveys only those at manufacturing sites do.

These sorts of employees—who work adjacent to manufacturing, but not in categorized establishments—make up a big chunk of the 2.2 to 2.8 million missing manufacturing workers.

It shouldn't be a huge surprise that some of the workers at these businesses think of themselves as working in manufacturing. After all, they are still contributing to the process of manufacturing goods, even if indirectly, and for many they might be doing the exact same non-production job they once did in a manufacturing establishment.��

When the business is the same but definitions change

Changes in the operations of a business can clearly lead to missing manufacturing workers. Yet another issue is that sometimes the business hasn't actually changed at all, but definitions have. An important illustration of this occurred in 1997 when U.S. statistical agencies changed their industry codes, switching from the Standard Industrial Classification System, which had been in place but with evolutionary changes since the 1930s, to the more modernized NAICS codes.��

This change was consequential for manufacturing in some datasets (importantly, not the BDS, which has consistent definitions over time). Previously when a manufacturing firm had a specific location that only engaged in R&D, the workers there would be counted as manufacturing. Under the NAICS system, those workers are instead classified based on the primary activity of their specific business location, not what the wider firm does. Workers at an R&D location for a manufacturing firm are not counted in manufacturing employment. The same is true of a location that is solely the headquarters of a manufacturing company.��

The change in method makes it clear that what is counted as a manufacturing job is a statistical choice, and one that government statisticians have made differently in the past.��

Altogether, from economists Teresa Fort and Shawn Klimek suggests that this change in industry definitions led to 1.4 million jobs being reclassified from manufacturing to services in the Census Bureau's Longitudinal Business Database (LBD).^[17] This likely represents another chunk of the missing manufacturing workers between at least some of the datasets.��

What counts as a manufacturing establishment?

In some cases, the distinction between a manufacturing worker and a non-manufacturing worker seems almost arbitrary despite the huge policy implications.

Consider Boeing's 1,000-acre facility in Everett, Washington.

Boeing builds jets in the main assembly building, which is the largest building in the world. But there are 200 separate buildings at the facility that contain activities ranging from R&D to safety certifications. An important measurement question is whether the 1,000 acres constitute a single manufacturing establishment, or whether the various functions performed in the other buildings are treated as separate establishments, with each assigned its own industry code.

It's not clear which should be the case, nor is it clear which is the case for the various datasets we are considering. Yet the key issue of "how many manufacturing jobs we have" hinges on this question and many more instances like it.��

Conclusion

The kind of work we care about varies by context. Whether a policy targets national security, productivity growth and innovation, or "good jobs" makes all the difference in how we should measure manufacturing employment.��

Certainly when it comes to "good jobs," whether a worker thinks they are in manufacturing is more consequential than what the business itself thinks. If a local policymaker promises to bring back manufacturing to their town, and a firm makes 1,000 new hires in R&D, marketing, human resources, and sales for a product manufactured in Vietnam, would that be regarded as a policy success? It seems likely it would.��

On the other hand, if a politician promised manufacturing jobs and instead a business was created that simply served as janitorial services for manufacturers, that would be unlikely to be counted as a policy success.��

In the context of productivity and innovation, the R&D work that is often excluded from official definitions of manufacturing would seem to be just as relevant as—and arguably more so than—assembly. However, to the extent innovation is bolstered by co-location with production, having production on-site may matter as well.��

For national security, one can make an argument in both directions. If the U.S. is cut off from assembly, then our ability to design, sell, and ship goods may be of little help. On the other hand, manufacturing R&D and logistics could be just as essential to military deployment.��

Accepting that there is information in what workers tell us does not necessitate abandoning the importance of assembly itself or the general reliability of business-based surveys. However, we should make sure that when talking about manufacturing, we are clear that there is more than one measurement and definition that may be relevant. When it comes to what workers think they are doing, we have a lot more manufacturing than is commonly reported.��

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By Adam Ozimek

Protectionists love talking about the auto industry. Believing it offers a potent example of the harms of globalization, their arguments have long been politically attractive to politicians on both left and right. Most recently they have justified the Trump administration’s 25 percent tariffs on auto imports by emphasizing the long-term decline of the industry.

It is time to set the record straight.��

The protectionist argument for insulating the American auto industry from foreign competition not only draws the wrong lessons from history, it gets the history itself wrong. It rests on four myths, all of which I debunk in this analysis:

1. The U.S. auto industry has collapsed.
2. Globalization caused the death of Detroit.
3. Japanese imports nearly destroyed the auto industry in the early 1980s…
4. … until auto protectionism saved it.��

Once these myths are set aside in favor of a clear, accurate understanding of the auto sector and its history, there is no reason to be optimistic that the Trump administration’s protectionist approach to the sector will work as intended. Indeed the case for it falls apart entirely.

I. The Auto Industry: Doing Just Fine?

The backdrop for President Trump’s tariffs is the idea that the auto industry has been decimated by globalization. “No one anymore, on the left or the right, denies that globalization has fractured the U.S., both economically and socially,” Joe Nocera at the Free Press. “It has hollowed out once-prosperous regions like the furniture-making areas of North Carolina and the auto manufacturing towns of the Midwest.”

The situation is so dire, Steven Miller , that “if we stayed on this current path, within a few years there would have been no US automobile industry.”

Such claims of vast deindustrialization ring true for certain manufacturing industries. Some goods really did stop, or mostly stopped, being made in the United States because of globalization.

Apparel, for example, is a quintessential globalized good, its factories shifting across the globe in search of the lowest labor costs. The United States once made a lot of clothes. Today it more than 90 percent fewer workers in apparel than it used to, and 90 percent less of the output. Apparel was a classic “China Shock” industry, where imports caused substantial and long-lasting economic disruptions in the parts of the country where it used to be concentrated. ^[1]

But the domestic auto industry is different. It remains alive and well, with 10.5 million vehicles assembled in American factories last year. This number is down from the peak of the post-NAFTA boom period, but it is well above the depressed years of the 2000s and nearly equals the average of 10.3 million annual vehicles made in the pre-NAFTA period dating back to 1969.

And these production numbers actually fail to capture the true strength of the industry. The economic value of the cars being made has climbed substantially through the years. As a result, real value added and industrial production — two different ways of measuring actual output — are now at all-time highs.��

What about jobs? The auto industry today employs 1 million workers. Between 1950 and the signing of NAFTA in 1993, it averaged 1.1 million workers, just slightly higher. ^[2]

So much for Myth 1, the persistent notion that the American auto industry has collapsed. With output at all-time highs and employment hardly lower than in the time before NAFTA (the biggest globalizing event for the auto industry in recent decades), the evidence goes hard in the other direction.��

II. The Detroit Whodunnit

But we are left with a puzzle. The perception that the auto industry has been decimated — and decimated specifically by globalization — is widespread. Where does it come from?

The likely answer is that in Detroit, the decline of the auto industry is certainly not a myth. But its very real decline was caused by competition not with the rest of the world, but with the rest of the United States.

The deindustrialization of Detroit is typically understood as a phenomenon of the 1970s and 1980s, and it is therefore blamed on the growth of trade during this period. But the fact is that auto investment and employment had started moving out of Detroit decades earlier.��

I pieced together data from a variety of sources, which shows that auto manufacturing employment in the City of Detroit had already peaked in 1950, at just over 220,000 workers. ^[3]

By 1970 the biggest declines had already occurred, with employment falling by more than half, to fewer than 100,000 jobs.��

An important nuance is that many of these lost jobs migrated to other parts of Michigan, at least for a while. So while auto employment was collapsing in Detroit, the rest of Michigan managed to hold auto employment stable for another five decades until the 2000s, when it started falling everywhere in the state.

The steady employment outside of Michigan did not, however, do anything to offset the big declines in Detroit. For all of Michigan, both Detroit and ex-Detroit combined, employment also peaked in 1950 and, except for a couple of blips, has been mostly in decline since. Because although the Big 3 (Ford, General Motors, and Chrysler) were moving some jobs from Detroit to other parts of Michigan, they were moving even more jobs out of the state entirely.

The exodus from the city proper is also evident in the investments of the Big 3. From 1946 to 1956, they built in the broader Detroit metro area, but not a single one within the City of Detroit itself. In 1940, 58 percent of Ford’s assembly plants were located in the City of Detroit. By 1956, none were. ^[4]

The historical record paints the picture. Henry Ford II announced in 1950 that his company’s investments would no longer be concentrated in their established industrial centers. By the mid-1960s, Ford had made major investments not just in the southern states of Alabama, Tennessee, and Georgia, but also in New York and New Jersey.��

For its part, GM made investments in Indiana, Ohio, Illinois, New Jersey, Mississippi, and California, while Chrysler invested in New York, Delaware, Indiana, and Ohio — all by the late 1950s.

These investments and the jobs that followed them did not occur as a result of foreign car companies establishing their factories in the south and other parts of the country. That came much later. Long before the Big 3 were seriously challenged by foreign automakers, they themselves had begun decentralizing auto investment out the industrial hub of Michigan and spreading jobs and investment across the rest of the country. ^[5]

So globalization couldn’t kill Detroit because Detroit was already dead. Or at least dying.

And it really was a story of decline in Detroit almost exclusively. From 1950 to 1980, auto employment even in most of the Rust Belt states expanded. The gains in Ohio, Indiana, and Illinois exceeded those of any southern state.

If not globalization, what drove this push out of Detroit?��

One big factor was the militancy of local unions. Consider what happened at Ford’s . Located in the Detroit suburb of Dearborn, it was once the largest integrated factory in the country with 93 structures, 90 miles of railroad track, and 53,000 machine tools. Its workers belonged to the United Auto Workers (UAW) Local 600 union. Throughout the 1940s, the Local 600 organized hundreds of strikes that would routinely shut down production at River Rouge.��

Citing this union activity as the cause, Ford Motor company relocated production to other parts of the country — building a stamping plant in Buffalo, NY, an engine factory in Brook Park, OH, and other factories in Tennessee and California.��

Between 1941 and 1960, employment in the River Rouge Complex fell from 90,000 workers to just 30,000. ^[6]

The Big 3 were not avoiding all unions. In a 1950 speech about Ford’s new investments to the Buffalo Chamber of Commerce, Henry Ford II praised Buffalo labor leaders as forward-looking, and Buffalo itself as “the place where an organization can get work done — where good production cooperation is possible.”^[7] It was specifically the local unions of Detroit that compelled the Big 3 to find new places to set up factories.��

The decentralization trend accelerated in the 1970s when foreign automakers began establishing their own factories in the United States, and then continued for decades beyond the 1980s.��

The desire of the foreign automakers to avoid Michigan and its unions was even stronger than it was for the Big 3. A letter from Mitsubishi to U.S. Representative Mary Rose Oaker, written in 1985 to explain why Cleveland, Ohio had been rejected as the site of their first plant, makes their rationale explicit: “The rule of thumb we have been using in our site selection process is to avoid going right into the heart of any existing heavily automobile industrial region.” ^[8]��

And while Nissan chose Smyrna, TN in 1980 for a variety of reasons, Tennessee’s status as a right-to-work state was a big one, as it was “far enough from the industrial North to be beyond the reach of the UAW.” ^[9] As the first manager of that plant said, “You won’t get the cooperation necessary to build a quality product with the union.” ^[10]

Michigan now has about 280,000 fewer auto jobs than it did in the 1950s, a decline of roughly 60 percent. ^[11]��For the United States as a whole, auto employment is only down 4.7 percent — further showing that the struggles of Detroit and Michigan are less about the decline of the American auto industry and more about its relocation elsewhere.��

Another way of understanding the trend: If Michigan had simply maintained the same share of American auto jobs as it had in the 1950s, meaning it did not lose any production to other states, then it would only have lost 21,000 auto jobs since then, not the 280,000 it actually did lose.��

Should the federal government have done more to help Detroit weather its deindustrialization? Maybe. A strong argument can certainly be made for it. But no argument can be made that protectionism would have helped, as tariffs and other trade barriers have absolutely nothing to do with internal competition between states.

III. Japanese Imports and the Crash of 1979–82

While the struggles of Detroit started back in the 1950s, a genuine crisis for the wider American auto industry did not arrive until nearly the end of the 1970s. But when it finally hit, it hit hard.

More than 400,000 auto workers lost their jobs between 1978 and 1982 — a staggering 30 percent decline — as the industry confronted its biggest challenge since the Great Depression. Domestic auto production had collapsed. American companies made fewer than 7 million vehicles in 1982, a 46 percent decline from their output just four years earlier.��

Some of the loudest voices from across the political spectrum placed the blame on Japanese imports. Demands for protectionist policy came not just from anti-trade crusaders but also from important figures inside the presidential administrations of both Jimmy Carter and Ronald Reagan. (More on the effects of their policies later.)��

Was globalization, and specifically the flood of auto imports from Japan, responsible for the crisis?��

The first point to make is that foreign competition did not arrive overnight. It had grown steadily over a long period. The first auto import was the Volkswagen Beetle, from West Germany, in 1949. Cars from the European automakers Austin Healey, MG, Jaguar, and Volvo arrived next. ^[12] In 1957 came the first Toyota imports, followed by the Datsun Bluebird from Nissan the next year.

These early imports were no threat to domestic automakers, who were dismissive of the new competition — especially the Japanese imports, which Detroit perceived as “shoddy, tinny” cars that “rattled and fell apart.” ^[13]

That initial perception was largely right. Toyota’s first imports were designed for low-speed driving on Japan’s famously bumpy urban roads. The fast speeds of American highways caused them to overheat and, yes, sometimes rattle and fall apart. Toyota stopped importing them within a few years and went back to the drawing board. ^[14]

But gradually the pressure from foreign competition increased. In the 1950s, the Big 3 carmakers were a comfortable oligopoly and faced little pressure to innovate. That would soon change.

As of 1957, only 4 percent of cars sold in the United States were foreign imports. ^[15]) Exactly a decade later, the share had tripled to 12 percent, and foreign imports had climbed to more than a million cars per year for the first time. The Volkswagen Beetle continued leading the way as the nation’s best-selling import. ^[16]

Japanese companies had meanwhile pioneered new and shockingly effective production methods, pushing their cars to the forefront of quality and cost. The cars were also, finally, well matched to American roads and drivers. In 1974, imports from Japan by themselves exceeded a million cars, boosting total foreign imports to more than 2.5 million — a fifth of all cars sold in the United States. ^{[17] [18]}

And yet despite the globalization of the industry, the steep rise in imports had failed to devastate American producers. Instead, domestic production and employment from the late 1960s to the late 1970s had risen together with imports.

In 1978, when imports hit a record high of more than 3 million vehicles, American auto producers had their best year ever, with 12.9 million cars assembled.��

If globalization had been destined to eviscerate the auto industry, it would have happened much sooner.��

As for what did bring about the crisis of 1979–82, the likely culprit was the cratering of consumer demand throughout the American economy, which itself had various causes.��

An oil shock in 1979 had pushed inflation above 10 percent. The Federal Reserve responded by raising interest rates to nearly 18 percent in March of 1980 and then keeping them elevated for several more years. The unemployment rate spiked and nearly reached 11 percent at the end of 1982, by far its highest level since the Great Depression. Quite simply, fewer people were making money, and the cost to borrow it was prohibitive.��

That auto sales fell as they did should therefore have been no surprise.��

Domestic auto companies took the biggest hit. Roughly 40 percent fewer vehicles made in the United States were sold in 1982 than four years earlier. Disappearing revenues forced American automakers to cut $10 billion in costs, leading to factory closures and layoffs. ^[19]

Chrysler was pushed to the brink of bankruptcy and needed a federal bailout from the Carter administration in the form of a $1.5 billion dollar loan guarantee. Ford stock fell by more than half, and its credit was downgraded by ratings agencies. ^[20]) (Ironically, Ford might also have faced bankruptcy, or at least been forced into a merger, were it not for its profitable overseas operations. In a sense it was saved by globalization. But protectionists tend to leave out that bit of the story.) ^[21]

During this time, sales of imports were more resilient, rising from 3.1 million vehicles to 3.3 million between 1978 and 1982 (see Table 1 above). Because the sales of American-made vehicles had fallen so much, importers dramatically increased their share of the market — setting the stage for what came next.����

Import competition, especially from Japan, became the scapegoat for the domestic industry’s problems. Demands for protectionism then followed. Ford and the United Auto Workers filed a complaint with the U.S. International Trade Commission (ITC), which included a warning from the UAW president: “The auto industry here is in danger of losing up to one-third of the U.S. market permanently if action is not taken rapidly.” ^[22])

But the ITC rejected the claim, denying that imports were a “substantial” cause of the industry’s problems. ^[23] Simple math, with the help of a thought experiment, strongly supports the ITC’s argument.

Counterfactual 1: Imagine a counterfactual world in which demand had not crashed. Annual sales of vehicles remained steady at 1978 levels throughout the crisis years. But in this counterfactual, foreign importers still increased their market share by the exact same amount as they did in reality, rising from 20 to 31 percent of all sales in 1982.

In such a world, American producers would have sold 10.6 million vehicles in 1982. This is fewer than the number sold in 1978, but only by 14 percent — which may not be great, but is still just a third of the decline that happened in real life (a 41 percent decline).��

Put another way, American producers in this counterfactual would have sold roughly the same number of vehicles as in 1976, just three years before the crisis started.����

Counterfactual 2: Now imagine an entirely different counterfactual, one in which demand does crash (as indeed it did in real life), but foreign importers fail to gain any market share, remaining at 20 percent of vehicles sold in the United States.��

In this world, American automakers would have sold 8.4 million vehicles, a 32 percent decline — much closer to the actual catastrophe that happened in the real world.��

Conclusion: Forced to choose between the collapse of demand (a 32 percent decline) or the rise of imports (14 percent decline), it is clear which counterfactual path the industry would have chosen.��

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A close look at truck sales offers another reason to doubt imports were the problem. ^[24]

Imports of light trucks rose 5 percent between 1978 and 1982, which was weaker growth than the 11 percent rise for imports of all vehicles. Yet despite the slower growth of truck imports, sales of domestic trucks actually fell by more than sales of domestic vehicles overall (see Table 2).����

Macroeconomic conditions — the weak economy, rising gas prices, high unemployment — were going to be a problem for the industry regardless of imports.��

While rising imports left the domestic auto industry more fragile than it otherwise would have been, they were just one among many problems. A lack of competition in the post-war period had lulled the Big 3 into a period of sclerosis, low innovation, and labor costs that had grown much faster than productivity. ^[25] The problems were most visible at Chrysler, which, in 1978, a year of record-high auto demand, lost $205 million and found itself $1 billion in debt. ^[26]

The domestic automakers also struggled because they simply weren’t making enough of the small cars that customers wanted when gas prices skyrocketed. They believed that small cars were a “profitless hole.” Their unwillingness to make a quality, affordable, small car in the 1960s was so obvious that UAW president Walter Reuther asked Lyndon Johnson to suspend antitrust enforcement and allow the Big 3 to collaborate on one. ^[27]

The growing share of imports no doubt placed competitive pressure on domestic producers. But in a healthy macroeconomic environment in which total demand was strong, as it had been for the decade prior to the crisis, there would have been no crisis regardless of rising imports.��

The dominant effect of consumer demand on the American auto industry can also be shown using statistics and a simple chart. In Figure 8 below, for each year between 1968 to 2024, the number of vehicles sold in the United States is plotted against the number of vehicles assembled inside the country (a measure of production).��

The precise relationship is that every 1 percent increase in total vehicles sold is associated with a statistically significant 1.2 percent increase in domestic production.��

In contrast, neither the import share of sales nor the percent change in imports has a statistically significant effect after controlling for total sales (Table 3). In fact, if total sales are not controlled for, higher imports are correlated with higher domestic production.��

A good market swamps everything, benefitting producers both domestic and foreign.

IV. A Protectionist Success Story?

Nonetheless, the scapegoating of Japanese imports and the mass layoffs at the Big 3 led to mounting pressure on policymakers to respond.��

The Reagan administration found itself caught between its free trade principles and its campaign promise to help American auto workers. As a compromise, the administration pressured the Japanese government into imposing voluntary export restraints (VER), which limited exports of Japanese autos into the United States. For three years, starting in 1981, Japanese carmakers combined were allowed to sell no more than 1.68 million cars per year to American buyers.��

The goal was to give the American auto industry “breathing room” — a phrase that pops up again and again in and the . The industry was in a crisis, and this was the plan to help it adjust.

Did the policy succeed?��

There are two reasons to doubt it. First, it had no significant effect on the primary goal, which was to help the Big 3 get through the crisis. Second, contrary to protectionist claims, the policy is not why Japanese automakers now produce so many cars from inside the United States.��

The conclusion of the crisis

The most important reason the American auto industry eventually did get through the macroeconomic crisis was that the macroeconomic crisis ended. December of 1982 was the last month of the recession. By then, interest rates had fallen all the way to their 1979 levels, while real gas prices (gas prices adjusted for inflation) had fallen halfway back to their pre-crisis levels. ^[28]) ^[29])

The economic stage was set for the auto industry to start recovering in 1983. That is exactly what it did, with total vehicle sales that year returning to 96 percent of the pre-crisis average. By 1984 they were 12 percent above it. ^[30] And after having lost a combined $8 billion during the crisis, profits for the Big 3 hit a record $10 billion in 1984. ^[31]

Profits were so high, in fact, that they enabled the UAW to negotiate a deal that included, for the first time, the infamous “jobs bank” requiring the automakers to find new employment for laid-off workers and continue paying them until then.��

Another factor helping domestic producers was their rollout — better late than never — of fuel-efficient small cars with front wheel drive, which started in 1979 and 1980. These cars were introduced, notably, before the Voluntary Export Restraints on Japan went into effect. Included among them were the Chrysler K and GM X series. ^[32]

While the improved economy and industry adjustments put an end to the crisis for the Big 3, it’s far less likely that VER played much of a role. The policy had little impact until the crisis was already over. The collapse in demand was so severe that even if the export restraints had been introduced earlier, during the worst years of the crisis, the VER’s limit on Japanese imports would not have been binding.��

In other words, automakers importing from Japan would have sold close to the maximum allowable 1.68 million cars between 1979 and 1982 anyways. How do we know? Econometric evidence shows that VER only started raising the cost of Japanese imports — demonstrating the effect of having curbed their supply in the American market — in 1984 and 1985. And the effect did not become statistically significant until 1986. ^[33]

A report from the International Trade Commission is consistent with only minor effects in the first few years, increasing domestic production by an estimated 75,000 units in 1981 and 128,000 in 1982. ^[34] These figures amount to just 1 percent of total industry sales those years.��

The ITC concluded that by 1984 the impact had become more substantial, with domestic auto sales 620,000 vehicles higher than they would have been without VER. By this time, of course, the crisis was long over.��

This story is also reflected in perceptions at the time. At a hearing of the U.S. Congress Joint Economic Committee in 1985, Acting U.S. Trade Representative Michael Smith said “one could argue that for the first year or so the price only gradually increased. By the time of the fourth year, the additionality was very clear.” ^[35]

Despite the accumulated evidence that VER had no meaningful effect until after the crisis had passed, it was extended beyond its initial term of three years. It remained in place until 1994, more than a decade beyond the conclusion of the crisis it was meant to address.

Japanese factories, inevitable

That protectionism did not achieve its intended purpose might seem like a closed case for declaring the policy a failure. But protectionists have another reason they love the policy of Voluntary Export Restraints: they believe it caused Japanese automakers to build plants inside the United States, thereby employing American workers rather than competing against them.��

As with the notion that VER led the way out of the crisis, this post hoc rationalization is unsupported by the actual evidence.��

The protectionist argument relies on two assumptions. The first is that protectionism pushes firms to invest in the United States. The second is that this investment then leads to permanent long-term changes for the domestic industry even though the protection itself is temporary. The temporary protectionism in this case is the VER, and the permanent long-term change is that Japanese automakers relocated their production inside American borders instead of just importing more and more.��

One problem for this theory is that Japanese investment was definitely not the Reagan administration’s goal when it negotiated this policy. Nor was it the goal of the Big 3 when lobbying for it. They simply wanted “breathing room” for American automakers to get through the crisis.��

The UAW had been appealing to Japanese automakers to invest in the United States throughout the 1970s, but for them too the goal was not to attract new investment. Its aim instead was to increase unionized employment. And just like the Reagan administration and the Big 3, the union didn’t get what it wanted either. By the late 1980s, the UAW was suggesting that even the American factories of Japanese companies should be constrained by quotas. ^[36])

As such, if VER worked to increase Japanese investment and employment in the American south, it did so while failing to achieve what those who actually fought for it wanted. Hardly a rousing endorsement of the idea that protectionism “works.” ^[37]

But more importantly, the theory is simply wrong. The United States was not on a path to entirely import-based production, so it follows that the VER did not prevent this outcome by bringing the Japanese automaker to America. There are many good reasons, on the other hand, to believe that powerful magnets would have pulled the Japanese automakers to eventually produce vehicles in the United States even if VER had never existed.��

The first is that producing in the country where the vehicles will be consumed not only reduces the risk of future protectionism, it also reduces exchange rate risk. Exchange rate fluctuations nearly bankrupted Jaguar in the United Kingdom and Saab in Sweden in the late 1980s, resulting in their absorption by Ford and GM respectively. ^[38]

Second, the economics of the auto industry compel production to move closer to the buyer�� once demand reaches a certain level. Automobiles are what economists Thomas Klier and James Rubinstein call a “bulk-gaining industry.” They write:

“An assembled motor vehicle occupies a much greater volume and is more expensive to ship than the sum of its individual parts. Consequently, carmakers have selected assembly plant sites that minimize their costs of shipping finished vehicles to dealerships.” ^[39]

Estimates of economies of scale in the industry suggest that an auto assembly plant should produce around 200,000 to 300,000 units to be cost efficient; engine plants should produce around 400,000 units; and transmission plants more than 500,000 units. ^[40]

It therefore makes sense for producers to wait until a local market demonstrates a persistent and sustainable demand for their products before making large investments needed to produce at efficient quantities. When vehicles are demanded in small quantities, it makes more sense to import.����

Evidence for this dynamic can be seen using data from a recent Quarterly Journal of Economics paper on the auto industry. ^[41] In 2018, the most recent year that data is available, there were 74 models of car sold in the United States by non-Japanese foreign auto companies. Only 11 percent of these models were assembled domestically, and another 5 percent in Mexico and Canada combined. But among the models with more than 100,000 vehicles sold, 60 percent were assembled in America. Looking at vans, trucks, and SUVs, roughly half the models with sales above 100,000 vehicles were assembled in the United States versus just 15 percent of all models.��

Looking across all 314 models in the data for 2018 (Figure 9) shows that as sales go up, vehicles become far more likely to be assembled inside the United States.��

Japanese automakers were coming because they were producing hit cars, and it is simply good business to make hit cars near the customers. At best, VER might have slightly accelerated a process that was occurring anyway — though as Jordan McGillis at City Journal points out, to whatever extent that is true, it happened at the expense of consumers looking for affordable, high-mileage cars. ^[42]

Indeed, the economics of the industry was already attracting investment from foreign automakers long before VER.��

• Volvo had announced in 1973 that it would build a $100 million factory in Virginia with the capacity to assemble 200,000 cars a year and would employ 3,500 workers.
  ^[43]
  The factory was built, but the plan was ultimately cancelled as a result of falling demand, and the factory switched to making buses instead. ^[44]
• Volkswagen opened a $250 million factory in Westmoreland, PA in 1978 to assemble Rabbits. ^[45]
• Honda was manufacturing motorcycles in the United States by 1979. When the motorcycle factory was confirmed in 1977, Honda executives said that if production went as expected, “it is our present intention to start manufacturing automobiles by expanding the plant site.” ^[46]
• The decision of whether to build an American plant was in front of the Nissan board for 10 years before the oil shock of 1979. The hesitance was about the concern that Detroit would fail to get its act back together and leave them with factories that were not competitive. ^[47]

Undoubtedly, the 1980s and 1990s brought a much more rapid pace of factory building in America by foreign automakers. But if avoiding VER had truly been the reason for it, the trend would have been limited to Japanese automakers. It wasn’t.��

Instead, both Japanese and non-Japanese automakers from abroad were shifting production to the United States or the other NAFTA countries whenever production of a given vehicle reached a high enough level. Automakers first tested the market with imports at smaller volumes, and then accommodated higher volume models with regional production.

Japanese automakers were coming to the United States in such big numbers because, in addition to having become the most productive auto companies in the world, they were making cars that were hugely popular with American drivers. The same is true for Korean and many European automakers now — even though the VER never applied to them and it expired more than three decades ago.

Finally, I have focused so much of this analysis on VER and the events of the early 1980s because they loom so large in the story told by protectionists, but I have not yet mentioned perhaps the most trenchant example of auto protectionism that continues to this day. Originally intended as a temporary policy, a retaliation against Europe for their tariffs on American chicken imports, the United States has upheld a 25 percent tariff on imported light trucks since 1964. ^[48] The result has been less competition, fewer choices, and higher prices for American buyers of these vehicles. ^[49]

VER lasted a decade longer than it was meant to, but at least it finally did end. The light truck tariff reveals the danger of implementing a policy that initially is not meant to be permanent but turns out that way nonetheless. A new protectionist policy can be sticky, leading to political apathy and status quo bias as policymakers accustom themselves to it, fearing the backlash from the protected industry if they try to undo it. In the case of the truck tariff, a policy response in an unrelated trade war ended up remaining in place for more than six decades — and counting.��

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To summarize, the policy of Voluntary Export Restraints failed in its intended goal of giving American automakers breathing room during the crisis of 1979–82. It then did give them a windfall — by forcing American drivers to pay higher prices — after the crisis had passed. Data and the economics of the auto industry support the likelihood that the Japanese companies were destined to eventually open American factories in greater numbers regardless of VER, just as other major auto producers did after VER had expired.��

As industrial policies go, this one was hardly a riveting success to be emulated.��

Conclusion

This history matters. By enacting 25 percent tariffs on auto imports, the Trump administration has once again decided that globalization is the problem and protectionism the solution.��

Supporters will point to the decimation of the American auto industry as demonstrating the need for trade barriers. This claim is false.����

Protectionists will doubtless continue pointing to the entrenched economic struggles of Detroit and Michigan as proof that globalization was indeed the villain. This too is false.��

And they will point to VER as an example of how temporary, targeted protectionism works in the auto industry to generate substantial new industrial growth. False yet again.��

The arguments in favor of tariffs are not just based on mistaken interpretations of the history of the auto industry. They are based on a deep and persistent misreading of the history itself.��

A clear and accurate understanding of the past reveals the flaws in the policies of the present.