Deindustrialization Revisited

I previously wrote an article titled Trump’s Industrial Nostalgia Misses the Modern Economy, which sparked valuable discussions within the economic circles I engage with. In that piece, I emphasized the facts underlying the natural developmental stages of economies while neither dismissing nor downplaying the strategic importance of industrial capabilities for individual countries.

Let me begin with a definition of deindustrialization. It refers to the decline of the manufacturing sector within an economy, measured both in terms of output, the total value produced by manufacturing, and employment, the number of people working in the sector.

A key distinction must be made between “absolute” and “relative” declines.

Absolute decline refers to an “actual reduction” in manufacturing output or employment. Relative decline, on the other hand, means a “shrinking share” of manufacturing within the overall economy, even if its absolute size remains stable or grows.

This distinction is crucial. In an expanding economy like that of the United States, manufacturing may “decrease in relative terms” while “maintaining or even increasing its absolute contribution.”

Another dimension of deindustrialization is trade competitiveness, typically assessed through the share of global markets captured by a country’s manufacturing exports. A declining share signals eroding competitiveness against international producers and/or reduced demand for domestically manufactured goods abroad.

Deindustrialization has demonstrated close links with globalization in recent decades. Yet today, we are no longer in a phase of accelerating globalization. Instead, the world economy is undergoing a process of fragmentation. This pattern reflects deeper geopolitical dynamics and shifting international alignments.

At the center of this transformation is the strategic rivalry between the United States and China, a contest for global hegemony that increasingly shapes global value chains and industrial frameworks.

Protectionism, industrial policy, and regionalism are once again at the forefront. This shift reflects an ideological realignment in how states and regional blocs manage their economies, shaped by geopolitical calculus.

It is imperative to underline that we still live in an already globalized world. The departure from globalization is not a complete retreat, but rather reflects ideological reconfiguration driven by geopolitical rivalry.

The U.S., for instance, has been actively pursuing reindustrialization and protectionist measures under the Trump administration as a strategic choice aligned with the hegemonic contest.

I must make my position clear: my ideas and ideology are rooted in a firm commitment to economic policies compatible with democracy, equality, and environmental sustainability. I am neither defending nor refuting the claims of particular ideologies. Rather, my aim is to mirror the facts.

For my previous article, I received some comments emphasizing that industry remains important. I fully agree and I want to be clear that I never argued otherwise. My intention was not to undermine the role of industry, but to highlight the broader structural shifts in the global economy. Industry is indeed important, not just for what it produces, but for how it shapes labor markets, technological development, and geopolitical power.

To understand how we arrived at this point, we need to take a step back to 1997. That year, the International Monetary Fund published a short but revealing paper on deindustrialization. Its insights and assumptions offer a valuable window into how globalization was understood at the time and how those expectations compare to what we are experiencing today.

While I am not a defender of IMF policies, I recognize the Fund as a valuable source of statistical information. My use of the 1997 report is intended solely to engage with its empirical content, not to endorse its ideological or policy positions.

Deindustrialization as a Feature of Development

In 1997, the IMF released Deindustrialization: Its Causes and Implications as part of its Economic Issues series. The paper aimed to explain the steep decline in manufacturing employment observed across advanced economies, from the United States and Europe to Japan and the East Asian Tigers. It portrayed deindustrialization not as a crisis, but as a natural stage in economic evolution.

Deindustrialization had been primarily driven by relative productivity growth in the years leading up to 1997. Manufacturing was becoming more efficient, producing more with fewer workers, while services, which had slower productivity growth, absorbed the expanding workforce. The report emphasized that this shift should not be viewed as a failure of industrial policy, but rather as a sign of economic maturation. I agree with this assessment.

Changing consumption patterns also played a major role in the deindustrialization process. As incomes rise, people allocate a smaller share of their spending to manufactured goods and more on services such as education, healthcare, and leisure. This sectoral rebalancing toward services was both demand-driven and, to a large extent, inevitable.

The share of manufacturing output in GDP, when measured in constant prices, had not declined as sharply as employment figures suggested. In other words, the manufacturing sector continued to hold its ground in terms of real output, even as it employed fewer people. This reinforced the view that deindustrialization was not necessarily a threat to economic health.

There had been particular concerns about globalization: the North-South trade. However, it was statistically proven that the impact of competition from developing countries accounted for only about 18% of the decline in manufacturing employment. According to IMF data, the main drivers were technological progress and structural transformation, not trade displacement.

Future economic prosperity depended on enhancing productivity in the service sector, where most employment was shifting. The challenge was to make services more dynamic, not to revive manufacturing as the core engine of growth. We should never forget that it was the hyper-globalization period and there were not significantly voiced concerns regarding China’s attempt to position itself as a hegemonic rival to the United States.

The Limits of the 1997 Vision

The years following 1997 brought major developments that both confirmed and contradicted expectations. Productivity in manufacturing continued to increase, and service employment expanded. Yet, the consequences of deindustrialization were far more uneven, politically disruptive, and regionally concentrated than the report had anticipated.

Although the IMF report minimized the role of North-South trade, subsequent empirical studies, most notably by David Autor and colleagues, showed that import competition from China had severe and persistent effects on manufacturing employment in the U.S. and other advanced economies. The so-called "China shock" not only displaced industrial jobs but also triggered long-term social and political dislocation in affected regions.

The report also did not foresee the hollowing out of industrial communities, particularly in the United States and the United Kingdom. As industries shut down or moved offshore, entire local economies, built around factories, suppliers, and skilled labor, began to unravel. Rising inequality, wage stagnation, and the erosion of union power followed, undermining the very social fabric that once supported industrial growth.

Moreover, the prediction that service sector productivity would compensate for the loss of manufacturing strength turned out to be too optimistic. While some high-tech and financial services have seen productivity gains, large parts of the service sector, especially in healthcare, education, and social services, have remained labor-intensive and low in productivity growth. As a result, overall productivity and wage growth have slowed.

Another blind spot was the geopolitical dimension. The IMF report was written during the height of hyper-globalization, when economic integration was widely seen as a path to shared prosperity and geopolitical stability. It did not anticipate the intensifying U.S.–China rivalry.

In short, the 1997 vision treated deindustrialization as a macroeconomic pattern to be managed through service sector adaptation.

Deindustrialization in the Age of Fragmentation

In today’s fragmented global order, the calculus surrounding deindustrialization has fundamentally changed. Manufacturing is no longer evaluated solely in terms of comparative advantage or productivity metrics. It is now viewed as a cornerstone of national security, technological sovereignty, and geopolitical relevance.

This shift is especially pronounced in the United States. Although the U.S. economy remains structurally deindustrialized, there has been a clear and bipartisan policy turn toward reindustrialization. This renewed emphasis did not originate solely with the Trump administration. It has continued, and even expanded, under the Biden administration, as reflected in legislation such as the CHIPS and Science Act, the Inflation Reduction Act, and a suite of initiatives aimed at reshoring production and rebuilding domestic industrial capacity. These policies are not only about creating jobs but also about securing critical supply chains, reducing dependency on geopolitical rivals, and maintaining technological leadership.

Importantly, the U.S. is a global leader in information and communication technologies both hardware and software. Advances in AI, cloud computing, and industrial automation have the potential to boost productivity in both manufacturing and services. This new technological infrastructure blurs the boundaries between industry and services and redefines the role of manufacturing as a platform for innovation.

In this context, even modest growth in advanced manufacturing has disproportionate ripple effects. It supports upstream sectors like research and development, software engineering, and materials science, while also driving demand in downstream services such as logistics, finance, and digital infrastructure.

In a world where fragmentation is replacing integration, industrial resilience has become strategic. Deindustrialization is no longer merely a developmental phase. It is now a condition that must be actively managed within a broader geopolitical and technological strategy.

China’s Rise During the West’s Industrial Retreat

China’s industrial ascent occurred in parallel with the West’s “natural” withdrawal from manufacturing, a historical convergence that reshaped the global economy. As advanced economies deindustrialized, offshoring their industrial base in pursuit of efficiency and short-term cost savings, China positioned itself to absorb outsourced production, scale up industrial capacity, and eventually lead in key strategic sectors.

The timing was critical. Beginning in the 1990s and accelerating after China’s accession to the World Trade Organization in 2001, global supply chains reoriented around Chinese labor, infrastructure, and industrial policy.

While the United States and much of Europe embraced financialization and service-sector expansion, China used targeted industrial policy, technology transfer mechanisms, and massive infrastructure investments to build an industrial ecosystem of unparalleled scale.

This transformation was not simply a case of labor cost arbitrage. China deliberately moved up the value chain, from textiles and basic electronics to high-end manufacturing, semiconductors, green technologies, and artificial intelligence. The state supported this through five-year plans, SOE reform, export credit systems, and investment in R&D and education. In contrast to the market-driven retreat in the West, China’s rise was the outcome of strategic industrial governance.

As a result, China is now the world’s largest manufacturing economy, with significant influence over critical minerals, rare earths, battery production, and clean energy technologies. It has also begun exporting not just goods, but industrial standards, digital infrastructure, and techno-political models.

China’s industrial expansion has profound implications for the global balance of power. The U.S.–China rivalry is no longer just a matter of military positioning or ideological competition. It is deeply rooted in the control of industrial value chains. In this sense, China’s rise must be understood not as a separate trend from Western deindustrialization, but as its geopolitical mirror image.

Deindustrialization as a Strategic Condition

The history of deindustrialization can no longer be told simply as a natural stage in economic development. It has been statistically observed and productivity trends have been identified.

We now understand that deindustrialization is not a linear transition to a post-industrial future, but a condition that must be actively navigated. It carries with it not only economic consequences but also societal, spatial, and strategic ones. Industrial employment does not merely provide income, it structures communities, embeds technological learning, and anchors geopolitical autonomy.

In the current era of fragmentation, industrial resilience is once again at the forefront of statecraft. Reindustrialization, in this light, is not a nostalgic return to the past, but a forward-looking imperative to build resilient, inclusive, and technologically sovereign economies. However, as I stated in the previous article, will Trump’s reindustrialization policy create domestic employment to the extent he expects? No.

The challenge ahead is not only to reverse the negative impacts of deindustrialization but to redefine what industrial strength means in a digitized, multipolar, and ecologically constrained world. That task is no longer optional. It is strategic.