Murder in Middle America — designed in the US, made in China
In the denouement of Agatha Christie's classic crime novel Murder on the Orient Express, Detective Hercule Poirot concludes that ALL the suspects were guilty.
It was similarly the case in the demise of the US manufacturing industry. Whodunnit? Almost everyone! In alphabetical order: consumers, mainstream economics, US Congress, US Federal Reserve, US Inc, US management consultants, US tax accountants, US retail sector, US Treasury, Wall Street… all these culprits played their part in the 'murder' of US manufacturing.
And this is before one points a finger at the foreign accomplices…
Prospects for the investment future of US Inc
With two exceptions, I do not intend to call out these culprits. The first exception is US Inc as currently constituted. I do this more to highlight the headwinds that will now face foreign investors whose default allocation to equities globally has long – and rightly – favoured US Inc.
As noted previously, in December 2024, US Inc's weight in MSCI's All Country World (equity) Index was 66%, twice the rest of the world combined. In 2000, that weight was a much lower 52%.
In 2009, Rolling Stone Magazine did a cover story on Goldman Sachs. In it was a colourful quote. They likened the US investment bank to 'a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money'.
The uncomfortable truth is that this would not be a wholly unfair description as to what US Inc became over the past two decades, especially as it has spread its tentacles worldwide.
US Inc's profit margins: Hard to see them rising from here
Profits for the US's S&P 500 companies as a share of US GDP averaged about 6% from 1960 to 2000, with a dip down to 3% in the 1980s. Since China's 2001 entry into the WTO, US Inc's profits as a share of US GDP have nearly doubled to 11%. Between 2000 and 2023, US Inc's share of the global profit pool also more than doubled, from 17% to 38%.
Globalisation has been a boon for US corporations since they were able to grow profits much faster abroad than they could at home. Frequently they did this at the cost of foreign competitors by cashing in on the soft power appeal of American brands like Levi's Jeans and by outsourcing production of these 'American' goods to nations with low wage costs, as Levi's did with its products to textile manufacturers in China, Vietnam and Bangladesh. Or, as Apple has said of its iPhones: 'Designed in America, Made in China.'
Finished products were imported back into the US at much higher profit margins than were previously available when these products were truly 'Made in the USA'. Indeed, sometimes even these profits made from selling foreign-made products back to US consumers were still retained in intermediate holding companies located in tax havens like Eire!
Products made in low-cost foreign locations were also sold – with profits accruing in tax haven-located holding companies – mainly into foreign markets able to sustain higher prices like Europe, Japan and increasingly even China.
In the period since 2000, when China's WTO entry constituted a positive(!) game-changer for US Inc, the overall average earnings before interest and tax (EBIT) margin for US firms increased from 10% to 11%. All this margin increase was driven from abroad as foreign margins rose from 10% to 14% while domestic margins stayed broadly flat over the same period.
S&P 500 firms did especially well in this era: their foreign EBIT margins increased from 11% to 16% over 2000 to 2020 while less-agile non-S&P 500 firms rather saw their foreign margins decline from 9% to 7%. Domestic EBIT margins stayed flat for both S&P 500 and non-S&P 500 firms.
Overall, the biggest gainers were – no surprise here! – US 'manufacturing' firms outsourcing production abroad, typically paying their foreign workers in owned subsidiaries 60% less than their US workers.
Those US firms that used foreign contract manufacturing companies – like Apple used Foxconn – likely compressed the wage component in their final product sales price even more.
A more hostile global tax environment
Note that these foreign margin increases were all achieved before tax. Add to the above, US Inc followed the judicious use of offshore holding companies to shield profits from tax: practising transfer pricing, pursuing royalty 'farming', carrying out tax planning (of which the most infamous example was dubbed the ' Double Irish with a Dutch Sandwich '), plus benefiting from the feature of the US Tax Code that allowed US corporations not to repatriate profits earned abroad and not pay tax on them until they did.
Thus, one can see why the foreign profits earned abroad by US Inc rose so markedly after 2000.
Also note that, for the global operations of Big Tech companies, accruing profits for the latter where it was most tax efficient to do so was often done by the press of a button. Were this foreign operating 'digital environment' to become less friendly – and the EU, via its Digital Markets Act, is on a campaign to achieve precisely this end – US Big Tech would be negatively impacted.
Meanwhile, in 2020, seven countries (Bermuda, the Cayman Islands, Ireland, Luxembourg, the Netherlands, Singapore and Switzerland) hosting but 6% of the foreign employees of US Inc, earned nearly half US Inc's foreign profits.
At what point did profit morph into greed?
Dylan's chorus again:
Well, it's sundown on the union And what's made in the USA Sure was a good idea 'Til greed got in the way
Granted, the American Bard (who also earned the nickname of 'The Voice of Protest') most likely used the word ' greed' for ' profit '. In US Inc's defence, in today's hypercompetitive world, it is hard to imagine that they would not pursue every opportunity to capture profit where they could, at home or abroad. However, Dylan implicitly raised the question – to echo a line used by General Motors in its heyday – ' whether what is good for US Inc is good for the USA?' Trump and his team are unequivocally answering 'no'.
A rockier road that lies ahead for US Inc in its operations
Looking forwards and from the perspective of equity investors worldwide in US stocks, how much of this post-2000 Golden Age for US Inc is sustainable in Trump's World? What might be the consequences of the seismic changes now taking place across today's investment landscape? How might global investors change their long-established behaviour?
What do we know with some degree of certainty?
The US dollar will, over time, likely continue to fall in value, especially against its Western DXY Index crosses: the euro, yen, pound, Canadian dollar, Swedish krona and Swiss franc. How the US dollar might fare against Asian and other emerging market currencies is less clear… though the recent strength of both the Taiwanese and Singaporean dollars may be portents of what lies ahead;
Adding to this negative currency effect, inputs imported into the US now face tariffs and so will cost more. Not all of these duties will be passed on to US consumers so profit margins for many US companies will shrink. In addition, higher end prices will almost certainly curb consumption volumes, creating a negative volume gearing effect. This will weigh on profits;
A product bearing an 'American brand' wherever made has heretofore usually attracted a premium price. This advantage is vanishing and may soon be a liability: think Tesla where, in February 2025, sales in Germany plunged by 76%, in Australia by 66% and in China by 49%;
If inflation leaks into the US system and interest rates are forced to rise, the cost of capital to US Inc will rise too;
Foreign consumers are becoming less welcoming of US products. For example, Canadians are boycotting US products; the Chinese are cooling towards Apple, Tesla, Boeing and Starbucks. EU nations meanwhile are tightening the 'freedom to operate as previously' on US Big Tech companies; and
Globally, most countries are looking to rein in 'clever' corporate tax structures that have reduced their capacity to collect taxes from foreign companies using tax havens like the Cayman Islands. US companies would especially be hit were this campaign to succeed. Only eight nations remain opposed to a UN tax convention aimed at tightening up on these practices: the five 'Anglo Saxons' – the US, the UK, Australia, Canada and New Zealand – plus Japan, South Korea and Israel. Forty-three percent of 2023's estimated tax losses were attributed to companies operating out of these eight countries.
Looking forward, it is hard to see the trend by which US S&P 500 companies grew their foreign EBIT margins from 11% to 16% over 2000 to 2020 continuing in Trump's World.
Given that foreign margin growth contributed ALL of the overall corporate margin growth in this period, even if this trend merely stalled and did not reverse, it would put a huge dampener on the prospects for future profit growth and so future share price performance for many of the S&P 500's leading companies.
Rocky road ahead for US Bonds too
The above addresses the investment prospects for the asset class that draws the lion's share of market commentary: US equities. US Bonds – which attract twice as much foreign capital as do US equities – face even cloudier prospects. After a four-decade-long bull market, from 1981 to 2020, when bond yields fell from just under 16% to just over 2%, the US bond market has since hit a four-year 'bad patch'. Non-Western central banks have been diversifying away from US Bonds into, among other assets, gold.
If US inflation were to rise, prompting the Fed to raise rates, and if the US dollar were to continue to see its value erode, foreign investors in the US Bond market might yet conclude it was losing its historic attractiveness. Were the US dollar's 'store of value' attributes to be compromised (and if the idea of Stephen Miran, chairperson of the Council of Economic Advisers, that foreign holdings of US financial assets should be taxed would do just that), this would further weaken its reserve currency status.
Threatening to confiscate US dollar assets, as the US did to Colombia, will not help either. Any weaponising of the US dollar will detract from its 'store of value' attractiveness.
Mea culpa: 'I' did it too!
The other actor I must call out who played a part in the Murder of Manufacturing in America is… 'myself'… or at last the profession of which I am a part: economics and the mainstream thinking that it has proselytised after World War 2. This thinking has especially dominated Anglo Saxon practice and, as it is now becoming clearer, it has a lot to answer for.
In a word, modern macroeconomic thinking has been shot through by what is called 'Keynesianism'… except that the current manifestation of the latter doctrine is not true to its academic origins. John Maynard Keynes would not have recognised the incontinence of the fiscal spending that is now the 'go to' solution for nearly all Western economic challenges. (Even previously more prudent Germany is now joining this club.)
Yes, Keynes recommended unfunded fiscal spending, but only when times were bad: echoing David Hume, the matching bookend to his thinking was that once the economy improved, the prior borrowing that was needed to jumpstart the economy should be repaid. Keynes believed running the economic engine with the fiscal choke permanently pulled out would eventually flood that engine and make new economic growth much harder to achieve. Sound familiar in 2025?
In 1962, Joan Robinson was the first to call out the twisted application of JMK's thinking, especially as it was manifesting itself in the universities of the US. She noted that 'the bastard Keynesian doctrine (that) evolved in the United States… (was) floating on the wings of the almighty dollar'. Her withering comment was made even before Valery Giscard d'Estaing's 1965 'exorbitant privilege' charge that the US was – by printing US dollars to cover its deficit spending, both current account and budget – living beyond its means, but still getting by courtesy of the kindness of foreign strangers/savers.
In the 1960s, Britain – which mistakenly thought sterling still had reserve currency status – tried following this American example. Result? Periodic hiccoughs. The 1967 Sterling Crisis was followed by the pound's slide from 1972 to 1976 (which ended with Britain calling in the IMF) and then the sorry experience of UK currency going into (1987) and being ejected from (1992) Europe's Exchange Rate Mechanism.
Together, these traumas underlined just how weak Britain's exorbitant privilege had become compared with that of the US.
Still, by the 1990s, with free capital flows accepted as mainstream behaviour in much of the world, funding deficits in part by borrowing from abroad, became easier… even, by the mid-1990s, for Britain.
Keynesianism as it had become was now one-sided demand management on steroids: never mind fiscal overspending if foreigners would help finance it. The demand side was all that mattered; little attention was paid to the supply side… which in any case, if regarded as industrial manufacturing, had from the 1980s rapidly migrated abroad anyway. Many Western governments paid no heed to that which was no longer there!
Manufacturing was now treated as was agriculture: yesterday's focus. As Vaclav Smil was to bemoan, for the Anglo Saxons and especially the US, from now on it was to be all about services. And these services were often underpinned by government spending.
In 2024, the US government provided more 'credit' (often interest free and non-repayable) than banks. Also in 2024, two-thirds of the US's 2.2 million jobs created were in healthcare and government; furthermore 80% of all post-Covid US jobs have been created directly by the US government or with its financial support.
And despite claims to the contrary, those in services nearly always import far more than they can earn by selling their services abroad (even when tourism services are added in). Especially among the Anglo Saxons, as manufacturing declined and their service-oriented economies expanded, this meant they ended up running larger and larger current account deficits. DM
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