A trade war would undermine America’s innovators
Stephen Ezell is Vice President for Global Innovation, and Rodrigo Balbontin is Associate Director of Trade, IP, and Digital Governance, both at the Information Technology and Innovation Foundation, ITIF
The Trump administration is correct to seek to revitalise American manufacturing—especially in critical advanced-technology industries. Thus far, however, the preferred path has principally been through tariffs that seek to induce manufacturers to relocate production to the United States. Unfortunately, a predominantly tariff-first reindustrialisation strategy is unlikely to succeed.
President Trump’s trade war will harm American innovation in four ways:
1) A tariff wall will increase the cost of manufacturing in the United States, increasing domestic consumers’ costs and making the economy less globally competitive;
2) Uncompetitive US-manufactured products will open the door for Chinese competitors to capture global market;
3) Other countries will enact their retaliatory tariffs;
and 4) The more that unpredictability become the hallmark of the administration’s trade war, the more that militates against companies committing to the expanded US advanced-manufacturing investments.
1. A tariff-first reindustrialisation will win back some manufacturing, but it will make US-manufactured high-tech products uncompetitive in global markets. The Trump administration’s intent is clear: to impose high tariffs across a wide range of both imported components and final goods entering the United States. Tariffs imposed under the International Emergency Economic Powers Act (IEEPA) are being litigated; however, the administration has a range of other tools at its disposal.
For example, they have given signs to implement a host of forthcoming ‘Section 232’ tariffs—at 25 percent or higher levels—on advanced-technology products such as biopharmaceuticals and semiconductors.
Let’s suppose a 25 percent tariff on semiconductors scenario. Building an advanced semiconductor fab can cost over $30 billion and depends on the import of specialized inputs and components sourced across the world. Japanese suppliers produce 90 percent of the photomasks and photoresists central to the semiconductor etching process. Netherlands-based ASML produces the world’s most sophisticated extreme ultraviolet (EUV) lithography equipment, which carries a price tag of $380 million.
A 25 percent tariff instantly raises its price by $100 million alone. Play that process out across the thousands of components that go into a semiconductor fab, and the reality that pervades is that while the Trump administration will likely attract some greater level of semiconductor manufacturing, the semiconductors America produces will be at a much higher cost.
More expensive US-produced semiconductors—or higher tariffs on imported semiconductors—will also have the downstream effect of increasing the price of every product that uses US-manufactured semiconductors (or foreign-imported ones). In the modern economy, that’s virtually every product. Again, this process will not only jack up prices for American consumers—it will make US exports of these products globally uncompetitive.
These dynamics explain why ITIF finds that a blanket 25 percent tariff on US semiconductor imports would produce a 0.18 percent downturn in US economic growth in the first year, and if sustained over 10 years, would result in a 0.76 percent slowdown in US economic growth in the 10th year. The same dynamics will play out in other relevant industries, such as biopharmaceuticals.
In short, Trump’s tariffs will likely induce a ‘Galapagos Island’ effect on America’s advanced-technology industries—referring to policy-induced, isolated markets that serve domestic constituencies but are ultimately globally uncompetitive1.
However, the administration has not appeared to be greatly troubled by this, as it believes the US market alone will be sufficient to support globally competitive advanced companies. That view is fundamentally mistaken.
Advanced innovation industries have an exceptionally high cost of initial R&D and capital, requiring companies to access global markets at scale to both amortize their costs and generate sufficient revenues to finance the next generation of innovations.
Indeed, these dynamics explain why US manufacturers export over $1.7 trillion annually, with at least $550 billion corresponding to advanced-manufacturing products produced by large companies in sectors such as chemicals, computers and electronics, electrical equipment and components, machinery, transportation equipment, and other manufacturing goods2.
America’s high-tech companies must have access to foreign markets to flourish. And it’s for this reason that they will likely maintain as much manufacturing abroad as they can—to make price-competitive goods for global markets. Thus, a tariff-first reindustrialisation strategy will attract far less manufacturing back to the United States than other strategies might, particularly ones focused on investing in advanced technologies.
A successful effort to attract advanced manufacturing investments involves the challenging work of developing and implementing a strategy that lays the groundwork for investment in the next generation of technologies, manufacturing processes, and robust supply chains, supported by a strong domestic base of manufacturing suppliers and a workforce that will make American manufacturing globally competitive
2. Uncompetitive US advanced-technology products will open the door for China to capture greater market share in third-party nations, denying US innovators the revenues produced from economies of scale to sustain future generations of innovation. The United States is locked in an internecine contest with China for leadership in the advanced-technology industries of the future, everything from AI and semiconductors to airplanes and electric vehicles to biotech and robots3.
Indeed, Chinese President Xi Jinping has stated that “technological innovation has become the main battleground of the global playing field, and competition for tech dominance will grow unprecedentedly fierce.”
China is faring much better in this competition than has generally been understood. In a 2023 study, ITIF examined countries’ enterprises’ global market share across 10 critical advanced-technology industries: pharmaceuticals; electrical equipment; machinery and equipment; motor vehicle equipment; other transport equipment (largely aerospace); computer, electronic, and optical products; information technology and information services; chemicals; basic metals; and fabricated metals4.
It found that while China accounted for less than 5 percent of the global market in these 10 industries in 1995, by 2020 that share exceeded 25 percent. Elsewhere, the United Nations Industrial Development Organization estimates that China now accounts for 26 to 30 percent of global manufacturing value-added, with that share potentially rising to as much as 45 percent by the end of this decade, while America’s share falls to 11 percent5.
In short, there’s a global fight for every new factory in the world—just as there’s a fight for the sale of every manufactured product in the world—and every time Boeing loses an aircraft sale to COMAC in Vietnam or Huawei sells a phone or AI chip instead of Apple or NVIDIA (whether in China, India, or anywhere else), American companies lose the opportunity to earn the revenues needed to sustain innovation. And if they’re forced to sell artificially more expensive goods into global markets due to tariffs, this dynamic worsens.
The unwillingness of the Trump administration—similar to the previous unwillingness of the Biden administration—to negotiate free trade agreements with key trade partners allows China to create trade frameworks that benefit its firms at the expense of Americans.
Indeed, China has already launched a ‘charm offensive’ seeking to deepen trade relations with countries such as Japan, Korea, and Vietnam.
China’s objective is to rewrite the global trade rules in its favour. In particular, China’s engagement in the Regional Comprehensive Economic Partnership (RCEP)—a trade agreement that includes Southeast Asian countries as well as Australia, Japan, Korea, and New Zealand—gives it a platform to reshape the global trade system. Notably, RCEP’s lack of robust enforcement mechanisms, market access commitments, workforce protection standards, or provisions against non-tariff barriers does little to constrain China’s mercantilist model.
The United States exigently needs to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), and in so doing, prevent China from joining, and then use that as the springboard to create a community of like-minded nations committed to much higher standards of private enterprise-led, market-based, rules-governed trade.
The countries—including the United States—that initially conceptualized the CPTPP envisioned it as an economic bloc to counter China’s mercantilism; China’s possible entry into this trade agreement—possible if the United States continues to refuse to engage—would crystallize American retreat from leadership of the global trade system.
3. The Trump administration does not appear to be adequately factoring in the harm that other nations’ retaliatory tariffs would inflict on American innovators. Indeed, if the United States were to implement and sustain significant tariffs on other nations’ goods, this would likely engender retaliatory tariffs in kind.
ITIF simulated the potential impacts on goods covered under the World Trade Organization’s Information Technology Agreement (ITA) if countries were to impose tit-for-tat tariffs on the United States under three scenarios: like those announced on Liberation Day, the 90-day pause of reciprocal tariffs announced a week later, and the exemption for 20 products announced a few days afterward. In these scenarios, US exports of ITA products would decline by between 18 and 27 percent, resulting in annual losses exceeding $56 billion6.
4. Trump’s tariffs implementation thus far creates an uncertain environment unconducive to attracting companies to make investments in the United States. A successful effort to attract advanced manufacturing investments involves the challenging work of developing and implementing a strategy that lays the groundwork for investment in the next generation of technologies, manufacturing processes, and robust supply chains, supported by a strong domestic base of manufacturing suppliers and a workforce that will make American manufacturing globally competitive.
Indeed, ITIF has long contended that only a serious national industry strategy—or ‘national developmentalist approach’—will be sufficient to counter China’s rise and place US advanced manufacturing competitiveness on a stable, long-term footing7.
Unfortunately, this is where the real lacunae of a tariff-first reindustrialisation strategy without the complementary investments truly needed get laid bare. For instance, the Trump administration has sought to gut the Department of Commerce’s Manufacturing Extension Partnership (MEP) program, which plays a crucial role in helping America’s SME manufacturers—which account for over 98 percent of all US manufacturers—adopt advanced production technologies and processes. While Congress is likely to maintain funding for the program, some administration budget proposals have called for zeroing out the program8.
Similarly, the administration has sought to severely curtail National Science Foundation (NSF) funding, proposing to cut NSF funding by $4.7 billion, more than 50 percent of what the agency currently receives.
The administration has also proposed funding cuts of nearly 40 percent at the National Institutes of Health and nearly half of NASA’s Science Mission Directorate9.
These proposed cuts are quite concerning, particularly when China’s gross R&D expenditures have likely already caught up to, if not exceeded, America’s10. Likewise, targeting international students seeking visas will also deter the world’s top researchers from coming to work in the United States.
To be sure, the Trump administration has proposed some supportive policies. Notably, proposed reconciliation legislation includes restoring first-year expensing, which allows for the immediate deduction of 100 percent of domestic R&D expenses for tax years 2025–202911.
Similarly, the executive order establishing the United States Investment Accelerator creates an entity that can play a productive role in reducing regulatory burdens, speeding up permitting, coordinating responses to investor issues across multiple federal agencies, and facilitating collaboration with national laboratories and other national innovation assets.
But this is where the greater focus needs to be: policies and investments that will make American manufacturing genuinely competitive on a sustainable basis. One final point should be made here. The Trump administration appears to view all manufacturing as equal. Even most food products involve some manufacturing process (eg. packaging).
However, not all finished products are relevant to America’s techno-economic global leadership (ie. a nation does not become a global power by manufacturing apparel), nor do they contain the embedded knowledge or advanced research and development (R&D) needed to generate spillovers to other sectors. Indeed, there’s a significant difference between potato chips and computer chips12.
The White House recently stated that “for far too long, globalist elites sold out the American worker and let other countries unfairly take our factories, our jobs, and our dreams.”13 Regardless of the rhetoric, the reality is that the United States is falling behind in the race for an innovative future, where America leads the world in innovation.
A trade war, as has been conducted so far, may only intensify this trend. Trump’s trade war might result in more innovation, but perhaps it won’t be American innovators; China might win because the United States is too busy fighting a trade war with the rest of the world.
Endnotes
2. https://itif.org/publications/2025/05/21/who-needs-the-world-anyway-american-innovators-do/.
4. https://itif.org/publications/2023/12/13/2023-hamilton-index/.
8. https://www.wired.com/story/nist-trump-manufacturing-extension-partnership/; https://www.manufacturingdive.com/news/trump-administration-kills-funding-for-10-manufacturing-extension-partnership-programs/744816/.
10. https://itif.org/publications/2025/04/09/china-catching-up-rd-may-have-already-pulled-ahead/.
11. https://www.congress.gov/bill/119th-congress/house-bill/1/text.
13. https://www.whitehouse.gov/presidential-actions/2025/05/world-trade-week-2025/.
