McKinsey chairs: Building a more resilient industrial base may require $2 trillion in investment

Intensifying technological competition and geopolitical risks have resurfaced a decades-old question with renewed urgency: Should the United States rebuild its industrial base? The United States imports about $3 trillion in manufactured goods each year. A meaningful share is tied to products that face at least one of three trade dependencies that expose imports to vulnerabilities: criticality to national security; concentration among a few suppliers; or sourced from geopolitically distant partners. One-quarter face at least two of them. Five percent lie in the bull’s-eye of all three, overwhelmingly computers, electronic products, and key materials like rare-earth magnets. Economic and national security are increasingly intertwined. Still, for cost and efficiency reasons it doesn’t always make business sense to produce things at home. Countries trade with each other for good reasons. To help quantify what’s possible for US manufacturing to make more at home, we created a “ramp-up factor.” It gauges how much domestic production would need to increase in order to produce what’s currently imported. We examined 5,000 products across almost 350 industries to assess how ramp-up varies. Factors below 1 suggest existing capacity can support enough extra production to replace imports. Some manufacturing stalwarts, like aircraft, fit this bill. And the output potential for these types of products adds up. Simply running factories at higher utilization could generate an additional $660 billion in output, equivalent to about half the trade deficit (of course, this uptick in output would depend on US producers having a market for the additional supply). But this would make little dent on the most sensitive exposures for future-shaping products like semiconductors and data center servers that will drive tomorrow’s economy. For about half of these goods, US production capacity would need to quintuple or more. Growing production to the extent needed to eliminate the most critical t