Manufacturing reality: Domestic vs foreign consumption gets more complex

Social media platforms were recently abuzz with videos purportedly of Chinese factory workers and business owners. These posts, emerging amid the intensifying United States (US)-China trade and tariff war, claimed that many ultra-luxury fashion products — such as handbags and apparel from globally renowned brands like Louis Vuitton and Gucci — were being manufactured in China at minimal costs, with the addition of a brand label alone inflating their retail prices to exorbitant levels. 

While these claims remain unverified, they do shed light on a broader and more critical issue: The degree of domestic versus foreign contribution to the consumption of a nation’s economy. The question of how much a country produces for itself versus how much it sources from abroad goes to the heart of economic interdependence — an issue gaining renewed importance in a world where supply chains are under strain, protectionist sentiments are rising, exacerbated by reciprocal tariffs introduced by the US, and the pro-globalisation narrative is visibly fraying. 

A report by the US Bureau of Economic Analysis (BEA), titled Purchased in America, 2023, offers revealing insights into how foreign and domestic content has shifted within the US economy over the past few decades. According to the BEA, the share of imported final goods in the US’s gross domestic purchases of manufactured products — this includes all purchases by American consumers, businesses, and government — rose from roughly 23 per cent in 1997 to about 37 per cent in 2023.

In contrast, the share of domestic content in the output of US-based manufacturers dropped from 65 per cent in 1997 to 52 per cent in 2023.  

This decline was most pronounced during the period between 1997 and 2008, coinciding with the peak years of globalisation, when offshoring production to lower-cost economies became the dominant corporate strategy.  

However, the share of foreign components used in domestically manufactured goods dipped only marginally — from 12 per cent in 1997 to 11 per cent in 2023 — suggesting that the bigger change came from an increased reliance on importing finished goods, rather than foreign components alone. 

This implies that Americans are sourcing more foreign-made goods, and domestic manufacturers contribute less to final good purchases. 

“Higher the share of foreign content in the goods purchased in the US, more is its economy exposed to potential global supply chain disruptions,” the BEA report noted. 

The Covid-19 pandemic, the Russia-Ukraine war, and now tariff-related tensions have shown how vulnerable even advanced economies are when global trade flows are interrupted. 

Sectoral breakdown 

The dependence on domestic versus foreign content varies sharply across sectors.  

In 2023, the food and beverages sector in the US retained one of the highest levels of domestic content at 78 per cent, with imported final goods contributing just 12 per cent and foreign inputs making up the remaining 10 per cent. This suggests that food manufacturing in the US remains largely localised, perhaps due to perishability, regulatory standards, and the economics of proximity. 

In sharp contrast, sectors such as electronics and apparel — typically seen as globally integrated industries — had notably high ratios of domestic-to-foreign content: 14.5 for computer and electronic products, and 11 for apparel and allied products.  

On the surface, this might seem counterintuitive, given that many of these products are physically assembled in Asia. But the explanation lies in where the real value is added.  

Paras Jasrai, associate director at India Ratings and Research, explains that most of the value addition in these sectors occurs in activities like design, branding, R&D, and marketing — functions still largely carried out in the US. This leads to a greater share of domestic value addition vis-à-vis the share of foreign content in those sectors. 

Jasrai gives the example of the Apple iPhone, saying that only about 10 per cent of the value addition comes from physical assembly, which typically happens in China or India. The bulk — design, software development, intellectual property — remains in the US, he adds. 

This dynamic explains why a product physically made overseas can still carry a high share of domestic value addition for the US economy. It also underscores why countries with robust innovation ecosystems continue to dominate global value chains even if they do less physical manufacturing. 

Ajay Sahai, director general and chief executive officer (CEO) of the Federation of Indian Export Organisations (FIEO), points out that the US has now moved towards advanced, capital-intensive manufacturing such as semiconductor chips or electric vehicles. These sectors allow for higher domestic value addition and are strategically important from both economic and national security standpoints. 

The road ahead of tariff tremors  With reciprocal tariffs in place and geopolitical tensions mounting, the composition of foreign and domestic content in the US economy is likely to undergo further shifts. The key question now is: Will the US begin to produce more at home and import less in the medium to long term? Will the share of domestic content in America’s domestic output increase, and the share of imported goods fall?  

Jasrai believes it’s possible — though at a gradual pace due to the difficulty of relocating global value chains (GVCs).  Reconfiguring global value chains is not easy. “It would come at the cost of increased inflation, because the earlier efficiency won’t be there,” he says, adding that this would translate into higher prices for consumers since firms would be more likely to pass these costs on rather than compress their profit margins. 

Sahai is more cautious about the likelihood of dramatic change. He is of the view that no manufacturer will invest in setting up production unless there’s long-term policy clarity — a 10- to 15-year horizon at the minimum. 

“If your wages are so high, then you are not competitive,” he says. “And assuming that you become competitive by starting a tariff war, even then who will invest knowing that tariff may or may not continue?” 

Opportunity for India 

India, too, has seen fluctu­ating levels of domestic value addition in its manufacturing exports.  

India’s share of domestic value addition in its gross exports of manufactured goods (as a percentage of gross exports) has declined sharply from 88.2 per cent in 1995 to 63.3 per cent in 2012, before rising to 73 per cent in 2020. 

Sahai says this is a situation of concern because it shows that domestic manufacturing is not keeping pace with India’s rising domestic demand plus exports.  

That said, he believes the reciprocal tariff scenario presents a great opportunity for India to shore up its manufacturing prowess, and that global companies are already looking towards India. 

“We have to make manufacturing competitive,” he says.  

One of the consequences of reciprocal tariffs is that global firms are now looking to diversify production across multiple countries, given the varying duties they are being subjected to.  

India could benefit, provided it can make its manufacturing ecosystem more competitive. 

However, Jasrai adds a note of caution: The ‘China+1’ strategy or a reshuffle in the GVCs doesn’t guarantee that firms will automatically come to India. “A company would only come to a country where it finds a competitive environment and a level playing field,” he says. 

As India aspires to become a developed nation — or Viksit Bharat — by 2047, the current geopolitical and economic churn offers a rare opportunity to strengthen its position in global manufacturing. But the window may not remain open forever. 

In a world where supply chains are being redrawn, and countries are rethinking their trade dependencies, the stakes could not be higher.