3 Causes of Deindustrialization

Steel worker with molten metal
Getty Images, Monty Rakusen

Deindustrialization is the process by which manufacturing declines in a society or region as a proportion of total economic activity. It is the opposite of industrialization, and therefore sometimes represents a step backward in the growth of a society’s economy.

Causes of Deindustrialization

There are a number of reasons why a society might experience a reduction in manufacturing and other heavy industry.

  1. A consistent decline in employment in manufacturing, due to social conditions that make such activity impossible (states of war or environmental upheaval). Manufacturing requires access to natural resources and raw materials, without which production would be impossible. At the same time, the rise of industrial activity has done great harm to the very natural resources on which industry depends. In China, for example, industrial activity is responsible for record levels of water depletion and pollution, and in 2014 more than a quarter of the country's key rivers were deemed "unfit for human contact." The consequences of this environmental degradation are making it more difficult for China to sustain its industrial output. The same is happening in other parts of the world where pollution is on the rise.
  2. A shift from manufacturing to service sectors of the economy. As countries develop, manufacturing often declines as production is shifted to trading partners where the costs of labor are lower. This is what happened to the garment industry in the United States. According to a 2016 report by the Bureau of Labor Statistics, apparel experienced the "largest decrease among all manufacturing industries with a decrease of 85 percent [over the last 25 years]." Americans are still buying as many clothes as ever, but most apparel companies have moved production overseas. The result is a relative shift in employment from the manufacturing sector to the service sector.
  1. A trade deficit whose effects preclude investment in manufacturing. When a country purchases more goods than it sells, it experiences a trade imbalance, which can reduce the resources needed to support domestic manufacturing and other production. In most cases, the trade deficit must become severe before it begins to have a negative effect on manufacturing.

Is Deindustrialization Always a Negative?

It is easy to view deindustrialization as the result of a suffering economy. In some cases, though, the phenomenon is actually the result of a maturing economy. In the United States, for example, the “jobless recovery” from the financial crisis of 2008 resulted in deindustrialization without an actual decline in economic activity.

Economists Christos Pitelis and Nicholas Antonakis suggest that improved productivity in manufacturing (due to new technology and other efficiencies) leads to a reduction in the cost of goods; these goods then make up a smaller relative portion of the economy in terms of overall GDP. In other words, deindustrialization is not always what it looks like. An apparent reduction may in fact just be the result of increased productivity relative to other economic sectors.

Similarly, changes in the economy like those brought about by free trade agreements may lead to a decline in domestic manufacturing. However, these changes usually have no adverse effects on the health of multinational corporations with the resources to outsource manufacturing.