Reshoring or Offshoring? Impacts of Tariffs, Premiums of Domestic Manufacturing, and Sourcing Strategies

Posted: 27 Dec 2019

See all articles by Kanglin Chen

Kanglin Chen

Hong Kong University of Science & Technology (HKUST) - Dept. of Industrial Engineering and Decision Analytics

Xin Wang

Hong Kong University of Science & Technology (HKUST) - Dept. of Industrial Engineering and Decision Analytics

Ying-Ju Chen

Hong Kong University of Science & Technology (HKUST) - Department of Information Systems, Business Statistics and Operations Management

Baozhuang Niu

School of Business Administration, South China University of Technology; School of Business Administration, South China University of Technology

Multiple version iconThere are 2 versions of this paper

Date Written: November 29, 2019

Abstract

Problem definition: We analyze the reshoring decision of a global manufacturer that is based in a developed country and sells its product in both domestic and overseas markets. The manufacturer can offshore production overseas to serve both markets, or reshore production back to the developed country by maintaining a manufacturing site in each market and serve them separately. We examine the following factors that affect the manufacturer's reshoring decision and consumer welfare: tariffs, consumers' higher valuation for domestically manufactured goods, and sourcing strategy changes associated with reshoring.

Academic/practical relevance: Traditional research on offshoring has been focusing on cost advantages. The aforementioned factors become more prominent in driving reshoring recently, but are less explored in existing operations management literature.

Methodology: We propose a game-theoretical model to study how these factors drive reshoring and affect consumer welfare.

Results: We find that the sourcing strategy changes might prevent a firm from reshoring when the domestic market size is large. Consumers' higher valuation for domestically manufactured goods always encourages reshoring. Raising tariffs might backfire and drive less reshoring because of suppliers’ strategic response to the higher tariffs. Finally, reshoring may hurt consumer surplus even though consumers value domestically manufactured goods more.

Managerial implications: This paper sheds light on the recent reshoring trend and signifies the importance of accounting for the manufacturer's multi-market operational structure and vertical interaction with suppliers in the reshoring decision and tariffs adjustment.

Keywords: global supply chain management; game theory; reshoring; tariffs

Suggested Citation

Chen, Kanglin and Wang, Xin and Chen, Ying-Ju and Niu, Baozhuang, Reshoring or Offshoring? Impacts of Tariffs, Premiums of Domestic Manufacturing, and Sourcing Strategies (November 29, 2019). Available at SSRN: https://ssrn.com/abstract=3495424

Kanglin Chen

Hong Kong University of Science & Technology (HKUST) - Dept. of Industrial Engineering and Decision Analytics ( email )

Hong Kong

Xin Wang (Contact Author)

Hong Kong University of Science & Technology (HKUST) - Dept. of Industrial Engineering and Decision Analytics ( email )

Hong Kong

Ying-Ju Chen

Hong Kong University of Science & Technology (HKUST) - Department of Information Systems, Business Statistics and Operations Management ( email )

Clear Water Bay
Kowloon
Hong Kong

Baozhuang Niu

School of Business Administration, South China University of Technology ( email )

Wushan
Guangzhou
China

School of Business Administration, South China University of Technology ( email )

381, Wushan Road
Tianhe
Guangzhou, NY Guangzhou 510275
China

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