Impact of Tariffs and Price Premiums of Locally Manufactured Products on Global Manufacturers' Sourcing Strategies
Posted: 22 May 2020 Last revised: 18 Aug 2020
Date Written: April 26, 2020
The past decade has witnessed significant movements to push manufacturing back to developed countries. Such movements call for raising import tariffs and increasing consumers' valuation on products made from locally sourced components. These factors are believed to motivate local sourcing for firms operating in a single market. However, it is not clear whether they are equally effective for multinational firms that produce and sell products in multiple markets. To gain a thorough understanding of this issue, we build a game-theoretical model to analyze the sourcing decision of a global manufacturer that maintains production sites and sells products in both domestic and foreign markets in a competitive environment. The firm can choose to source components from suppliers located in the same markets of the manufacturing sites to gain tariff savings and a price premium from consumers' higher valuation, or choose to source all components from a single foreign supplier to obtain a lower sourcing cost. We find that the global supply chain structure plays a critical role in the firm's sourcing strategy. Consumers' higher valuation for locally manufactured goods always promotes local sourcing. Raising tariffs, however, might backfire and discourage local sourcing because of the firm's global supply chain structure and the foreign supplier's strategic response to the higher tariffs. Finally, local sourcing may hurt consumer surplus even though consumers value locally manufactured goods more. This paper sheds light on the recent movement to push manufacturing back to developed countries and signifies the importance of accounting for the manufacturer's global supply chain structure and vertical interaction with suppliers.
Keywords: global supply chain management; game theory; tariffs; sourcing
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