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

Posted: 22 May 2020

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

Baozhuang Niu

School of Business Administration, South China University of Technology

Multiple version iconThere are 2 versions of this paper

Date Written: April 26, 2020

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 debate on offshoring and reshoring 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: First, when the domestic market size is large compared to the foreign market, reshoring might not be beneficial to the manufacturer. Second, raising tariffs might backfire and drive less reshoring. Third, 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: offshoring; reshoring; multi-markets; tariffs; domestic manufacturing

Suggested Citation

Chen, Kanglin and Wang, Xin and Niu, Baozhuang, Reshoring or Offshoring? Impacts of Tariffs, Premiums of Domestic Manufacturing, and Sourcing Strategies (April 26, 2020). Available at SSRN: https://ssrn.com/abstract=3585550

Kanglin Chen

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

Hong Kong

Xin Wang

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

Hong Kong

Baozhuang Niu (Contact Author)

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

Wushan
Guangzhou, AR Guangdong 510640
China

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