Reshoring or Offshoring? Impacts of Tariffs, Premiums of Domestic Manufacturing, and Sourcing Strategies
Posted: 22 May 2020
Date Written: April 26, 2020
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
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