Impact of tariffs and production cost on a multinational firm's incentive for backshoring under competition

Abstract

We consider the effect of tariffs and production cost on a multinational firm's incentive for backshoring under competition. The multinational firm (M) can produce in a low-cost foreign country, but her products are imposed tariffs if imported. When selling to home customers, M competes with a national firm (N). To model the two competing firms’ interactions, we adopt three common game modes: M-led or N-led Stackelberg games, and a simultaneous game. Our analytical result shows that under offshoring, M’s profit can increase in the market competition when the competition is intense, and this trend is more likely to exist when the low-cost advantage of offshoring is greater, or M becomes more powerful. Second, compared with onshoring, offshoring always hurts N but benefits home customers, and it is beneficial for M only when the tariff rate is low. Third, it is more difficult to induce M to backshore by imposing tariffs when M is less powerful. Furthermore, in a model variant, we show that under offshoring, selling through an independent domestic retailer (R) is more attractive for the multinational group (G) than selling directly when the tariff rate is high, and G’s incentive for selling through R is stronger when R is more powerful.