Tax policy and sourcing strategy — A social welfare perspective

Abstract

For recent decades, China has been the clear choice for global companies to build manufacturing plants to supply the world due to its seemingly unlimited supply of low-cost labor, lower currency, and attractive government incentives. However, recent trends have showed that the U.S., with a resilient corporate sector, flexible skilled workforce, and potential stricter tax policies, is becoming more attractive as a place to manufacture many goods to consume on its own soil. This research studies the incentives, possibilities and benefits of reshoring from the perspective of the social welfare. First, our analysis indicates that firms may remain offshoring even if the government provides tax incentives. Secondly, reshoring may increase the employment in the home country, but it also has a negative effect on the domestic consumer surplus, and then impair the overall social welfare given the tax policy implemented by the government.