Re-export Tariffs, Cross-border Production Location Choice and Welfare

Since the commencement of Mr Trump’s second presidential term, the US government’s plan of levying tariffs on imports from the overseas affiliates of US multinationals into the US market has come to the fore. In this article, we examine how such a proposed tariff influences a US multinational’s decision to reshore production from its cost-effective, offshore facilities back to the United States. By modelling a Cournot competition between a US firm and its Chinese rival, both serving the US and Chinese markets, we establish that tariffs on the share of the US firm’s output, produced abroad and sold in the United States, can never induce complete reshoring of production. Moreover, the tariff-induced partial relocation of production causes a decline in the welfare of the private US economy. On the other hand, beyond a critical threshold rate of tariff, it leads to national welfare losses for the United States. In this light, our findings do not validate the Trump administration’s ‘America First’ trade rhetoric, which claims that reshoring US firms’ production of output, intended for sale in the United States, would yield clear benefits for the US economy.