How to bring manufacturing back - The impact of tax policies on reshoring

Moving manufacturing back to the USA has been in many fierce debates. While many believe that reshoring is beneficial to the USA through creating more jobs, our paper intends to gain more insights into this issue by studying a sourcing game between global firms and governments. Global firms may choose between offshoring and reshoring. Governments, as tax policymakers, aim at improving social welfare. First, our analysis indicates that firms may choose reshoring even if there are cost advantages to offshoring. Secondly, while reshoring may increase employment in the USA, it may also have a negative effect on the overall social welfare. Thirdly, when the labour cost in the USA is moderately higher, the government may launch new tax policies to motivate reshoring and improve social welfare. Finally, numerical examples demonstrate that reshoring improves social welfare in labour-intensive industry, while tax policies may curb such improvement with high tax rates.