It is no mystery that U.S. companies that produce goods in other countries, like China, and sell them in the U.S., have successfully implemented many strategies over the years to maximize profits while minimizing taxation on their operations, especially profit tax.
One common strategy is transfer pricing, which involves setting prices for goods or services sold between different parts of the same company. For example, if your U.S. company buys products from your factory in China, you can set the price at a level that shifts profits to the country with the lower tax rate. Apple is a great example of this. They sell iPhones to their Irish subsidiary at a low price, and the Irish subsidiary sells them globally at a higher price. This keeps most of the profit in Ireland, where corporate taxes are lower.
Another approach is to set up a subsidiary in a low-tax country. By creating a subsidiary in a country with low taxes, like Singapore or Ireland, you can keep more of your profits there. For instance, Google (now Alphabet) has subsidiaries in Ireland and Bermuda. They route profits through these countries to take advantage of their lower tax rates. This way, less profit is taxed in the U.S., where corporate taxes are higher.
Companies can also take advantage of tax treaties between the U.S. and other countries. These treaties are designed to avoid double taxation, meaning you don’t pay taxes twice on the same income. For example, if your U.S. company pays royalties to a subsidiary in Ireland, the tax treaty between the U.S. and Ireland might reduce the withholding tax on those payments. Microsoft uses this strategy to reduce taxes on royalties paid to its subsidiaries in Puerto Rico and Ireland.
Cost-sharing agreements can be useful for companies that invest in research and development (R&D). These agreements allow your U.S. company and a foreign subsidiary to share the costs and profits of developing new products or technology. Facebook (now Meta) uses this strategy to allocate profits from its intellectual property to its Irish subsidiary, where taxes are lower.
From what I have just described, it is clear how American companies, especially large ones with international operations, greatly benefit from selling to voracious U.S. consumers (who would rather continue piling up debt on their credit cards than spending within their means) while the U.S. and its economy only marginally benefit from their operations:
- Production is done abroad in low labor-cost countries, weakening the backbone of any major economy: manufacturing.
- Tax contributions are being minimized, resulting in lower government resources available for the benefit of the public.
- The economy becomes overly reliant on partners to the point that these can gain significant geopolitical leverage on the economy itself.
- Capital is kept abroad and mostly idle rather than being reinvested where the revenues are being generated.
- Investors, who represent a small part of the population, are the only beneficiaries through capital appreciation and dividends (that are usually paid by companies raising cash in the U.S. by debt, not repatriating cash from abroad since that would trigger a big profit tax).
If a company that sells goods in the U.S. while producing them in a low-labor-cost country, like China or Vietnam, decides to shift its production and supply chain to the U.S., the financial impact would unfold in both the short term and the long term. In the short term, the company would face significantly higher production costs due to the increased cost of labor and potentially more expensive raw materials in the U.S. For example, the average hourly wage for manufacturing workers in the U.S. is around 20-30 USD, compared to 3-6 USD in China, which would directly reduce the company’s gross profit margins unless it raises prices or improves efficiency. Additionally, the company would need to make substantial upfront investments in new facilities, machinery, and technology, which could strain its cash flow and potentially require taking on debt. These higher costs might force the company to increase the selling price of its products, risking a loss of price-sensitive customers, or absorbing some of the costs, leading to lower profit margins.
In the long term, the company could benefit from several advantages that might offset the initial financial strain. By producing domestically, the company would avoid tariffs on imported goods and reduce shipping and logistics expenses. The U.S. government also offers various incentives for domestic manufacturing, such as tax credits and accelerated depreciation on equipment, which could help lower the overall tax burden. Additionally, producing in the U.S. would enhance the company’s supply chain resilience, reducing the risk of disruptions caused by geopolitical tensions or global events like pandemics.
Over time, these benefits—combined with greater control over production quality, faster time-to-market, and the ability to customize products for the U.S. market—could make the shift to domestic production a strategic success, despite the initial financial challenges. However, U.S. investors, who focus on very short-term company performance, especially profit margins and revenue growth, are unwilling to take the risk of a significant short-term impairment on the value of their investment even if the value could be regained in the long run. This time their own internal economy would be a great beneficiary of it compared to today. This explains the broad market reaction to Trump’s tariffs that are part of an agenda to rebuild U.S. production and manufacturing, ultimately strengthening an economy so far too reliant on services and credit that by definition create far less value for the real economy. Personally speaking, I find it ridiculous reading about those people who keep blaming China, Mexico, or whatever other country because they keep producing cheap goods that are then exported to the U.S., while the reality is that’s what U.S. companies want and enable for their own benefit (and the benefit of a few wealthy investors in the U.S.).
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