A crucial issue for U.S. policymakers is how to create conditions that make the U.S. economy more attractive as a location for both headquarters of supply chains and for each segment of both U.S. and foreign parented supply chains. In general, the more value that is added domestically, the more domestic job opportunities that may be created and greater the well-being of Americans. A possible test for policy is to ask if the predominant effect is one of diversion or creation. Does a proposed policy divert production (including services, research, and marketing) and employment that goes with production from the U.S. economy to a foreign location, draw production toward a U.S.-based location, or shift production between two foreign locations? Does the proposed policy create more production, or does it discourage productive activity? Does it induce foreign-owned businesses to locate segments of their supply chains here? Does the policy disrupt or enhance supply chain operations and decrease or increase overall supply chain efficiency and profitability? How does a policy affect the distribution of benefits among corporate executives, workers, shareholders, and consumers? Does a proposed policy encourage the delivery of products for consumers that are high in quality yet low in price? Also, does a proposed policy affect where intellectual property is created or resides, and what are the spinoff benefits for the rest of society?
Public policy affects businesses in two distinct ways. The first is in the environment for business or the economic, political, and social crucible in which it operates. This includes a wide range of factors including basic institutions of private property, commercial law and rights, market access, rights of establishment, national treatment, border barriers, exchange rate policy, protection of intellectual property, infrastructure, education and training of workers, energy policy, the climate for innovation, political governance, and the panoply of policies aimed at the general climate for business that all companies face.
The second way that public policy affects business is in actions that affect the internal operations of companies. These are actions that directly affect costs of production and profitability, and may include tax policy, specific customs duties, wage and employment policies, accounting and reporting rules, health and safety requirements, specific environmental requirements, and product safety. Some policies affecting the general business environment, such as energy costs and subsidies for research and development, also affect internal costs.
The development of global supply chains adds another dimension to the impact of public policy. This appears in the incidence (who is affected) by policy. Since manufacturing processes now have become fractured, the incidence of policy likewise has become fractured. A supply chain consists of a domestic parent, domestic suppliers, foreign suppliers, and a community of supporting functions that include logistics, supply chain management, and quality assurance. Public policy may provide incentives or disincentives for supply chain parent companies to establish and retain their headquarters in the U.S. market. This applies both to historically American companies and to foreign companies that may locate regional headquarters in the United States. Public policies favorable to business in the United States also may induce both American and foreign-owned supply chains to locate more segments of their supply chains in the United States (and vice versa).
U.S. policies, however, also may lower the costs of manufacturing abroad. Reciprocal tariff reductions; free trade areas; reducing market access barriers in other countries; improving U.S.