As I read Dr. Krugman's column today, I started to think about "value added" and import tariffs. Suppose that a pair of sneakers sold in the U.S features the following global supply chain. The base of the shoe are made in the U.S and then Mexico makes the laces and then the laces and the base are assembled in the U.S to make the final sneaker. If there is no market for Nike laces then how would a tax authority know how much of the sneaker's value was produced outside of the U.S?
Some authority would need to guess how much of each U.S sold product was produced outside of the United States and what is the value of this input. If there is no market for such differentiated products, then I'm puzzled about how a tax authority could value inputs that do not have market prices. In an age of "specificity" where different products have specialized inputs, this problem becomes even harder.
If intermediate inputs are taxed via the tariff, how many of them return to the U.S to avoid the tariffs? With such special treatment, will the U.S bring back the jobs? This is actually an interesting urban economics issue. Firms offshore because their profits from doing so are higher than if they keep all production in the U.S. As Trump has said, he wants production back in the U.S and doesn't care where it goes.
So a producer who sells to U.S consumers who wants to avoid Trump's new taxes can choose any of the 50 states. Which offers the best deal in terms of the highest profit for the firms that return home? This is the site selection problem. Will states with weak union laws, or low energy prices, or lax environmental regulations succeed? This depends on what inputs the offshoring firms use in production. Read my 2013 paper with Mansur.