Correct accounting for duty drawbacks with outward and inward processing in global production networks

We develop a new model for the correct accounting of customs duties levied on a product. We examine inward and outward processing – that is, processed components can be either imported or produced in a foreign country – in the strategic planning of a global production network. This complex modeling problem is structured with path variables, and the duty drawbacks can be simultaneously and correctly entered for n production stages in m market regions (with corresponding duty regions) for all products with a maximum n-level bill of materials. We present a case study from the automotive industry to examine whether or not the possibility of future duty rate changes or free trade agreements, such as one between the United States and the European Union, could affect the design of a production network and hence should be considered in strategic planning. We show that correctly accounting for duty drawbacks can lead to changes in the global footprint of production. We also demonstrate that intercontinental trade barriers (in the form of duties) diminish working capital and entail longer delivery routes. Eliminating these political trade barriers could increase the returns to capital while reducing both delivery lead times and environmental costs.