The Impact of Tariffs on Economic Incentives

Companies typically locate where costs are low, logistics are efficient, talent is abundant, and economic incentives are attractive. Tariffs disrupt this balance, forcing companies to reconfigure their supply chains, which, in turn, increases the competition among states to secure new investments.

The purpose of tariffs is to promote and increase the market advantage of domestically produced goods and to raise income for the government in the importing country. Two primary types of tariffs used to accomplish this are:

• Ad valorem tariffs, which are calculated as a percentage of the value of imported goods
• Specific tariffs, which are calculated as a fixed fee based on the quantity of goods, regardless of value.

Additionally, compound tariffs can be imposed as a combination of ad valorem and specific tariffs.

When a country imposes tariffs on imported goods, it increases the cost of doing business, which can lead a company to choose to relocate some or all its operations to lower-cost or tariff-free jurisdictions.

This has happened in the past

• In 2018, the imposition of steel and aluminum tariffs prompted many states to recruit domestic smelters and mills.
• EVs and battery tariffs imposed on Chinese battery materials led to large battery manufacturers locating in states like Georgia, Illinois, Indiana, Tennessee, Texas, and Michigan.
• The semiconductor industry has been recently incentivized to grow in the U.S. with the implementation of the CHIPS Act.

According to CBS News, the following companies have announced their intent to expand in the U.S., presumably based on the imposition of tariffs:

• Abbott Laboratories
• Apple
• IBM
• Nvidia
• Roche
• Chobani
• Johnson & Johnson
• Honda Motor
• Hyundai Motor Company
• TSMC

Interestingly, while some of these companies simply stated their intention to invest millions throughout the U.S., many have already announced where their projects will occur, and there is a lot of geographic diversity: California, Arizona, Idaho, Iowa, Indiana, Michigan, Texas, North Carolina, New Jersey, and Delaware. Unless there is a specific reason to locate in a particular state (such as labor, supplier base, customer base, or raw materials), a company will weigh which states offer the best tax environment and economic incentives.  

To lure relocating businesses due to tariff pressures, states may offer the same toolkit of economic incentives they otherwise would for growing and expanding operations:

• Cash grants
• Tax credits, exemptions, and abatements
• Infrastructure assistance
• Financing and loans
• Regulatory and permitting assistance
• Workforce training

A couple of well-known examples of states competing for investments due to tariffs on Chinese imports in 2018 were Foxconn and Toyota-Mazda. Wisconsin lured Foxconn, which assembles Apple products and other electronics, to build a $10 billion manufacturing campus by offering a $4 billion incentive package. Alabama offered Toyota-Mazda more than $900 million in economic incentives to locate a $1.6 billion factory and 4,000 jobs in Huntsville.

While some may argue that tariffs strengthen the economy and lead to the reshoring of impactful industries, one must also be cognizant of the reciprocal tariffs that can result. With many policies, there are often winners and losers; however, given the chaotic nature of the current tariff imposition under the Trump administration, it is difficult to determine exactly who will come out on top. Regardless, states need to remain poised to compete for industries such as mining, agriculture, and manufacturing that are most likely to be impacted by tariffs.  

States that may benefit most from tariffs imposed on mining activities are likely Nevada (lithium, gold, silver), Arizona (copper, rare earth elements), Utah (copper, lithium), Texas (industrial minerals, uranium), Alaska (gold, zinc, lead), and Minnesota (taconite, nickel, cobalt), based on a combination of natural resources, manufacturing capacity, favorable regulatory environments, and state and local economic incentives. 

In the agricultural industry, states with strong agricultural bases, logistical infrastructure, favorable regulatory environments and state and local economic incentives such as Texas (cattle, cotton), California (nuts, fruits, vegetables), Iowa (corn, soybeans), Georgia (poultry, peanuts, cotton), Nebraska (grain, beef), Kansas (grain, beef), and North Carolina (tobacco, poultry) stand to gain most from reshoring ag-related activities. 

Conclusion

State and local economic incentives, such as tax breaks, grants, infrastructure assistance, and other financial benefits, are crucial for attracting companies facing increased tariffs to help offset the additional costs of doing business. These incentives make relocation or expansion more financially viable, allowing companies to maintain competitiveness, protect jobs, and continue contributing to local and national economies. 

Ultimately, strategic state and local economic incentive assistance can be the deciding factor in where companies choose to invest, innovate, and grow in a challenging global trade environment.