This combo tariff would destroy the rules-based global economy, mire the U.S. in trade wars and be catastrophic for American industries and consumers.
“Tariff Man” is back at it. In a mid-August Fox Business interview, former president Donald Trump said he likes the idea of a 10 percent tariff on all U.S. imports. As experts have argued, it’s a crazy idea.
In that same interview, Trump also proposed something he called a “matching tax.” It came across as being a second tariff and is especially troubling because Trump spoke about “retribution” in explaining how it might work.
I’m loathe to read too much into an interview. But as the Wall Street Journal editorial board put it: “Donald Trump exaggerates many things, but on economic policy his record is that he means what he says.”
Trump talked matter-of-factly about the 10 percent tariff, but really took over the interview when pitching his matching tax. He revealed the details in recalling his frustration with India’s treatment of Harley Davidson.
Trump explained that Harley has to build bikes in India to get around its sky-high tariff, in contrast to Indian Motorcycle, which enjoys zero-tariff market access to the U.S. It’s true that Indian Motorcycle sells tariff-free in the U.S., but that’s because it’s an American company. If Indian Motorcycle was from India, as Trump clearly believes, then it would pay America’s 2.4 percent most favored nation rate, not zero.
But Trump’s main point is right: Harleys are subject to a 100 percent applied most favored nation tariff in India. So, how would he solve this problem?
Like other countries, India would face the across-the-board 10 percent tariff. But as Trump urged, India is “very big with tariffs,” so more would be needed. To reshore Harley’s jobs, the fix would presumably be an additional 90 percent matching tariff.
Put aside, for the moment, that this combo tariff would destroy the rules-based global economy, mire the U.S. in trade wars and be catastrophic for American industries and consumers. Trump couldn’t possibly calculate his retribution tariff in any meaningful sense, and his Harley case study shows why.
Harley’s main source of uncertainty in India is not the 100 percent applied most favored nation tariff, but rather that this tariff is unbound. This means there’s no legal limit on this tariff under India’s tariff schedule under the World Trade Organization. For that matter, Harley also produces in Thailand, which has a 60 percent applied most favored nation tariff that’s unbound.
If a country’s tariff is unbound, or there is a big difference between a country’s applied and bound rates, how would Trump’s matching tariff be calculated? If it’s allowed to fluctuate, it would create the same business-killing uncertainty for U.S. importers that tariff overhang causes in developing countries.
Then there’s the third-market problem. Harley makes bikes in Thailand not just to skirt the 60 percent applied most favored nation tariff, but because the country is an export platform. Indeed, it enjoys zero tariff market access to Australia, India, Japan, New Zealand, Peru, countries in the Association of Southeast Asian Nations, and members of the Regional Comprehensive Economic Partnership. Thailand also intends to join the Comprehensive and Economic Trans-Pacific Partnership.
If Harley exports motorcycles tariff-free from Thailand to, say, China, and China has a 30 percent applied (and bound) most favored nation tariff on bikes from the U.S., would Trump’s retribution tariff only target Thailand’s (unbound) 60 percent rate, or would it necessarily have to be higher to also account for Thailand’s preferential access to China? If not, then equalizing tariffs with Thailand wouldn’t reshore Harley jobs.
Harley also produces bikes in Brazil for the same reason. If Trump had wanted to zero out India’s, Thailand’s or Brazil’s tariffs on Harleys (and nearly all industrial goods) without risk of retaliation, he could have done so by pushing for more U.S. free trade agreements. Instead, Trump withdrew the U.S. from the Trans-Pacific Partnership.
The only thing that Trump did for Harley was put it squarely in the sights of the European Union amid the trade war he started over his steel and aluminum tariffs. Brussels hammered Harley. The EU started with 25 percent retaliatory tariffs, which raised the price of each Harley sold by $2,200. At first, Harley said it would eat this added cost, but this quickly proved unsustainable.
Then the EU hit Harleys made in Thailand with the same retaliatory tariffs slapped on U.S.-made bikes. After five customs decisions to the contrary, Brussels claimed the work done in Thailand wasn’t “economically justified,” so these motorcycles would be treated as if they were made in Missouri, Pennsylvania or Wisconsin. This was like running an anti-circumvention case on Harley as if the company had been hit by an antidumping duty. It hadn’t. This was creative retaliation, and the message to the United States was that this was how Brussels would wage future trade wars.
Republican hopefuls are sure to feel pressure to engage with Trump on these tariffs. Don’t follow him quietly into that dark night. His 10 percent tariff and matching tariff would have done nothing to help Harley, or the U.S. economy.
Marc L. Busch is the Karl F. Landegger Professor of International Business Diplomacy at the Walsh School of Foreign Service, Georgetown University, and a Global Fellow at the Wilson Center’s Wahba Institute for Strategic Competition. Follow him on Twitter @marclbusch.
