There is an entire strand in the trade literature called “Tariff Jumping Foreign Direct Investment.” The idea is that, instead of exporting, firms may move production locations to avoid high tariffs. This literature is equally well known as the Tariff-Retaliation literature, which outlines that tariffs are seldom imposed unilaterally, but followed by retaliation from countries that are hard hit.

Donald Trump has just provided two new case studies. His tariffs on European Steel produced retaliatory tariffs from the EU — The EU tariffs then induced Harley Davidson to move production out of the US and abroad to avoid the tariffs. As theory predicts, trade restrictions reduce national income and employment.  No one but Trump is surprised. perhaps with the exception of Peter Navarro.

In keeping with Trump’s previous attempts to micromanage multinational investment decisions, he  threatened  to tax Harley-Davidson “like never before.” His statements that “A Harley-Davidson should never be built in another country-never!” implies he is unaware that Harley Davidson is already a multinational company with factories in Brazil, India and Australia.