There is much talk on the campaign trail from the two leading candidates about imposing tariffs on imported goods. Former President Trump wants to impose a 10% tax on all imports. President Biden’s administration is considering imposing tariffs selectively, the so-called “small yard, high fence” approach. The impact of a tariff is not fully predictable and does not follow a straight line. While it may give a small boost to the country imposing tariffs in the short term in a variety of ways, it could have unintended consequences in the long run. 

Just as with any decision, there are benefits and disadvantages to imposing tariffs. For example, the depression-era tariffs had the effect of sharp declines in global trade when other countries imposed their own tariffs in response to the U.S. government’s tariffs on agricultural and manufactured products. 

Tariffs can cut both ways. To prop up the domestic motorcycle production and Harley-Davidson — the 120-year-old iconic and sole surviving motorcycle manufacturer — and to prevent the flooding of less expensive Japanese imports, President Ronald Reagan, abandoned his conservative principles and increased tariffs to 45% on imported motorcycles in 1983, scaling down to 10 to 20% each year for four years. 

The impacts of tariff are both beneficial in the short run but could be counterproductive in the long run. In the case of Harley, one might argue that the tariffs imposed by President Reagan was helpful and has allowed Harley to thrive. Without it, it may have collapsed. Between 1983 and 1987, Harley-Davidson made significant changes to make itself more competitive and garnered 50% share of the U.S. market — up from 15% just a decade earlier. Harley even asked the U.S. government to lift the tariffs altogether when it came back strong. 

On the one hand, tariffs could stymy competition and give protection to companies plagued by manufacturing and quality problems (as was the case with Harley). Consumers may have to pay more for higher quality imports or settle for lower quality domestically made products. However, tariffs protect domestic companies and the people they employ. Tariffs also protect tier 2 and tier 3 companies that supply the automobile assembly lines. In fact, many tier 3 suppliers to GM, Ford and Stellantis are small mom-and-pop stores who find it difficult to make payroll, thus tariffs help them in the short run. Tariffs help raise revenue. The tariffs imposed by President Trump on goods from China in 2018 and 2019 worth $300 billion helped raise $80 billion in “taxes.” The U.S.-China Business Council claims this action cost the U.S. economy 245,000 jobs. The trade deficit with China actually went up in 2020 compared to 2018. 

The current manufacturing and supply chain network is so complex that tariffs may have a negative impact on the country imposing them even in the short term. Ford, GM, Volvo, and Polestar (owned by Volvo, which itself is owned by Geely) make the Lincoln Nautilus, Buick Envision, EX30, and Polestar 2, respectively, make electric cars exclusively in China. When these are imported into the U.S., it costs American companies and consumers more. Importing electric cars helps reduce the carbon footprint. The imposition of tariffs could lead to a higher carbon footprint. 

Some argue that tariffs help level the playing field, especially if the government in the exporting country provides subsidies or engages in unfair trade practices. Many say this is the reason the U.S. should impose tariffs on goods from China. While this may be true, it may be difficult to account for the indirect subsidies offered by the U.S. government via the Build Back Better, CHIPS and Science Act, or the Inflation Reduction Act to U.S. manufacturers. 

Even tariffs imposed to punish adversaries or competitors such as China, Iran, North Korea, and Russia have limited impact. Such countries find clandestine ways of avoiding tariffs. Countries with which the U.S. has free trade agreements are exempt from these tariffs. Hence, Chinese car makers are entering the Mexican market to sell to U.S. consumers. Congressional members wanting to impose tariffs will want to prevent that. Similarly, when tariffs on Chinese-made solar panels were imposed in 2023, the producers quickly moved their operations to Cambodia, Vietnam, Thailand, and Malaysia. 

The Biden administration is also considering tariffs on batteries for electric cars. This could make electric vehicles in the U.S. more expensive. 

We are witnessing a world that is going through turmoil and change. The invasion of Ukraine by Russia is creating difficulties in getting agricultural products to many parts of the world, including Africa. The Israel-Gaza conflict and the attack of the Houthi rebels on maritime transportation in the Suez Canal has made many major ocean carriers avoid the Suez Canal for the foreseeable future, forcing them to move containers around the horn of Africa, increasing costs and transit times significantly. The Panama Canal drought is also forcing shipping companies to reduce the size and weight of cargo passing through the canal. 

Five large countries (U.S., Bangladesh, India, Indonesia, Pakistan, and South Africa) will have elections in 2024. The power dynamics within and between these countries will shift depending upon who gets elected. The recent elections in Taiwan handed victory to Lai Ching-te, who advocates sovereignty of the island. This is sure to escalate the friction between Taiwan and China. 

Clearly, there are many exogenous factors creating high levels of uncertainty for businesses. More are to come in 2024. Businesses want some level of certainty, especially as it pertains to government policy. Tariffs add more uncertainty.  While I am not arguing we do not impose tariffs on anyone at any time, it is helpful to consider long-term impacts and unintended consequences. Perhaps the U.S. government can offer incentives to scale up domestic production. The Build Back Better, CHIPS and Science Act, and the Inflation Reduction Act are steps in the right direction. Focused tariffs on products deemed sensitive and of high value (small yard, high fence approach) makes sense. 

Back to the Harley-Davidson story. In 2021, the tables were turned. The European Union attempted to slap a 56% tariff (up from 6%) on their motorcycles. After negotiations, the number was brought down to 31%. Even vehicles produced in Thailand were subject to the same tariff. In 1986, Harley produced a total of 37,000 vehicles. In 2022, it was 180,000. Just the fact that the company is alive and thriving is an indication that tariffs, selectively applied for a limited time, work, at least some of the time. 

Sunderesh S. Heragu is a Regents professor and associate dean in the college of engineering, architecture and technology at Oklahoma State University.