Trade and the Art of Motorcycle Tariffs

President Donald Trump has repeatedly said the U.S. is being ripped off by its trading partners—so much so that on Thursday he vowed he would impose steep tariffs on steel and aluminum imports to, as he sees it, protect local manufacturers from having to compete with underpriced foreign imports. The specifics of the plan are still unclear: He did not say, for instance, whether the barriers would be imposed on all imports or only aimed at certain countries.

There are many reasons Trump sees global trade as fundamentally unfair to American workers—he often cites large trade deficits with China, for example, though many trade experts tend to believe trade deficits aren’t by themselves harmful to a particular country’s economy. But earlier this week, he also offered another illustrative example of his worldview on trade—and it had to do motorcycles.

Harley-Davidson motorcycles, to be exact, and how they are sold in India.

This time, though, the tariffs went the other way. “When they send a motorcycle to India, as an example, they have to pay 100 percent tax—100 percent,” Trump told U.S. governors on Monday. “Now, the [Indian] prime minister, who I think is a fantastic man, called me the other day. He said, ‘We are lowering it to 50 percent.’ I said, ‘OK, but so far we’re getting nothing.’ So we get nothing, he gets 50 [percent], and they think we’re doing—like they’re doing us a favor. That’s not a favor.”

Trump compared the tariffs imposed on Harley-Davidsons in India to U.S. tariffs on motorcycles made in India. “India sells us a lot of motorbikes,” he said, and the tariff on them is zero. The Washington Post reports Harley-Davidson sells about 4,500 motorcycles annually in India—most of them assembled domestically and not subject to the tariffs levied on motorcycles assembled outside the country. The only major Indian company that sells motorcycles in the U.S. is Royal Enfield, which sells fewer than 1,000 motorcycles in the U.S. each year.

The numbers are small, and Trump’s outrage over the amounts involved may be misplaced, but his remarks also reflect how seemingly small trade matters can affect other international priorities. The U.S. has long had similar concerns about doing business with India. At the end of Bush administration, for instance, the two governments said they would negotiate a bilateral investment treaty—but that issue is no longer discussed because of a number of disagreements. The two sides also remain at odds over things like India’s protections for its agricultural sector, and Indian patent laws the U.S. views as weak insufficient to protect U.S. intellectual property. The U.S. also dislikes Indian price controls on medical devices and tariffs India recently imposed on articles such as cell phones and auto components. India, likewise, has concerns about Trump administration’s threats to raise tariffs—it is, for example, one of the largest exporters of steel to the U.S.—as well as his administration’s stated opposition to visas for high-tech workers, a key economic driver for the Indian economy.

“Even at the start of the Trump administration, you had a lot of pent-up hostility and frustration on both sides,” Richard Rossow, an expert on India-U.S. trade at the Center for Strategic and International Studies, told me. “And in the last couple of months, you’ve seen a further escalation in those things.”

During that time, Indian Prime Minister Narendra Modi’s government has increased customs duties in as many as 50 sectors—from electronics to fruit juice and toys—in an attempt to spur domestic manufacturing, which is an approach philosophically akin to Trump’s. Despite this, Modi is widely seen as India’s most pro-economic reform leader ever, and some of the steps he has taken, such as lifting restrictions on foreign-direct investment, have been praised by investors. But, Rossow said, the Indian leader appears less interested in trade than his two immediate predecessors, Manmohan Singh and Atal Behari Vajpayee, and has slowly been erecting barriers. The Indian prime minister’s “Make in India” campaign hasn’t been as successful as he’d hoped and so, Rossow said, Modi is “resorting to some steps to close up the market a bit and provide a bit more space for domestic manufacturers to take off.”

Sadanand Dhume, a resident fellow at the American Enterprise Institute, said Modi had his own domestic imperatives, which don’t necessarily translate into smart economics.

“In some ways, Modi himself ironically has embraced a Trumpian view of how trade and manufacturing work,” he said. “And that does not augur well for the U.S.-India economic relationship.”

Dhume said that, motorcycles aside, “the real story here, in my view, is the signaling.” Trump, he said, is appealing to his own domestic constituency by pointing out that the U.S. is a largely open economy and India, along with many of the other countries the U.S. trades with, is a relatively closed economy.

“I think he has honed in on that broad truth and I think that has implications for the U.S.-India relationship,” he said. “Because as a signaling device what he’s essentially doing is sending a message to trade negotiators, bureaucrats, the people in the system, trade bodies, that he sees the U.S.-India economic relationship unfairly skewed toward India, and this is something he would like to see changed.”

Indeed, Reuters reported last week that U.S. businesses and diplomats were urging India to reduce tariffs on imported products, which were increased in India’s recent budget. A U.S. State Department spokesperson said “we believe it is important that India make greater efforts to lower tariff and non-tariff barriers, which will lower prices to consumers, promote development of value chains in India, and contribute to India’s objective to become a global competitor across a variety of sectors.”

“Trade benefits both of our countries and we want to see it grow,” the spokesperson said. “We will continue to work to resolve the issues that are preventing the U.S.-India economic relationship from reaching its full potential.”

But India’s complicated trade relationship with the world is unlikely to make that possible. For instance, the U.S. trade deficit with India is about $30 billion (by contrast, the U.S. trade deficit with China is $375 billion). But while India enjoys a trade surplus with the U.S., it has a large trade imbalance of about $150 billion, with the rest of the world—one of the highest of any of the world’s largest economies.

“When you look at it through the [U.S.-India] bilateral lens, India appears to be quite competitive, and if India takes steps to open up trade, it may create a little more parity,” Rossow said. “But from India’s perspective, the U.S. is one of many trading partners, and across the board they tend to have trade imbalances in other countries’ favor—China in particular.”

China is India’s number-one trading partner and enjoys a 5-to-1 trade surplus with India. “From Indian policymakers’ perspective, China is the thing they think about most actively in terms of ‘what's  the real threat if we liberalize trade a lot more effectively across the board?’” Rossow said.

When it comes to concern about China, at least, the U.S. and India have something in common. And it’s not just trade. The U.S. has criticized China’s ambitions in the South China Sea, where Beijing had adopted a more muscular military posture in waters and islands that are claimed by other countries; as well as its belt-and-road initiative, a massive infrastructure plan that aims to connect China to its neighbors in Asia and farther afield. Even as the Trump administration has withdrawn from the Trans-Pacific Partnership trade agreement, which was seen as a counterweight to China’s influence, it has included India, Japan, and Australia as part of its military and economic plans for what the administration now calls the Indo-Pacific region.

“When it comes to grand strategy and the future shape of the international order, there is a more and more convergence between the U.S. and Indian positions,” Dhume said. “The problem really is that things always tend to look much better from the 30,000-foot view than they do on the ground—and this Harley-Davidson kerfuffle is really an example of that.”

“Part of the tension is that from the Indian side, there seems to be this belief that if the strategic relationship is so important, the U.S. should just ignore these little eruptions along the way as the world's only superpower,” he said. “But in reality that’s not how politics works anywhere—and certainly not how politics works in the U.S. And so … if both countries want this strategic partnership to play out in the way that they intend, they have to find a way to manage these economic issues.”

The two countries have so far managed to keep “the negative economic stuff and the positive defense relationship” in different silos, Rossow said, “but I don’t know how long that’s sustainable.”