Back in the 19th century, trade tariffs worked in some way or other. Nevertheless, they were still net negative forces, but companies generally didn’t have much choice where things could be made. Companies were nationally focused and could certainly not move production around the world at will. Yes, tariffs are a 19th century tax.

In today’s world, modern trade is a lot more complex and trans-national companies dominate. Around 40 percent of global trade is estimated to take place “within” companies, moving things from one subsidiary to another, which gives companies flexibility to avoid tariffs.

President Trump has been critical of the fact that Harley-Davidson has announced it will shift production of bikes outside of the United States to avoid the tariffs that the European Union (EU) has now raised on US-made motorcycles from 6 percent to 31 percent in retaliation for the US tariffs or taxes.

On Monday, Trump tweeted “Surprised that Harley-Davidson, of all companies, would be the first to wave the White Flag. I fought hard for them and ultimately, they will not pay tariffs selling into the E.U., which has hurt us badly on trade, down $151 Billion. Taxes just a Harley excuse - be patient!”

From a business prospective, Harley-Davidson’s action is entirely reasonable. The EU’s retaliation to Trump’s steel and aluminum levies will cost Harley-Davidson about $2,200 per motorcycle shipped to Harley’s second-biggest market in the world, the company stated in a “Form 8-K” filing on Monday.

Moreover, the European Union (EU) is highly unlikely to pursue Harley Davidson specifically. The EU was aiming to hurt the US economy with its tariffs to achieve political ends.

While Harley Davidson was making bikes in the United States, the EU tariffs hurt the US economy, Harley Davidson and potentially the EU consumer if the tariffs are passed on.

If Harley Davidson switches production elsewhere, then the EU tariffs hurt the US economy but do not hurt Harley Davidson and do not hurt the EU consumer.

Investors could do well keeping in mind that It can be expected that a lot of the U.S. tariffs on goods made in China can also be avoided through similar flexibility of production.

President’s Trump trade adviser Navarro attempted to sound more conciliatory on trade policy yesterday suggesting that there would not be severe investment restrictions imposed and also saying the US equity market declines were an overreaction given the strength of the US economy.

Mr. Navarro also informed that a Treasury Department report is due later this week on American restrictions on foreign investment and that it won’t be as sweeping as markets are anticipating.

U.S. equities pared losses after Navarro’s comments. Still, Chinese shares tumbled into a bear market (minus 20 percent from their peak) this morning.

Now, investors could do well keeping in mind that a very important part of S&P earnings come from outside the U.S. and as listed companies are disproportionately engaged in international trade, trade is far more important to the equity market than it is to the economy.

Euro Area

Over in the Euro area we have the politics about “reform” that continue ahead of the European Union summit that will take place on Thursday and Friday.

The euro does not work economically and has never worked economically. Economists were pretty clear from the start that the euro wasn’t going to work economically.

The issue is how to reform the euro in such a way to make it work better economically in the future, which means looking at fiscal transfers and a proper banking union because that’s what monetary unions need.

Let’s be clear, the euro is not going to fragment any time soon. Moving ahead with reform would be important for creating confidence in the euro in the longer term. French Finance Minister Lemaire issued a strong call for a Euro area budget yesterday calling it was “non-negotiable.” About 12 countries with the Netherlands on top have already signaled their “wide divergence” on the need for any budget.

Emerging Markets

Compounding trade threats deepened the worst monthly rout for developing currencies since the U.S. election. Goldman Sachs said yesterday it’s reducing an overweight position in developing-nation currencies, preferring a more “defensive” stance as China and Europe warned the escalating trade war could trigger a global recession. Citi cautioned that investment flows into emerging-market assets will subside, while Morgan Stanley lowered its recommendation toward the asset class, citing the risk of a stronger U.S. dollar and ballooning trade threats.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.