Volkswagen Move to Vacate Onshoring Shows US Tariff Policy Flaws

Volkswagen AG’s decision to shelve plans to build an Audi plant in the US amid ongoing tariff costs exposes a fundamental flaw in tariff-first industrial policy as an impetus to onshoring: It assumes the US market is always large enough to compel compliance, even when tariffs themselves erode that market.

Encouraging domestic investment requires a smarter, rather than more aggressive, trade policy. Tariffs should be deemphasized as a blunt industrial policy tool, and where they remain, they should be grounded in market realities through return-on-investment modeling.

In the last year, tariffs have been used as the trade policy equivalent to a sin tax. The idea is familiar. If you tax a disfavored thing—cigarettes, sugary drinks, or foreign assembled German vehicles—you discourage consumption of it.

This theoretically reorients the market by yanking on both the supply and demand levers until behavior shifts. Because such taxes are imposed to eradicate harmful behaviors, you’ll ostensibly be content if consumption falls to zero or close to it.

But trade tariffs are imposed to extract value, whether in the form of jobs, investment, or competitive pricing. Tariffs pretend to be corrective taxes, but they risk choking off the very economic relationships they’re supposed to leverage.

An assumption that sufficiently high tariffs would hike prices enough for foreign producers to onshore production misses a basic economic reality—that the US market may not be the irresistible magnet for every global firm some lawmakers seem to think it is. When tariffs shrink that market even more today, such firms may have difficulty imagining the investment case for tomorrow.

In VW’s case, tariffs on European cars have helped push prices higher, undercutting demand and shrinking its already relatively modest US market share—down 20% in the last three months of 2025. That’s a warning sign to pull back, not an incentive to build.

There are several policy and market fantasies operating at once. Chief among them is the misapprehension that global firms can quickly onshore production—that spooling up manufacturing capacity in the US is a project measured in weeks or months instead of years or decades. VW may have seen the writing on the wall, extended trendlines, and reckoned it would have de minimis market share in the US by the time any new plant could be operational.

Lawmakers should require market-based return on investment modeling before any new tariff regime is imposed.

Photographer: Krisztian Bocsi/Bloomberg via Getty Images

Another mistaken assumption is that a company such as VW would opt to manufacture in the US solely to reduce its prices and compete more effectively. Tariffs are, after all, similar to taxes levied at the border and paid by importers and consumers. This means VW isn’t primarily feeling the pinch of the tariffs in its bottom line on each vehicle sold, but rather in the number of vehicles US consumers buy given the higher cost.

If you are a company like VW—facing stiff domestic competition and without dominant US sales—the return on a multibillion-dollar factory investment is far from guaranteed on any reasonable timescale.

This is doubly true in capital-intensive industries, where the decision to build doesn’t just affect this year’s profits, but is an exercise in multi-decade cost recovery and projection. Committing to new capacity makes little financial sense when the US represents a shrinking slice of your global sales.

So the intended outcome of more domestic production, more jobs, and stronger industrial capacity is replaced by its opposite. Firms like VW will scale back, consumers will see higher prices for what goods are available, and job-creating investments flee. Absent individualized policy attention, VW may leave the US market entirely.

Tariffs aren’t a panacea for industrial policy, and threats aren’t strategy. At best, tariffs are a century-old tool misapplied to a modern economy. They should be deemphasized as the centerpiece of trade strategy—not out of deference to globalization—but because they don’t deliver the outcomes policymakers claimed they would.

If tariffs must remain in the toolbox, let’s at least treat them like the crude economic instruments they are and be selective in using them. Sledgehammers have a place in construction, but not when delicate mechanisms are in play.

Lawmakers should require market-based return on investment modeling before any new tariff regime is imposed. They should determine whether the targeted industry even has the US market exposure necessary to do the thing we want: to invest in domestic production.

Tailoring incentives around actual US market presence and potential for consumer benefit would be a smarter long-term approach. This would reflect a recognition that not every global firm has equal reason to build here, but US consumers may have an interest in accessing their products nonetheless. Industrial policy should reward economic realities and should at least consider preservation and expansion of consumer choice.

VW’s retreat is unlikely to be an outlier and should be read as a flashing red light for a trade strategy built on faulty assumptions. When policymakers assume every company will build here, no matter the cost, they set the market up for failure.

The US can’t just rely on economic saber-rattling to win more factories, more jobs, more choice, and lower prices. Capital seeks stability, predictability, and profit. Until industrial policy reflects that, we’ll keep watching press releases about factory plans falling through and global firms deemphasizing the US market.

Andrew Leahey is an assistant professor of law at Drexel Kline School of Law, where he teaches classes on tax, technology, and regulation. Follow him on Mastodon at @andrew@esq.social.

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