Harley-Davidson Moves Production Overseas To Avoid EU Tariffs
Regarding his protectionist trade policies with Canada, China, the EU, and Mexico, Donald Trump has repeatedly pointed to Harley Davidson, as one of the most iconic American companies, as well as one of the brands who will benefit from these measures (1).
However, according to the New York Times (1), Harley Davidson will begin some of its production process overseas, for the sake of avoiding tariffs implemented by the EU.
As it was previously reported, Trump has begun a trade war with some of the United States most important trade partners, citing that allies have been taking advantage of Americans for a long time.
China, the EU, Canada, and Mexico, have all responded with tariffs in turn, and the unintended consequences of some of these policies may be the move of American manufacturing plants overseas.
The company released a statement stating that it wasn’t their first choice, but it’s their only option so they can maintain their business with European customers (1).
The purpose of Donald Trump’s tariffs on foreign markets is to promote manufacturing at home, but it appears that it may have opposite effects in some cases.
Many American companies rely on organizations from overseas for materials, production, as well as the sale of actual products.
Harley-Davidson Isn’t The Only One
Last week, Daimler blamed the Chinese tariffs for a slump in sales of the SUVs they build in Tuscaloosa, Alabama. The company warned about a drop in profits due to the tariffs (1).
And Mid Continent Nail Corporation, a Missouri-based manufacturer of nails, revealed last week that it had to lay off 50 of their 500 employees because of the higher cost of importing the steel from Mexico (1).
According to The Times, the stock markets have decreased marginally as a result of the trade war, despite some reports to the contrary, with the Standard & Poor-500 dropping by 1.4% on Monday (1).
In a tweet, Donald Trump said Harley-Davidson was using the “tariffs as an excuse” to move production out of the country.
Early this year Harley-Davidson said they would move much of their plant operations in Kansas City to Thailand. That was long before Tariffs were announced. Hence, they were just using Tariffs/Trade War as an excuse. Shows how unbalanced & unfair trade is, but we will fix it…..
— Donald J. Trump (@realDonaldTrump) June 26, 2018
The president later said his trade policies would still work. Trump explained he was surprised that he was surprised Harley-Davidson would do such a thing.
Just last week, the European Union responded to Trump’s tariffs including steel and aluminum tariffs with penalties of around $3.2 billion worth of American goods (1).
Some of the goods include orange juice, bourbon, Harley-Davidsons, and playing cards (1).
According to Harley-Davidson, the tariffs on the motorcycles to the European Union increased to 31% from 6%, which means, each bike costs around $2,200 more when exported to Europe (1).
Trump, Harley-Davidson, and The European Union
Europe is one of Harley-Davidson’s most important markets, and they’re shifting part of their production overseas to avoid expensive penalties (1).
In a public filing, the motorcycle manufacturers explained that the huge increase in cost would stop their customers from accessing their products overseas (1).
Shortly after Donald Trump came into office back in 2017, he talked about Harley Davidson as one of the greatest American companies, especially because of the fact that they chose to build their products on American soil (1).
In an increasingly globalized economy, like most companies in the world, Harley-Davidson is relying on foreign markets for both their raw materials and the sale of products.
The motorcycle manufacturer makes some bikes and their parts at facilities in Brazil, Australia, India, and Thailand, and has put many of their production plants in India and Thailand as a means of avoiding the high-import tariffs in those nations (1).
Last year, Harley-Davidson sold 40,000 motorcycles in Europe, which equals one-sixth of their worldwide sales(1).
At the moment, the motorcycle company hasn’t revealed just how many employees they’re cutting in the United States. A spokesperson for the organization said they were “still evaluating” whether they would need to do so or not (1).
Reportedly, Harley-Davidson has eliminated many of their jobs lately as they’re “consolidating” their United States operations (1). Recently, their shares fell by around 6% (1).
Donald Trump, Carrier, and American Manufacturing
Donald Trump has frequently lamented the revival of American manufacturing; it was a part of his platform in 2016.
During his campaign, the president repeatedly talked about the furnace and air-conditioner manufacturer, Carrier, who wanted to close up shop and shift their factory to Mexico.
According to CNNMoney, Trump actually managed to get Carrier to keep their business on American soil, something which he frequently bragged about (2).
CNNMoney reported Carrier would receive around $7 million in financial incentives over the span of ten years from the state of Indiana to keep 1,000 jobs on American soil (2).
A small portion of the $65 million they expected to save each year had the company moved their plants to Mexico (2). Obviously, this factor alone can’t be the one for Carrier’s decision (2).
The company would also get around $500,000 per year in tax refunds in the state of Indiana, so long as at least 1,069 manufacturing jobs stay there (2).
They would also get $200,000 in government money to retrain workers (2).
Previously, government officials including Senator Bernie Sanders said it was merely a tax cut for a company that wouldn’t change its practices anyway.
Sanders explained that now companies would threaten to move to Mexico just to get tax breaks from the US government (2).
Trump And Unintended Consequences
Mr. Trump wanted to impose tariffs on foreign steel and aluminum as a means of forcing other nations to lower their trade barriers. However, according to The Times, the opposite has happened.
Mexico, Canada, and the European Union have created their own levies, many of which are aimed at the states which supported Trump the most, including Ohio, Iowa, Pennsylvania, and Wisconsin (1).
On Monday, Speaker of the House, Paul Ryan, a Republican in Wisconsin, said that raising trade barriers wasn’t a good idea.
According to Ryan, the best way to help American workers was to “open new markets” rather than close them off to foreign powers (1).
Chad Bown, an economist at the Peterson Institute for International Economics, said Trump’s trade war is counterproductive (1). According to Bown, he’s expecting more American companies to follow Harley-Davidson’s lead.
Bown explained that perhaps there would be more production of aluminum and steel as a result of Trump’s policies, but now, Harley-Davidson won’t sell as many motorcycles for exports (1).
However, workers for the company had an opinion much closer to that of the president.
A labor union representing Harley Davidson employees said on Monday that the company was merely using this as an excuse to move jobs offshore (1).
Robert Martinez Junior, the president of the International Association of Machinists and Aerospace Workers, said this is just another hostile move from Harley Davidson, who continues to shift plants off of North American soil (1).
Sharon Zackfia, an analyst for Willliam Blair, said that the company has 10% of their bikes manufactured outside of the United States. It’s hard to estimate what will happen to the production of bikes within the US (1).
However, the best course of action in her opinion would be to end the trade war. She added that “everyone is hoping” the trade war and tariffs would end (1).
Sarah Huckabee Sanders, the press secretary, stated it was the EU’s fault for doing such things, and not that of Trump.
It looks like Trump is doubling down on his tariffs as well, as he previously tweeted that the US would do more than “retaliate” if the artificial barriers weren’t removed (1).
Nevertheless, the stock markets have swooned in the last few days due to the fear of a worsening trade war (1). Some economists claim that this sort of policy is what causes recessions, and in some cases, depressions.
Trade Protectionism And The Great Depression
There are many causes for the Great Depression in 1929, and to this day, economists can’t agree on precisely why it happened in the way that it did.
Typically, the arguments for why the Great Depression occurred fall into three different camps, 1) the Keynesian and institutional economists, 2) the monetarists, and 3) the heterodox theorists who claim labor market policies played a key role in the length and severity of the Great Depression.
The American Smoot-Hawley Tariff Act is usually cited by economists as one of the primary agents for the stock market crash and the Great Depression.
They believe that tariff acts such as the Smoot-Hawley Act end up in what’s called a “beggar thy neighbor result,” the idea that the policies of one nation end up hurting the economy of another nation.
The Tariff Act harmed farmers and agriculturalists especially because farmers were unable to pay back their loans.
Eventually, the banking system in the mid-west collapsed, and some economists believe the defaulting on loans played a role in this (4).
Before the US government signed it into law, one-thousand economists signed a petition requesting for the United States government to abolish the ‘SHTA’ because it would have horrible economic consequences (4).
However, the government signed the act anyway (4).
In the 1920’s, governments around the world began spending less money on foreign goods and imposed tariffs, import quotas, and exchange controls.
Many of these policies resulted in a reduction in trade, and intercompetition between competing countries on the market (3).
In a survey conducted in 1995 of American economic historians, around 66% of them agreed that the Smoot-Hawley tariff act at least made the Great Depression worse (4).
As the nations of the world increasingly become closer together, the trading relationships between them will only get stronger.
According to an article by Malcolm Fairbrother from the University of Bristol, there is an economic consensus that trade protectionism usually hurts the economy rather than helps it (5).
In an open letter to Congress in 2014, N. Gregory Mankiw and 13 other economists explained that International trade is good for both the US economy as well as American families (6).
Economists typically disagree on almost everything, like in many disciplines in Academia. However, according to Mankiw, most agree that international trade is good for the world economy (6).
This argument began back in the 18th century with Adam Smith when he stated in his book, Wealth Of Nations, that nations trading with each other was the same as trade between individuals. It’s a mutually beneficial relationship (6).
At the time, Smith was arguing against mercantilism, which, according to Mankiw, were cautious when it came to imports but thought exports were inherently good (6).
Adam Smith disagreed with mercantilists and explained that nations can benefit from imports and not just exports (6).
Strangely enough, it seems like the average voter, as well as the politicians, are typically ignorant of the sort of economic policy that is actually helpful (6).
In a book written by Bryan Caplan, The Myth Of The Rational Voter: Why Democracies Choose Bad Policies, he explained that politicians and voters usually are ignorant of what will actually strengthen the economy (6).
Voters continue to hold on to mistaken beliefs, and then politicians hold them as well and put them into practice in public policy (6).
Perhaps, Donald Trump is an example of this.
(3) The New York Times – Paul Krugman