The Strategist

Harley-Davidson, the first defector in the Trump trade war

07/02/2018 - 15:28

It’s been less than 4 days after the introduction of the EU response fees, but the famous motorcycle manufacturer announced transfer of part of its US-based production abroad. The US President is outraged.

Harley-Davidson motorcycles are one of the symbols of America. That is why they were included in the list of goods that the European Union imposed on additional duties since Friday, June 22. The duties became a response to the defensive duties on steel and aluminum from the EU imposed by the US on June 1. It was important for Brussels to aim to inflict a few symbolic blows on the protectionist policy of Donald Trump.

The Harley-Davidson company was ideally suited for this purpose for several reasons. On the one hand, its products are not vitally important for Europe. On the other hand, it's about the legendary American firm with a 115-year history. In addition, it is headquartered in Milwaukee, Wisconsin, and this is the birthplace of Paul Ryan, one of the leaders of the Republican Party, the speaker of the lower house of the US Congress. This makes it possible for Europeans to force the voters of this particular state to pay for the trade war waged by the Republicans led by Donald Trump against the EU.

Finally, Trump himself used Harley-Davidson to justify his protectionist plans under the slogan "America First". Less than two weeks after the inauguration of the new US president, on February 2, 2017, when the company’s management arrived in Washington (naturally, on motorcycles), and presented its latest models on the lawn in front of the White House.

At a press conference after a lunch, Donald Trump noted the company’s merits ("Thank you, Harley-Davidson, for making your country richer thanks to your products"), accused other countries in abusing access to the US market, and promised that the trade and economic policy of his administration will make this company "very happy."

And now there’s a plot twist. Less than four days after the EU introduced counter-duties, the management of Harley-Davidson announced that it was forced to curtail part of the production in the US and move it abroad, since otherwise it would not be possible to hold onto the European market.

Europe is the second most important market for Harley-Davidson after its native American. At home in the country the company sold about 148 thousand motorcycles in 2017, in Europe - almost 40 thousand, in the Asia-Pacific region - about 30 thousand. At the same time, the importance of foreign buyers is steadily growing, as the interest of young Americans in motorcycles is falling. So, in the first quarter of 2018, the company's revenue outside the US increased by 12 percent, while growth at home wasn’t noted.

The increase in EU duties from six to 31 percent will lead to a rise in the cost of each motorcycle for European buyers on average by 2,200 dollars, Harley-Davidson’s headquarters calculated. And they concluded that an increase in selling prices of the same magnitude would cause "immediate and prolonged" damage to sales in this region.

Therefore, a radical and even dangerous decision is made for sake of the company's financial health: retail prices in Europe are not raised, additional fees are paid out of the company’s own pocket (it will cost the company about 30-45 million dollars until the end of this year), part of the production in the US is curtailed in exchange to launch additional capacity for supplies to the EU at existing factories in Brazil, India and Thailand in 9-18 months.

This is the exact opposite of what Donald Trump was seeking. He promised to create new jobs in the US, and but this story turned his attempts to a failure. In a Twitter message, the indignant White House boss accused the Harley-Davidson administration of using a trade dispute with the EU as an excuse. After all, it announced its intention to transfer a significant part of the production of motorcycles from Kansas City to Thailand at the beginning of the year. The US president recalls that this happened long before the EU duties were introduced.

This is true, but Trump did not mention what the reason for such plans. Namely, it was his decision to withdraw from the Trans-Pacific Partnership. US participation in this free trade area would significantly reduce duties on motorcycles produced in America and exported to fast-growing Asian markets.

Thus, the decision to move a large part of the production of Harley-Davidson motorcycles from the USA to other countries is one of the first vivid examples of the fact that the protectionist policy of Donald Trump is counterproductive for the US economy. It leads to the opposite effect on the labor market.

Apparently sensing this, Donald Trump in another message on Twitter defends his trade policy, while the wish for the reality: "We force other countries to reduce or abolish duties and trade barriers that for years have been unfairly applied against our farmers, workers and companies".

So the president of the United States has no intention to change his course yet. This is also evidenced by his hint of the imminent introduction of duties on European cars. And this will lead to further escalation of the transatlantic trade war.