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The Trouble with Tariffs, Part 1

The Trouble with Tariffs, Part 1

August 13, 2018

Tariffs are taxes. As goods are imported from other nations, U.S. companies pay the U.S. government tariffs through customs brokers or agents. Tariffs directly increase purchase costs for U.S. businesses that buy imported goods - just like taxes do - and so those businesses raise prices for their customers.  

Tariffs literally take money out of the pockets of U.S. businesses and consumers and give it to the federal government. If you are pro-tariff, you are in favor of a federal government tax on certain classes of imported raw materials, components and finished goods. 

And then there are “retaliatory tariffs.” That’s when the nations impacted by your tariffs turn around and put their own tariff on the stuff you export to them. 

Effects of Tariff Taxes on Harley-Davidson

Since the beginning of 2018, the Trump administration has announced a series of tariffs on a wide range of goods - including steel and aluminum - from several nations, including the European Union. The EU retaliated by putting a 25-percent tariff on a variety of U.S. products it imports – including motorcycles, a provision that primarily affects Harley-Davidson. 

For Harley, the U.S. and EU tariffs create two problems for products it produces in the U.S.:

  • The company pays more for the imported steel and aluminum it uses to manufacture motorcycles.
  • The cost of its products goes way up in countries where governments have put retaliatory tariffs on Harleys imported from the U.S. This is the case in the EU.  

Europe is Harley’s second-largest market and total non-US sales account for 41 percent of its overall revenues. If you were running Harley-Davidson, you’d look for a solution to the tariff problem. The good news is that one is readily available: move more production to your plants that are located in nations with better trade relationships with the rest of the world, especially Europe. By doing this, Harley-Davidson: 

  • Doesn’t have to pay tariffs on the steel and aluminum it brings into those nations to manufacture motorcycles, and,
  • Doesn’t have to pay retaliatory tariffs when it ships bikes to Europe from non-U.S. plants 

On June 25th, Harley reported to the Securities and Exchange Commission that the retaliatory tariffs add about $2,200 to the price of every Harley-Davidson motorcycle sold in the EU. Total cost to the company: about $90-100 million annually. It also reported that while it was committed to producing motorcycles for the U.S. market in the U.S., it was planning to move production overseas for motorcycles intended for foreign markets, particularly the EU.

“Harley-Davidson maintains a strong commitment to U.S.-based manufacturing," the company said. "Increasing international production to alleviate the EU tariff burden is not the company’s preference but represents the only sustainable option to make its motorcycles accessible to customers in the EU and maintain a viable business in Europe.” 

Any good management team would do the same thing. If they didn’t, they’d oversee a big deterioration in sales and profits, and the Board of Directors would fire them. That’s how capitalism works. 

Unfortunately, President Trump has not been understanding of the dilemma his administration has created for Harley-Davidson. Just yesterday, he tweeted, 

"Many @harleydavidsonowners plan to boycott the company if manufacturing moves overseas. Great!"

So as tough as it will be for Harley to move its manufacturing overseas to avoid tariffs and retaliatory tariffs, the real battle will come as it tries to avoid a backlash from its own customers and the White House.

We’ll explore that tomorrow. I invite your comments below or by email. But please keep it professional – this is an economics discussion; I am not taking a position on President Trump other than on tariffs. You can reach me at ian@mdm.com.

 

© 2019 Gale Media, Inc.

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