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The Trouble with Tariffs, Part 2

The Trouble with Tariffs, Part 2

August 14, 2018

In yesterday’s column, Ian Heller argued that tariffs are taxes on U.S. consumers and businesses. In this column, he explores the reaction of President Trump as well as some motorcyclists to Harley’s decision. In tomorrow’s third and final column, Heller will share his thoughts on what all of this means to distributors.

As the feedback I’ve received to yesterday’s column demonstrates, people in the U.S. have strong feelings about President Trump and Harley-Davidson. However, tariffs are an important economic issue that affects distributors, so we believe it’s important for us to provide analysis on the topic, despite the controversy. 

One of the challenges in debating tariffs is that President Trump and Harley-Davidson both possess polarizing “brands.” People tend to love them or hate them. You already knew that about President Trump, but as a long-time motorcyclist, I can tell you the same is true with Harley-Davidson: many motorcyclists make a lifetime commitment to the company by tattooing its logo onto their bodies. There are also motorcyclists who believe that Harleys are overpriced and more about image than substance. 

As a result of all of this emotion, when Harley announced it was moving more production overseas for product intended for the EU and other global markets, the reaction was explosive. President Trump tweeted:

"Harley customers are not happy with their move - sales are down 7% in 2017. The U.S. is where the Action is!"

The U.S. tariffs and the EU’s retaliatory tariffs were both announced and went into effect in 2018 – whatever caused Harley’s sales decline in 2017, it wasn’t related to their reaction to tariffs in 2018. In addition, the motorcycle industry is about $7 billion in the U.S. each year; that’s less than 10 percent of the global market. The U.S. motorcycle industry is about half of what it was pre-Great Recession and it’s stagnant, so this is not really where the action is. 

He also tweeted:

"A Harley-Davidson should never be built in another country-never!"

Many Harley-Davidsons intended for foreign markets have been manufactured in other countries for years. The Trump Administration’s trade policies have made it financially advantageous for Harley’s management team to push more of that production overseas. This is the same rational, profit-maximizing choice most businesses would make. Harley has a long history as an iconic brand. However, it’s also a publicly-listed company and its investors rightly expect management to maximize profits; the company must do that in the context of legislative and economic realities. 

Often, the U.S. benefits from this strategy (and so do distributors). For example, foreign automobile manufacturers operate more than 20 plants in the U.S. According to Forbes, these plants produce more vehicles for the U.S. market than do U.S.-owned brands – and 75 percent of cars with Japanese brand names sold here are made here. That’s how many global vehicle manufacturers operate. 

However, many motorcyclists are unhappy about Harley’s decision. On June 26, the Charleston Post and Courier interviewed Chris Cox, the president of “Bikers for Trump.” Cox explained that “one biking option for some is switching to another American motorcycle brand: Indian.” 

Indian Motorcycles are manufactured in the U.S. by Polaris Industries. On a July 25th earnings call, Scott Wine, the CEO of Polaris said, “We will counterbalance tariff effects,” by moving production destined for the European market to Poland. The company makes more than 90 percent of its off-road vehicles sold in Europe there and “will execute a similar plan with Indian Motorcycles in 2019.”

Wine also pointed out that “competitors who are neither based nor manufacture in the U.S. can sell here with lower cost because they do not pay higher tariff-adjusted prices for the same materials we source into the United States from our global trading partners.” 

That means the tariffs create a new disincentive for foreign manufacturers to move production to the U.S., even for products that will be sold here. If a motorcycle manufacturer like Honda, BMW, Yamaha or Triumph can source raw materials and components less expensively in other countries that have lower tariffs, that offsets much of the transportation cost advantages foreign manufacturers – like automakers – enjoy by making goods here. Of course, motorcycles are cheaper to ship than cars, particularly non-U.S. brands, which tend to be smaller and weigh less than Indians or Harleys.  

On July 3rd, the President tweeted, “Now that Harley-Davidson is moving part of its operation out of the U.S., my Administration is working with other Motor Cycle companies who want to move into the U.S.” 

I can’t figure out why foreign brands would make that move unless the U.S. provides substantial financial incentives to offset the tariff costs imposed by producing here. If that happens, then U.S. taxpayers are not only paying higher prices for tariff-affected goods but also subsidizing the capital investments of foreign motorcycle manufacturers. 

It seems to me that it would be simpler just to negotiate with the EU to lower tariffs all around. This would make it cheaper and more sensible for both Harley and Indian to keep building motorcycles in the U.S. and export them around the world. I’m still hopeful this will happen. 

Harley-Davidson has remained nearly silent since announcing its decision to move some production overseas. In tomorrow’s column, I’ll talk about why that’s a mistake. Also, the motorcycle industry is just an example that illustrates the challenges and complexities of tariffs. Tomorrow, I’ll also lay out how all of this affects distributors. Stay tuned.

I invite your comments below or by email. But please keep it professional. You can reach me at ian@mdm.com

 

© 2019 Gale Media, Inc.

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