Tariffs are a double-edged sword
On June 1, the U.S. imposed a 25 percent tariff on steel, and a 10 percent tariff on aluminum, imported from the European Union, Canada and Mexico.
Retaliation came quickly. The EU, for example, imposed tariffs on 180 products imported from the U.S., including steel, aluminum, agricultural goods, clothing, washing machines, cosmetics and, notably, motorcycles. Specifically, the EU increased the duty on motorcycles from 6 percent to 31 percent.
That was not welcome news for Harley-Davidson, which has set a goal of growing its international business to 50 percent of annual sales by 2027. On average, the tariff will raise the price of a Harley in Europe by $2,200.
As a result of the tariffs, Harley announced that it will shift production of motorcycles bound for the EU from the U.S. to its newly opened assembly plant in Rayong, Thailand.
Just six months earlier, in January, Harley said that it will close its assembly plant in Kansas City, MO, in the fall of 2019, costing some 800 workers their jobs. Harley will consolidate production at its factory in York, PA, where it expects to add 450 full-time, casual and contractor positions to support the extra work. But, that’s still a net loss of 350 U.S. jobs.
The news underscores what a double-edged sword tariffs are. Harley opted to build the factory in Rayong to avoid Thailand’s 60 percent tariff on imported motorcycles and to get other tax breaks when exporting to Thailand’s neighbors—thanks to a trade arrangement among members of the Association of Southeast Asian Nations. The Thai factory also became necessary, according to Harley CEO Matt Levatich, when the U.S. abandoned the Trans-Pacific Partnership, the free-trade pact with a bloc of 11 countries, mostly in Asia.
The Rayong factory isn’t Harley’s only overseas operation. It also has plants in India (to avoid a 100 percent tariff on imported motorcycles) and Brazil (to take advantage of an economic free-trade zone).
Harley is hardly unique in this regard. Many OEMs, particularly in the automotive industry, operate assembly plants throughout the world to avoid tariffs and gain tax advantages. The U.S. has benefited greatly from such investment.
The irony of the Harley situation is that it once advocated the same tariffs it now decries. In the early 1980s, Harley was struggling financially. Kawasaki, Honda and other Japanese OEMs had put a dent in Harley’s sales, and, like today, the U.S. motorcycle market was down. Taking advantage of its position as the last remaining U.S. motorcycle manufacturer, Harley persuaded the Reagan administration to impose tariffs on imported bikes. The tariff was increased from 4.4 percent to 49.4 percent for one year. The tariff would then decrease gradually over the next four years. Ultimately, Harley recovered and the tariff regime ended early.
Will the latest round of tariffs help or hurt U.S. manufacturers? Probably neither.