26 Jun 18

Trump 'surprised' at negative effects of trade war

Is Trump's trade war with the rest of the world getting out of hand? He himself seems to think so, expressing his 'surprise' at Harley-Davidson's decision to move some of its production overseas. Yet that doesn't seem to blunt the U.S. president's enthusiasm for further punitive measures. 

The U.S. motorcycle manufacturer's decision, on Monday, was a fairly predictable result of the recent tariffs imposed by the U.S. on foreign steel and aluminium products, including from the European Union.  

Iconic products
In retaliation, the EU imposed tariffs worth about $3 billion of its own, including on iconic American products as bourbon, blue jeans and Harley-Davidson motorbikes (pictured). Specifically, EU import duties on Harleys imported from the U.S. would rise from 6% to 31%, adding around $2,200 to the cost per unit for EU consumers. 

With 40,000 units sold last year, or 16% of overall sales, the EU is Harley-Davidson's biggest foreign market. If it undertook no action, the company would see its full-year profits reduced by up to $100 million, or 15% of the total. On Monday, the first trading day after the announcement of the tariffs, Harley-Davidson shares sank by nearly 6%.

So it stands to reason that the company would take steps to avoid these tariffs, by shifting its production for Europe to one of its non-U.S. plants (in India and/or Brazil). If this trend is repeated throughout other targeted industries, the net result of Trump's tariffs could be jobs lost instead of saved. 

20% tariff
Yet the president has more tariffs other trade sanctions up his sleeve. On Friday, Trump threatened a 20% import tariff on vehicles assembled in the European Union. This would spell major trouble for most European OEMs, especially for niches such as European-manufactured convertible cars – especially from the high-end German brands.

The U.S. and the UK, alongside Germany itself, are the main markets for convertibles. With Brexit already complicating the British market, Trump's tariffs raise a barrier to growth for this segment on the American market. A global shrinkage of the convertible market is now a plausible outcome. 

BMW, Mercedes-Benz and VW all have plants in the U.S. itself, meaning that the high-volume SUVs, crossovers and sedans manufactured there will be exempt to U.S. tariffs – although higher tariffs on imported steel and vehicle parts will have a significant effect on the manufacturing cost. 

Niche market
However, those plants are not flexible enough to switch to foreign models that will be hit by those tariffs. Increasing the U.S. import tariffs on European cars – currently at 2.5% - would virtually eliminate a niche market already in decline: from 177,000 units in 2012 to 127,000 in 2017. Even without tariffs, the forecast for 2019 was for 113,000 units sold.  

And that's not counting the effect of the other front in Trump's global trade war. Punitive measures imposed on China would most likely lead to retaliatory tariffs which will hit U.S. car exports to China – of which German manufacturers represent the majority. 

And, true to form, Trump is picking a trade fight with China as well. The U.S. president plans to bar a number of Chinese companies from investing in U.S. technology sector and block U.S. tech companies from exporting a number of products to China. Motivated by concerns for America's economic and national security, the aim of both measures is to prevent the transfer of technological know-how, developed in America, to China.

Tit for tat
If successful, the U.S. policy could thwart 'Made in China 2025', Beijing's ambition to become a global leader in 10 technological sectors by the year 2025, among which electric mobility.  

However, it is expected that China will launch punitive steps against U.S. companies operating in China. Many observers are concerned that a tit-for-tat exchange of retaliatory countermeasures could escalate much further beyond the present scope. The result of Trump's two-front trade war – ostensibly to protect America's economic interests – could be a lot more 'surprises' of the Harley-Davidson kind, and a lot worse. 

Authored by: Frank Jacobs