Media  Global Economy  2018.07.17

Trump is enraged by Harley, but he deserves it as a result of his own actions. - Harley transfers their factories for motorcycles to be exported to the EU to outside the US. What happens in the motorcycle industry will happen in the auto industry.

The article was originally posted on Webronza on July 2, 2018

Chain reaction to the raising of tariffs

As a countermeasure against the Trump administration raising the tariffs on steel and aluminum, the EU raised the tariffs on motorcycles exported from the US, including those manufactured by Harley-Davidson. Harley-Davidson announced that it would transfer its factories for motorcycles to be exported to the EU to outside the US, because its costs would exceed its profit if the tariffs on motorcycles to be exported from the US to the EU are raised from 6% to 31%.

President Trump has been inflamed with rage, since he had previously flattered Harley-Davidson as a role model for US companies. He has now attacked the company, saying "If they will move, watch, it will be the beginning of the end- they surrendered, they quit! The (company's) Aura will be gone and they will be taxed like never before." Moreover, he has threatened the EU by stating that he will raise the tariffs on cars from 2.5% to 20%.

Originally, Harley-Davidson's action was caused by the Trump administration raising the tariffs on steel and aluminum. The government raised them one-sidedly without offering any compensation measures for those countries adversely affected by the rise.

Did President Trump think that the affected countries would just endure it, doing nothing for fear of the power of the US?

When a normal administration plans a policy, it takes into consideration how those countries likely to be affected by the policy will respond. If the administration thinks that their response will cause a great deal of damage to its own country, then the administration will suspend the planning of the policy.

The Trump administration seems different from any other US administration so far.

Presidential Assistant Peter Navarro, an advocate of the "China threat theory," takes the leadership

Mr. Navarro, an assistant to President Trump, seems to be taking the leadership in a series of trade measures, ranging from raising the tariffs on steel and aluminum to raising the tariffs against China.

He has insisted the so-called "China threat theory" asserting that China's economic activities will destroy the US's employment and economy. He is a professor emeritus at the University of California, Irvine. During the presidential election in 2016, he was said to be the only economist who supported candidate Trump.

The US raised the tariffs on steel and aluminum arguing that China's overproduction of steel resulted in a decrease in steel prices worldwide. Therefore, this series of increases in tariffs seems to reflect the insistence of Mr. Navarro who is an advocate of the China threat theory.

When Mr. Navarro was interviewed by PBS TV in the US before the presidential election, he showed the identity equation, "GDP = consumption + investments + government expenditures + (exports - imports)," and insisted that if a country increases exports while decreasing imports, its GDP will increase. The Trump administration, for which Mr. Navarro is taking the leadership in planning trade policies, seems to think that if the US raises tariffs while decreasing imports, its GDP will increase.

The same thing will happen in the auto industry

This may be true if the US measures do not cause any reaction from other countries. However, even if we engage in Mr. Navarro's discussion, the US exports will decrease and its GDP will decrease accordingly if the affected countries impose tariffs on imports from the US as a countermeasure.

In addition, if the US raises the tariffs on steel and aluminum, this will raise their domestic prices, which will then raise costs in the industries where they are used as raw materials, resulting in lower competitiveness of those industries. Harley-Davidson should have had a problem of production in the US before the EU raised the tariffs on motorcycles.

Because the US raised the tariffs on steel and aluminum, but did not raise the tariffs on motorcycles, Harley-Davidson faces fierce competition from other countries' motorcycle manufacturers that use inexpensive steel and aluminum, and export their products to the US. In addition, because Harley-Davidson has to use expensive steel and aluminum, it will be difficult for the company to compete in the global market including the EU. The Trump administration itself destroyed the level playing field for Harley-Davidson. The EU raising the tariffs on motorcycles has only worsened this situation.

President Trump could have issued an order to put up with the situation if he had given Harley-Davidson enough subsidies to offset the raising of tariffs on steel and aluminum. Imports of steel and aluminum may decrease, but the competitiveness of the US motorcycle and auto industries will also decrease, resulting in a decrease in exports and an increase in imports. This will result in a decrease in GDP according to Mr. Navarro.

A phenomenon that occurs in an economic field has an impact on other fields. If a car manufacturer tries to increase production, the production of steel plates, electrical equipment, and other raw materials will also increase, which then will create ripple effects. Has the Trump administration understood this ordinary economic process?

As a countermeasure against the US, which had announced that it would increase the tariffs on Chinese products worth 50 billion dollars by 25% because they had violated intellectual property rights, China announced that it would increase tariffs on US products worth the same amount, including cars and farm products, by the same rate. Although China's countermeasure has not yet been carried out as of July 2nd, China's importers have cancelled the import of US soybeans. As a result, the price of soybeans exported from US ports, 349 dollars/ton, is now 12% lower than 398 dollars/ton, the price of those from Brazil.

Secretary of Commerce Ross has made a statement to the effect that because the US exports to China are smaller than China's exports to the US, China will have to surrender first if both countries retaliate against each other. However, there is no rule that, as a countermeasure, China must not impose more tariffs on US imports than those instituted by the US. If the US increases tariffs on certain amount of imports from China by 25%, China can increase tariffs on less amount of imports from the US by 50%.

On the other hand, the Harley-Davidson employees who support Trump have not wavered in their support. Rather, they have criticized the EU's and their company's response. At least until the midterm elections this autumn, President Trump will try to maintain these drastic trade measures. Rather than stopping there though, he seems to think he can increase his supporters by making the trade measures even more drastic.

What happened to Harley-Davidson may happen to the auto industry, which has been placed in a similar situation. If China greatly increases the tariffs on cars as a countermeasure, how will the US auto industry respond? Will the industry do nothing but put up with it for fear of President Trump?

(This article was translated from the Japanese transcript of Dr. Yamashita's column in "Webronza" on July 2, 2018.)