TariffWatch Continues: Harley Woes Edition

As TariffWatch continues, I had 16 browser tabs opened to different reports about the effects of proposed tariffs on companies just from this past week! On Tuesday, Donald Trump tweeted, "We are finishing our study of Tariffs on cars from the E.U. in that they have long taken advantage of the U.S. in the form of Trade Barriers and Tariffs. In the end it will all even out - and it won’t take very long!" What exactly “even out” means is very much under debate, but what isn’t being debated is the fact that nobody outside the Oval Office wants any sort of tariffs to happen, and that all projections suggest a really bad outcome for everyone.

Having previously threatened as much as a 25% tariff on vehicles assembled outside the United States, Trump changed his mind a bit again last Monday, saying maybe just 20% will do. What it will actually do is raise prices, by quite a lot. Assuming the 25% tariff, consumers, to whom the additional cost would be passed, would face an average of $5,800 added to every car, totaling about $45 billion in extra taxes paid every year. This is applied to all vehicles considering the steel and aluminum tariffs and anticipated tariffs applied to auto parts used to assemble cars within the U.S.

German luxury vehicles would be the models hit the hardest, since their high prices mean the tariffs would drive their costs to consumers to truly untenable levels. This not only means fewer sales, it means we could start seeing manufacturers start withholding their cars from the American market. According to Reuters, the tariffs would destroy the business case for niche market vehicles like convertibles and sports cars, which are sold in low volumes and for high prices. If companies can’t sell them and can’t make money on them, why produce them? Or at least why send them to America? Hell, even the very American Toyota Camry, the best selling car in the country, would see its price increase $1,800.

Ostensibly, these tariffs are meant to harm German manufacturers, which they would, to the tune of around $5.24 billion, according to analysts at Evercore ISI. But it’ll hurt other manufacturers, including American ones, especially FiatChrysler, whose profits would take an $886 million hit if the 25% tariff is enacted.

But it’ll create jobs, right? Well, the Council on Foreign Relations estimates that the 25% tariff will actually cost the country between 18,000 and 40,000 auto industry jobs just by the end of next year as companies look for ways to lose less money. And that’s the most conservative study! The American Action Forum estimates a net decrease of 157,000 jobs while the Peterson Institute for International Economics is even more dire, suggesting 195,000 industry jobs will be cut. And that study goes on to suggest if other nations retaliate with tariffs, as is expected, the total industry loss would be around 624,000 jobs.

While this tariff isn’t yet in place and may not be enacted if anyone can talk any sense into Trump and his advisers, the tariffs placed on aluminum and steel are already wreaking havoc on American companies. After their metals were taxed, the European Union responded with tariffs of their own on blue jeans and Harley-Davidson motorcycles. They probably would’ve taxed apple pie too, if that were feasible.

Unfortunately, Europe is Harley’s second biggest market, where they sold more than 40,000 bikes last year, and an increase of between 6 and 31 percent in Europe means their bikes are going to run on average $2,200 more expensive, which is a tough sell. They were already hurting from the steel and aluminum tariffs, which caused costs to rise $15-20 million and the tariff is added an additional $35-40 million to that just this year. Next year they expect to lose more like $80-100 million.

To counteract this, Harley announced that they would move some manufacturing to Europe to avoid the tariffs, which is sort of the exact opposite effect I think Trump was hoping these taxes would have. Previously having called Harley a true American icon, Trump engaged in one of his wildly incoherent tweetstorms, ending with a threat that the company would lose their aura and be hit with taxes like never before. Well, they already are, and it’s your fault, buddy.

Honestly the most terrifying part of all of this is the fact that, while we’re over here slamming doors and storming off to build walls, China announced this week that after July 28th, they will roll back foreign ownership restrictions on joint ventures in the country. After decades of requiring companies from other countries to find a Chinese company to take the lead when they wanted to sell their cars in China, the country is saying, “Hey Tesla, BMW, everyone else! I know you’re getting a raw deal over there in America, why don’t you have a seat over here. We’re keeping it nice and warm for you.”

When even Toyota has to issue a public comment stating that its 137,000 employees in the U.S. don’t pose a national security risk, you know something is backwards, and what that is, is progress. What, I think in many people’s mind, made America great was its role as the guiding force in international commerce, politics, and trade. Now we’re seeing China step up and challenge us for that role and instead of forging forward as we have, we’re stepping back and saying, “Hey, do whatever you want, we’re fine on our own.” The problem is, in this situation, we're not fine on our own and it’s we the people who pay the price, whether through increased costs or restricted choices. Trade wars are the true enemies of automotive enthusiasts and consumers in general.

Authored by
Devlin Riggs

Trade War Update

Donald Trump this week celebrated a small victory in a preamble battle to the Trade War he wants to start and insists will be easy to win. China announced that they will cut import tariffs for cars from 25% to just 15% starting on January 1. Car parts will be cut from 10% to 6%, which will help lower the cost to build new cars in the country as well. In exchange, the United States has lifted a ban on products from Chinese telecom company ZTE Corporation, which had apparently crippled the company. Set to benefit most from the relaxed tariffs are Volkswagen and luxury car makers like BMW and Mercedes-Benz, who don’t produce cars in China. Tesla also benefits, as do some premium Japanese brands, which will now be able to compete cost-wise on a more level playing field with vehicles produced in China.

This doesn’t particularly help Ford or GM, who have already established extensive production in China specifically to avoid high tariffs, and with the 15% tariff still in place, there isn’t much likelihood brands will magically decide to start producing cars in the States again and ship them over. There’s also some rich irony that the Germans seem to benefit most from the actions of the U.S. President.

Photo by Dilworth Police Department

And while China cuts their import tariffs, Trump heard only the phrase “import tariff” and decided “yeah, that’s a great idea, let’s look into that” and assigned the U.S. Secretary of Commerce some homework. Specifically, Trump wants him to initiate a Section 232 investigation into the import of automobiles, trucks and auto parts to determine their effects on America’s national security. And right now you’re thinking “oh, this is supremely stupid,” but remember, it has happened twice that Ford Fusions from a plant in Mexico were caught in the U.S. loaded down with a bunch of weed that some drug mules north of the border failed to offload, so it’s entirely possible that cars are the single greatest source of drug trafficking in the United States. Or maybe it could be that pot should be legalized and regulated and we wouldn’t have people smuggling it in and that two examples of some incompetent drug cartel don’t exactly signify a trend. In any case, the Commerce Secretary will decide.

But Trump’s call for the investigation itself has been met with widespread condemnation from, well, kind of everyone. It’s being regarded as a waste of time and resources that could end up not only harming our relationship with other countries, but harming American consumers through generating higher prices for goods, much like the tariffs on steel and aluminum have done. Moreover, most consider it a stretch to think that an import tariff has anything to do with national security, with Canadian Prime Minister Justin Trudeau going so far as to say it rests on “even flimsier logical grounds.” Automotive News has a great roundup of all the quotes lambasting the move but the best and most concise probably comes from John Bozzella, CEO of the Association of Global Automakers, who said “The U.S. auto industry is thriving and growing. To our knowledge, no one is asking for this protection. This path leads inevitably to fewer choices and higher prices for cars and trucks in America.” So who’s going to win this Trade War again?

Authored by
Devlin Riggs

In Trade Wars, Everyone Loses

Now, I try not to get to political because my podcast is about cars and not ideologies, but the truth is the automotive industry is heavily affected by the actions of politicians, so every once in a while, those actions are worth exploring if only to evaluate their impact on our favorite past times; cars and driving.

The policies in play this week are all about import tariffs, taxes placed on things made outside the United States for the simple fact that they were not made in the United States. Last week it was steel and aluminum, both of which are critical components in cars and which are rarely made in the United States anymore. China, specifically, is one of the world’s leading exporters of steel and and the theory is that, by imposing a tariff on Chinese steel, companies would rather purchase steel from US steel plants because it’s cheaper, thereby creating jobs in the steel manufacturing sector and leading us all to live happier, more fulfilling lives knowing that we provided people with some work.

The problem with that theory is, companies that use steel don’t exist to create jobs or give everyone a warm, fuzzy feeling inside. Unless that company is Chipotle, companies exist to make money and they will fight tooth and nail for every profit margin possible. That means that, when something costs more to make, they will charge consumers more to buy it, leading to price inflation and a lower quality of life because people have less money after spending it all on whatever they are buying with steel or aluminum in it. Like, for instance beer cans or my beloved Diet Coke.

This week, the conversation turned from raw materials to completed cars, when Trump proposed implementing a tariff on European vehicles, claiming that the US had been treated very unfairly by the European Union. The EU responded by saying they would tax Harley-Davidsons if such tariffs were applied to their vehicles. And let’s be honest, people are not going to go buy a Cadillac instead of a Mercedes just because a 10% import tariff has been applied, they’re just going to pay more for the Mercedes and hate the government.

The apparent issue at the core of this is that Trump thinks that, because the US has a trade deficit, that means that everything is all wrong and we’re losing and everyone else is winning and we need to be the ones winning, when that simply isn’t the case.

Here’s a quick explanation of the trade deficit; I go into Chipotle and I get steak tacos, I have a trade deficit with Chipotle and I have to pay them for the product I received. This is partially because it’s more expensive to go buy the ingredients myself, but also because I am lazy and by having Chipotle do the hard work for me, my quality of life is higher.

And that’s what it boils down to: quality of life. The primary argument for implementing tariffs and reversing the trade deficit is to create jobs, but that effort is doomed to fail because we have things like the minimum wage here, and health and safety rules that make the production of goods more expensive than they can be produced in China or most countries in southeast Asia, where there is little to no worker protection. And why have those regulations in place that guarantee a certain hourly wage and working conditions that aren’t likely to wind up in employees dying? Because we want a higher quality of life. Part of the price we pay for that is a trade deficit, where we consume more than we create, product-wise. What we also get are cheaper goods, access to more and varied items and low inflation.

And now we’re at a point when our chief executive is calling for a trade war that he insists is good and will be easy to win. What we’ll get with a trade war is more expensive raw materials, more expensive products, access to fewer items, higher inflation, higher debt from greater spending on more expensive items and the accompanying high inflation, which will likely increase personal bankruptcies and lead to actually fewer jobs than it will create because we can never truly compete with our trading partners in some sectors. Especially after we learned this week that Americans owe more than $1 trillion in car loans, and we’re borrowing record amounts of money to buy cars, often at deep subprime interest rates, we simply cannot contemplate policies that will only cause us to plunge deeper into personal debt. There’s no such thing as a good trade war, and there are no winners. In a trade war, everyone loses, including us petrol heads.

Authored by
Devlin Riggs