Harley-Davidson Crashes Into Trade Policy

Trump's trade war is starting to take an economic toll.

The trade spat between the US and the EU may have claimed its first casualty. In June, motorcycle maker Harley-Davidson announced it would transfer some production overseas. The Milwaukee-based company blamed retaliatory EU tariffs that had increased the tax on bikes imported from the US from 6% to 31%. The tariffs add $2,200 to the cost of the average Harley. “The tremendous cost increase, if passed on to our dealers and customers in the EU, would have an immediate and lasting negative impact on our business,” the company said in a statement.

The EU measures answer steel and aluminum import tariffs brought into force by the US in early June. “We are very concerned by the damage a tit-for-tat dispute would cause to the transatlantic economy,” said Susan Danger, CEO of the American Chamber of Commerce to the EU, “and its impact on jobs, investment and security across the Atlantic.”

Her concerns are well-founded. The Trade Partnership, a trade and economic policy consulting firm, predicts total retaliatory tariffs will climb to more than $35 billion. The cost, it estimates, will be a 0.2% drop in US GDP in the short term and a loss of as many as 400,000 jobs.

Thus far, the administration is ignoring such cautions. President Trump, who last year praised Harley for “building things in America,” reacted badly to the manufacturer’s decision, saying it could expect a “big hit.” In truth, the hit has already come. In an April earnings call, CFO John Olin said higher steel and aluminum prices will add $15 million to $20 million to its raw material costs. Moving production will not be quick enough to blunt the impact.

“Currently, the firm can utilize its India and Brazil CKD factories to support demand, with a facility in Thailand expected ahead,” says Jaime Katz, a senior equity analyst at Morningstar. “But this will likely come with an incremental investment and could take more than a year to complete.”

In the meantime, Standard & Poor’s Global has placed Harley’s A- credit rating, currently four notches above junk, on credit watch, citing profit margin deterioration due to rising costs.