ITR Experts Say: File It Under Unintended Consequences...

On Monday, June 25th, Harley-Davidson Inc. announced it would be moving some of its domestic production of European Union bound bikes overseas. Harley-Davidson cited recent retaliatory tariffs from the EU, which came in response to US tariffs on imported steel and aluminum from the EU, as a driving force behind the decision. The American icon shifting production out of the United States despite, and apparently due to, tariffs that are supposed to protect domestic industries is a perfect example of the unintended consequences that crop up when engaging in a protectionist policy.

The first and most readily visible negative consequence of protectionism is inflation, something that even proponents of tariffs will sometimes admit is a side effect (though they will discount it as a necessary sacrifice and one that helps domestic producers). Domestic and international buyers of Harley’s will certainly face inflation; the prices of aluminum and steel inputs that go into the bike's construction have gone up markedly in recent months. In this case, the impact does not end here, as the elevated input costs and associated margin pressure was then compounded when Europe responded to US tariffs by imposing their own tariffs on US products. Harley-Davidson sold nearly 40,000 new motorcycles in Europe in 2017 and claimed the tariffs would cost the company up to $100 million a year. Is it possible that Harley-Davidson was already considering moving some of its domestic production abroad as part of their longer-term planning? Certainly. However, recent tariffs and counter tariffs surely made it an easier decision to make.

This undesirable outcome is another step beyond direct inflation and one that ITR speakers have been cautioning as a possibility when speaking at events out on the road during the past few months. Not only are consumers feeling the pinch directly, but we are now seeing impacts on downstream production in the American manufacturing space – the group that is supposed to benefit most from tariff protection. Any corporation has a fiduciary responsibility to shareholders to best navigate the headwinds that come their way, even if they come in the form of government interventionism. In this case, and possibly more in the future, it resulted in outsourcing some production to another country to circumvent the tariffs. For now, we will file it under ‘Unintended Consequences’.

Connor Lokar
Economist