This week Donald Trump criticised well-known US motorcycle firm Harley-Davidson over its proposed plans to shift production away from the US. Such a move was proposed to avoid the recent EU tariffs placed on US goods in retaliation to Trump’s own raising of US duties on steel and aluminium imports, allowing Harley-Davidson to continue to expand into the international market largely unhampered. Being the opposite of what Trump originally wanted – American companies prospering in America and feeding the economy – Trump said the company had become “the first to wave the white flag”.
The words ‘what did you think would happen’ come to mind. I’m no economics student, but if you tell a large international trading organisation such as the EU that you are disincentivising people in your country from buying their goods, they are going to retaliate in kind, namely by making it harder to buy your goods. Not wanting to hurt their business prospects, companies will do whatever to avoid a loss in trade, so it’s a sound decision from Harley-Davidson to move foreign production away from the economic area that is being punished. So much for Trump being a great businessman.
What is even more daunting is the fact that this has happened before in modern history, and it has happened specifically with the US. In 1930, at the height of the Great Depression in America, the US Congress passed the Smoot-Hawley Act, which in effect raised tariffs on twenty thousand imported goods, and which saw a move away from the more open, outward looking America of the post-war Wilson era. Alongside the government telling Americans to ‘buy American’, a phrase that Trump himself has also repeated, the intention was to provide a financial incentive for Americans to buy their own goods, putting money back into the economy, but the Act only exacerbated the effects of the Great Depression as other world powers, themselves still recovering from the effects of the First World War, retaliated by putting tariffs up on American imports, cutting US imports and exports by half.
The Great Depression raged on in this way for another two years before FDR was elected, who duly reversed the tariffs and began to rebuild the country. Given this stark, obvious example of how raising import tariffs can hurt businesses and the economy, it is no surprise that many now are forecasting Harley-Davidson to be the first of many to at least partially leave the US for pastures cheaper.
The lesson is also one that we in the UK should be wary of. With more and more companies like BMW and Airbus threatening to downsize their UK operations in the event of a ‘hard’ Brexit, it is plain to see that reverting to WTO trading rules with the EU is a parable with a tariff hike; whilst there are no tariffs on trade between EU member states, the average non-agricultural tariff the EU imposes on countries under the WTO is 2.3%, but this can go up to as much as 10% for things like cars, like those assembled in Derbyshire by Toyota. If we revert to WTO rules post-Brexit, trade will not stop, but we may see exports and UK-based companies take the hit.