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Trump’s Tariffs Cause Harley-Davidson to Move Overseas

August 27, 2018/in Articles /by Brittany Hunter

For months, economists have warned of the potential consequences of engaging in a global trade war. And yet, President Trump has pressed on with his tariffs in an attempt to compel consumers to “buy American.” Imposing a 25 percent tariff on imported steel, and a 10 percent tariff on imported aluminum, this new trade policy has dealt a blow to the global economy.

Originally, Trump had said that the European Union would be excluded from these trade restrictions, but this has since changed. And unfortunately, imposing tariffs on materials purchased from the EU has now resulted in one beloved American company moving its manufacturing abroad.

On June 25th, the motorcycle brand Harley-Davidson filed with the Securities and Exchange Commission, disclosing its intent to move a portion of its manufacturing facilities overseas. Currently, the giant of the motorcycle world manufactures its products in the Rust Belt. However, with the escalation of Trump’s trade wars, the company is moving some of its facilities to Europe to save money and avoid losing its foreign consumer base.

Unfortunately, other countries do not take kindly to trade barriers being arbitrarily placed on imported goods. And in many instances, when these types of policies are instituted, foreign countries respond by creating their own tariffs on American goods in retaliation. This is exactly what is happening now. The European Union is moving forward with new tariffs targeted at American products including denim, orange juice, bourbon, motorcycles, peanut butter, motorboats, and cigarettes.

For companies like Harley-Davidson, who do a lot of business in Europe, this presents a huge problem. In fact, the new tariffs are expected to increase the cost of a motorcycle exported to the EU by $2,200 per bike. Additionally, the new policy is estimated to cost Harley-Davidson upwards of a $100 million each year. This is a huge burden to place on the company.

Unwilling to participate in a war that they did not start, Harley-Davidson made the decision to move some of its manufacturing abroad so as not to alienate its European market. The company’s filing said that passing of this costly burden to the European consumer would result in “an immediate and lasting detrimental impact.” But since it takes almost a year to get a new manufacturing plant setup, the company is still expected to lose anywhere from $30 to $45 million in the process.

While the domestic consequences of this decision are still unknown, it is not out of the realm of possibility to assume that by moving its manufacturing abroad, the company will have to lay off American workers. But what else is the company to do?

Trump has attacked the company for this decision, tweeting:

“Harley-Davidson should stay 100% in America, with the people that got you your success. I’ve done so much for you, and then this. Other companies are coming back where they belong! We won’t forget, and neither will your customers or your now very HAPPY competitors!”

But Harley-Davidson’s decision is a direct result of Trump’s careless trade policies. These tariffs make it more expensive for American companies to get the supplies needed to make their products. This is then coupled with the tariffs placed on American goods abroad, making this a lose-lose situation for Harley-Davidson. They are spending more while also suffering losses since their products are now too expensive for foreign buyers. Trump has tied the hands of the company, along with many others. And as far as consequences go, we are just getting started.

It is very likely that in the coming months, more companies will be forced to make the decision to move manufacturing abroad. And the only entity Trump can blame is himself. Individuals and the companies they represent should be free to trade with whomever they choose.

What Really Caused the Great Depression?

August 18, 2018/in Articles /by Brittany Hunter

The Great Depression is one of the most commonly misunderstood events in American history. While many history teachers have attributed the infamous economic crisis to laissez-faire capitalism, this is simply not the case. But if free market capitalism is not to blame for the worst financial crisis in American history, then what is the real culprit?

The truth of the matter is, the Great Depression cannot be pinned on one particular thing alone. In fact, there were a series of unfortunate occurrences that ultimately led to, and prolonged, the Great Depression. And if we take a closer look at the interventionist policies that were put into place before and during the depression, we will see that the causes can really be boiled down into different causes.

The Austrian Business Cycle

The Austrian business cycle asserts that there are “booms” and “busts” that occur in the market. This cycle begins when the government interferes with monetary policy, inflating the money supply and artificially lowering interest rates, thus, making credit more accessible. This is what happened prior to the Great Depression. In Murray Rothbard’s book America’s Great Depression, he estimates that between the years of 1921-1929, the Federal Reserve expanded the money supply by 60 percent. It is no wonder this reaped disastrous consequences. “Easy money” caused people to borrow and spend without a care of what would happen when the market corrected itself.

The New Deal

There is this belief that by intervening and implementing the New Deal, FDR saved Americans from the depths of the Great Depression. But in fact, the opposite was true. FDR’s New Deal actually prolonged the Depression and made it far worse than it otherwise would have been.

The Wagner Act

After several years of economic unrest, in 1935 the U.S. economy seemed as though it might be in recovery. Unfortunately, this trend wouldn’t last long. Just a few months after the Supreme Court’s decision to uphold the Wagner Act in 1937, which empowered labor unions, industrial production fell and with it, employment rates. In fact, the situation grew so dire, employment rates fell back to the 1931 levels when the Great Depression had just begun. But what is particularly interesting is that employment rates fell even as union membership continued to grow. And with the rise of unions, employers and business owners suddenly became the bad guy. Looking for any excuse to squeeze money from the private sector, the Wagner Act also solidified FDR’s war on the business class.

Read more about the Wagner Act.

The Smoot-Hawley Tariff

Over the last several months, thousands of economists have warned of the negative consequences that inevitably arise from imposing tariffs on foreign countries. Many fear what might happen to the economy if Trump continues his love affair with protectionism. And this fear is not unwarranted or unprecedented.

By the time the Smoot-Hawley Tariff Act was passed in 1930, the market had already experienced an economic bust. Economists had warned that instituting new tariffs would result in the economy falling further into a recession. The American Economic Association was so concerned about the impacts that Smoot-Hawley might have, 1,028 of its members even signed and published a statement opposing its passage.

Why The Great Depression Still Matters So Much Today

August 11, 2018/in Articles /by Brittany Hunter

Why worry about an event that occurred almost a century ago? Because history left unexamined is doomed to repeat itself. And sometimes even then, history still repeats itself. “What is past is prologue,” the old saying goes, but it doesn’t have to be that way.

I have previously spent some time taking a closer look at the root causes of the Great Depression, which are widely misunderstood. While mainstream economists will often attribute the crash of 1929 to unbridled capitalism, quite the opposite is true. Government intervention both caused and prolonged the economic crisis, leaving many Americans financially ruined.

But by understanding the root causes of a historical crisis as severe as the Great Depression, we stand a better chance at recognizing the potential for similar events to occur today. And if we know what warning signs to look for, we also stand a better chance at preventing future economic crises from occurring altogether.

In fact, there are two modern examples that perfectly demonstrate the importance of heeding history’s warnings: the housing crisis of 2008 and Trump’s recent trade wars.

The Housing Crisis

The 2008 housing crisis, had many similarities to the Great Depression. But unfortunately, many mainstream economists failed to recognize the warnings signs. Had they been paying closer attention, we may have been able to avoid, or at the very least lessen the impact of, the Great Recession.

Like the Great Depression, the housing crisis has many contributing factors. But both are perfect examples of the Austrian business cycle in action. Just like the Great Depression, prior to 2008, the government had meddled with the monetary supply, artificially lowering interest rates and increasing credit, making it accessible to more people.

This resulted in many people making the decision to purchase a home, and why wouldn’t they? In the short-term, this seemed like a smart idea since interest rates were so low. For a manageable monthly payment, they could own a brand new home, which is more than many thought they would ever be able to afford. But they failed to realize that the low rates were only temporary. Eventually, the regular rates would go back into effect, significantly increasing monthly mortgage payments.

But with each new home loan approved, the housing bubble grew even larger, until eventually, it popped. With new homeowners unable to make their monthly payments, many were left with no option but to foreclose. And with so many people defaulting on their home loans all at once, the bubble burst and the Great Recession was born.

If the elected officials and mainstream economists in 2008 would have paid attention to the Austrian business cycle, they would have recognized what was about to happen. And to be sure, there were many Austrian economists who warned of the coming crash. They were, however, laughed at and dismissed as crazy by the media and other economists.

Tariffs and Trade Wars

Unlike the housing crisis, Trump’s trade wars can still be stopped before they do any further damage, if those in power make the right decisions. Over the last several months, economists from all camps have warned Trump that tariffs on foreign imports would spell disaster for the American economy. The president has been an advocate for protectionist policies, that he believes will boost the American economy by forcing consumers to “buy American,” thus creating more jobs domestically.

But tariffs do not serve to benefit anyone and our economy will most certainly be in extreme trouble if we engage in any actions that bring us closer to a full-blown trade war, as the Great Depression taught us.

In fact, economists have likened the new tariffs to the infamous Smoot-Hawley Tariff, which, as discussed previously, exacerbated the downfall of the economy in the earlier days of the Great Depression by increasing the rates of unemployment. We already know how that story ended, so one can only hope that Trump Administration proceeds with caution lest we end up in a similar position.

The new tariffs, which will focus on Chinese imports, has not gone into effect yet, which means there is still time for President Trump to change his mind. Hopefully, he studies history before engaging in a trade war that could cost many Americans jobs.

Trade Wars Lead to Depressions, Just Look at History

August 7, 2018/in Articles, News /by Brittany Hunter

Tariffs seem to be the topic on everyone’s minds these days, as Trump’s trade war continues. But as we contemplate the consequences that such protectionist policies may have on our modern economy, we would be wise to take a sober look at history. For if we take a closer look at the causes that led to, and prolonged, the Great Depression, we will find that tariffs played a most important and destructive role.

Smoot-Hawley Tariff

As mentioned previously, the Austrian business cycle teaches us that economic booms and busts will always occur when the state meddles in the economy. But the situation tends to grow much worse and lasts much longer the more governments intervene and try to correct their mistakes. This is exactly what happened with Smoot-Hawley.

The statement contained the following concerns:

“We are convinced that increased protective duties would be a mistake. They would operate, in general, to increase the prices which domestic consumers would have to pay. A higher level of protection would raise the cost of living and injure the great majority of our citizens.

Few people could hope to gain from such a change. Construction, transportation and public utility workers, professional people and those employed in banks, hotels, newspaper offices, in the wholesale and retail trades, and scores of other occupations would clearly lose, since they produce no products which could be protected by tariff barriers.

The vast majority of farmers, also, would lose through increased duties, and in a double fashion. First, as consumers they would have to pay still higher prices for the products, made of textiles, chemicals, iron, and steel, which they buy. Second, as producers, their ability to sell their products would be further restricted by barriers placed in the way of foreigners who wished to sell goods to us.

Our export trade, in general, would suffer. Countries cannot permanently buy from us unless they are permitted to sell to us, and the more we restrict the importation of goods from them by means of ever higher tariffs the more we reduce the possibility of our exporting to them. Such action would inevitably provoke other countries to pay us back in kind by levying retaliatory duties against our goods.

Finally, we would urge our Government to consider the bitterness which a policy of higher tariffs would inevitably inject into our international relations. A tariff war does not furnish good soil for the growth of world peace.”

Unfortunately, all these fears came to fruition, which is what inspired modern economists to invoked the 1930 statement in their own recent letter to President Trump. Many hope that if Trump understands how this tariff contributed to the Great Depression, he might be more cautious about repeating history’s mistakes.

Tariffs and The Great Depression

Like Trump’s recent tariffs, Smoot-Hawley was supposed to incentivize consumers to “buy American” by placing high tariffs on foreign goods. And by forcing Americans to buy domestically, the government believed they could solve the unemployment problem. But instead of helping the economy and creating jobs, the tariffs ignited a global trade war. As Lawrence Reed writes:

“They ignored an important principle of international commerce: trade is ultimately a two-way street; if foreigners cannot sell their goods here, then they cannot earn the dollar they need to buy here.”

As America’s new tariffs began reeking havoc on foreign economies, governments overseas began imposing their own tariffs in retaliation. But all this trade war meant that foreign countries were not buying American goods, especially agricultural products. Smoot-Hawley resulted in farmers losing ⅓ of their customers, which signaled the beginning of the decimation of the American agriculture industry.

This, in turn, then led to President Hoover’s plan to save American agriculture through subsidies. Hoover’s administration began allocating millions of dollars to the farmers whose livelihoods he had ruined by signing Smoot-Hawley. These handouts only served to worsen the situation, however, as higher income tax rates were imposed on the American people in order to pay for these subsidies.

And worse still, these subsidies did nothing to help the agriculture industry, which would continue to plummet as the depression continued. In fact, agriculture would continue to play a major role in the depression. Just a few years after Smoot-Hawley, President Roosevelt would propose his own plan to save the agriculture industry as part of his New Deal. Of course, this would also prove to have disastrous consequences, as we will see in the next installment.