In this segment from MarketFoolery, host Chris Hill and Motley Fool Pro's Jeff Fischer discuss trade imbalances, trade wars, and the latest company to face the tweeted ire of President Trump: iconic U.S. motorcycle manufacturer Harley-Davidson (NYSE: HOG).
In the wake of the Trump administration's decision to impose tariffs on aluminum and steel, among other products, the European Union responded with tariffs of its own that would have made U.S. motorcycles far less competitive there. So Harley said it would start building bikes for Europe in Europe. What followed is a situation that illustrates the challenges of the current political climate for businesses of any size, from mom-and-pop operations to multinational titans.
A full transcript follows the video.
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This video was recorded on June 26, 2018.
Chris Hill: We have to start once again with Harley-Davidson, which continues to be in the spotlight. Yesterday, we talked about Harley-Davidson looking to move production outside the U.S. because of the tariffs from the E.U. adding $2,200 per motorcycle. This morning, President Trump going on Twitter and threatening Harley-Davidson, and saying, and I'm quoting here, "If they move, it will be the beginning of the end. They will be taxed like never before." I saw this, Jeff, and I just sort of shook my head and said, yeah, we called this just a couple of weeks after the election.
Jeff Fischer: He is threatening Harley, just like he threatened The Motley Fool back in the late 90s.
Hill: That's true. You were there.
Fischer: When we were short his stock. He said, "You are going to be so wrong. We're going to refinance the debt and the stock's going to soar."
Hill: By the way, that didn't work out.
Fischer: It didn't work. They did go bankrupt. But, he persuaded us to close the short. We had a nice gain, a 60% gain on it, when we closed it. Harley, though. $2,200 extra per bike these tariffs would cost if Harley made them in Minnesota and then shipped them to the E.U. because of the new E.U. tariffs on them. That amounts to, Chris, about $88 million a year in lost revenue to Harley, which already, they say, would decrease their earnings per share the next year by 5-6%, which is a large amount. If you start talking about earnings per share flattening out for just, say, the S&P 500 or many companies, let alone going down, the stock market will not be a pretty place for quite a while. So, yeah, they're looking to move some production overseas. Europe is their second largest market, I think it's about 15%.
Hill: And growing.
Fischer: And growing, nicely. So, move some production there to serve that market, makes sense. The tax threat, one of the tweets, not the threat, but after or before it --
Hill: There were several tweets about Harley-Davidson this morning.
Fischer: [laughs] It said, "If they think they can make bikes overseas and bring them back, they'll be taxed extremely when they bring them back." Well, that's not Harley's plan. They'll keep the U.S. production in the U.S., and have some in Europe, as well.
Hill: Earlier, when I said we said this was going to happen, what I'm referring to -- longtime listeners may remember this -- within the first few weeks after Donald Trump was elected president, late November, early December of 2016, before he was sworn in and he was taking to Twitter and attacking Amazon and all these different companies, one of the things we talked about on this podcast was, look at your portfolio. Everybody look at your portfolio. And know that for the next four years, for any reason, this could happen to any stock you own -- the President taking to Twitter, and for whatever whim he has, decides, "I'm just going to take a shot at this public company. For slights real and imagined, I'm going to attack this company, and the stock will drop."
Fischer: It's fairly unprecedented. That's certainly true. And it's whether you're Little Red Hen or Harley-Davidson, you can be any size.
Hill: Yeah, if you're a small restaurant in rural Virginia or you're a public company managing an iconic American brand, it could happen to you.
Fischer: It could be kind of fun, if you were president, and you're like, "This morning, my coffee from Peet's Coffee on 7th Street Northwest was not hot enough! Those guys are Un-American!"
Hill: It could be.
Fischer: Let's talk about the trade deficit, which is the target of what's happening right now, and a lot of concern in the stock market, too, because of the tariffs that are happening. It's a tough battle, to be sure. The U.S. total trade deficit as of last year was only 2.8% of our GDP. It's small. It's only about $500 billion. And China is around 70% of that deficit. So, rightly so, the focus is on China.
But keep in mind, the U.S. has a $19 trillion economy GDP, and China has $12 trillion. Our economy is much larger. You would expect a trade deficit with basically almost every country in the world, given that we have the largest economy by a multiple compared to most countries. We're going to be able to buy a lot more than we sell to these countries. You have to keep in mind, China for years has bought U.S. treasuries and supported us in other ways other than just trade. So, if your relations turn south, they could start to let our debt interest rates rise. They could do all sorts of other things if they're unhappy with us.
But, it's a small number. To make it the battleground is tricky. So many studies show that if you put tariffs on products, you're very likely to lose more jobs than you gain, at least the way we're doing them right now. The U.S. put tariffs on steel and aluminum and whatnot, but the number of jobs in this country that produce steel, say, it's fewer than 20,000. The number of jobs affected by steel prices going up is in the hundreds of thousands. So, when your input costs are going up and you only output a little bit of the commodity, it's a net loss. So, it's a tricky game. I think it's important to try to decrease the consumer electronics and electronics in general pirating that's all over China.
Fischer: Definitely, I agree with that. It's tricky. This is one way to try to put the squeeze on China and Europe and everyone else, but the repercussions --
Hill: But, yeah, if you're the CEO of Harley-Davidson, you're like, "What did I do?!"
Fischer: [laughs] Exactly! Or if you're soybeans, or bourbon. Bourbon! Jeez! The repercussions could reverberate for some time to come. We're just starting to see them trickle out with Harley lowering its earnings guidance, for instance.
Hill: Also just a little bit surprising when you look at, in the years before he was president, the merchandise that was produced that bore Donald Trump's name, most of it was made overseas. So, there's that, too.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Chris Hill owns shares of AMZN. Jeff Fischer owns shares of AMZN. The Motley Fool owns shares of and recommends AMZN. The Motley Fool has a disclosure policy.