EU tariff retaliation throttles Harley-Davidson

Europe has it in for Harley-Davidson.

The iconic American company is accustomed to seeing tariff code 871150 – i.e., a bike with an engine over 800 cc – on “hit lists” drawn up by the European Union (EU). But not like this. Last week, Brussels informed Harley-Davidson that the bikes it makes in Thailand will now be treated as if they were built in the U.S. This means they will pay the full price of EU retaliation over President Trump’s steel and aluminum tariffs. On June 1, this tariff will rise from 25 percent to 50 percent, effectively blocking Harley-Davidson from its second-largest market.

Many U.S. exporters have been hurt as collateral damage in this trade war, but the EU is going out of its way to beat up Harley-Davidson.   

First, some background. In 2017, Harley-Davidson announced that it would build a plant in Thailand, its third offshore production facility after Brazil and India. The decision made sense from a trade perspective. Thailand’s tariff on 871150 is a stunning 60 percent. Worse still, it’s not even bound under Thailand’s commitments at the World Trade Organization (WTO), meaning there is no legal limit on how high this tariff can go. To skirt this risk, Harley-Davidson engaged in “tariff-skipping foreign direct investment,” making some bikes in Thailand to avoid wild fluctuations in import duties. The company used this same strategy in India, which has a whopping 100 percent tariff on 871150, and no bound rate.

Like Brazil, Thailand is an export platform, linked through trade deals with Australia, India, Japan, New Zealand, Peru and the Association of Southeast Asian Nations (ASEAN). Even more is in the works. Thailand wants in on the Trans-Pacific Partnership (TPP) and the Regional Comprehensive Economic Partnership (RCEP), which includes China. For Harley-Davidson, all of these trade deals provide better market access than what the company gets when it sells from the United States.

Then, in 2018, under the guise of “national security,” President Trump slapped tariffs on steel and aluminum from Europe and eight countries outside Europe. Like several others, the EU retaliated with its own tariffs. As usual, 871150 was on Brussel’s hit list. This meant Harley-Davidson bikes faced a 25 percent retaliatory tariff on top of Europe’s 6 percent most-favored nation (MFN) duty.

At first, Harley-Davidson vowed that it would not pass this extra $2,200 per bike on to consumers, but this wasn’t sustainable for long. Plan B was to “shift production of motorcycles for EU destinations from the US to its international facilities to avoid the tariff burden.” This, in short, meant exporting from Thailand. That’s where things get really interesting.

Is a bike manufactured in Thailand using U.S. parts a Thai or a U.S. bike? Until now, the EU has treated Harley-Davidson’s exports from Thailand as Thai, subjecting them only to Europe’s 6 percent MFN tariff, not the 25 percent retaliatory tariff. But Europe has had a change of heart, rescinding the ruling that Belgium’s customs authority has rendered five times in the past two years. As a result, since April 19, Harley-Davidson’s bikes from Thailand are being hit with a 31 percent tariff (i.e., 6 percent MFN plus 25 percent retaliatory), going up to 56 percent on June 1 (i.e., 6 percent MFN plus 50 percent retaliatory).

What changed? Not the way Harley-Davidson makes its bikes in Thailand.

Now Brussels says Harley-Davidson’s work in Thailand is not “economically justified.” It argues that the company is trying to do an end-run on its retaliation. EU Regulation 2015/2446 says when Brussels can extend “preferential tariffs” to countries, but it’s a stretch to apply this to retaliatory tariffs, let alone ones that are WTO illegal. The EU is waging an anti-circumvention case as if it were enforcing an antidumping duty. It’s not. EU Decision 2021/563 even concedes that tariff circumvention “may not necessarily be the only purpose of the shift of production.” Why is Brussels suddenly overruling five decisions reached by Belgium’s customs authority in two years? 

The reality is that the EU is giving President Biden one last chance to drop the steel and aluminum tariffs. No one expected him to do this on his first day in office, but it’s doubtful that Europe thought it would take long. For Commerce Secretary Gina Raimondo to call these tariffs “effective” only added fuel to the fire.

Harley-Davidson can fight back in court. Thailand should lend its political support, since the tariffs could deter some foreign direct investment that the country might expect as a result of reaching an EU-Thailand trade deal.

The big picture is that Biden needs to end the steel and aluminum tariffs. The EU has to make concessions too, since its retaliatory tariffs are also illegal under the WTO. Both sides are in need of a face-saving way out of this mess. In the spirit of supply-chain security among allies, this tariff insanity has to end.

June 1 is just around the corner, and yet another round of transatlantic tariffs is coming in July if the aircraft dispute isn’t resolved. It’s time to get creative.

Marc L. Busch is the Karl F. Landegger Professor of International Business Diplomacy at the Walsh School of Foreign Service at Georgetown University, a nonresident senior fellow at the Atlantic Council and host of the podcast TradeCraft.