global economics

BCO221 GLOBAL ECONOMICS Task brief & rubrics

Task brief MIDTERM MAKEUP ASSIGNMENT

This is an individual task. Avoid any “copy-paste” practice to prevent possible problems of plagiarism.

Answer the following 3 question (short essay form) and the questions of the case study

1- Explain the concept of the Absolute Advantage, Comparative Advantage opportunity cost. Provide one examples for each (20%)

2- Explain the reasons for protectionism (at least two). Support your explanation with references to theory and examples (20%)

3- Explain and contextualize the two more recent globalization waves. Who are nowadays the winners and losers of the globalization process?

Always refer to the theory and provide evidence-based opinions.

4. Case study

Please read the following case study summary by the Thunderbird School of Global Management last year about Harley-Davidson Inc. and the situation created by the imposition of Tariffs. Then, answer the questions you will find below.

In June 2018, Harley-Davidson, Inc. (NYSE: HOG), the iconic American manufacturer of motorcycles — hogs as they were affectionately referred to — announced that it would shift some United States-based production to a foreign country. Harley explained it had little choice if it was to remain competitive in foreign markets, specifically, Europe. The European Union (EU) had, the previous month, announced an increase in the import duty imposed on Harley-Davidson motorcycles manufactured in the U.S. in retaliation for President Donald Trump’s imposition of increased tarffs on European steel and aluminum. But Harley’s problems went much deeper than simply European import duties. Harley was suffering from a decade-long slump in sales and profitability. Would shifting production out of the U.S. be the solution?

William S. Harley held, from an early age, a fascination with the bicycle and ways to develop it. In 1901, he completed a blueprint of how to fit an engine into a bicycle frame. Two years later, Harley-Davidson motorcycles was founded in a small shed in Milwaukee, Wisconsin, a business venture between Harley and two brothers, Arthur and Walter Davidson.

Harley had to constantly compete in an international marketplace, one where it had to not only fight in foreign markets, but in its home market as well. In 1952, Harley led a complaint with the U.S. Tariff Commission for protection from imports, namely Triumph (United Kingdom), requesting a 40% tax on imported motorcycles. The Commission denied Harley’s request and, in a surprising turn, found Harley guilty of unfair business practices. Harley had tried to shut out foreign competitors from the U.S. market by only selling to dealerships that would not carry competitor products.

Harley continued to grow and innovate. In 1965, the company went public, listing its shares under the stock exchange symbol of HOG, an acronym for the Harley Ownership Group.

Japanese producers created some problems for Harley in the 80’s. In 1982, Harley applied to the U.S. government for protection from Japanese imports. Harley claimed that Japanese manufacturers were exporting motorcycles into the U.S. at such a rapid rate that U.S. manufacturers were being “harmed.” The U.S. International Trade Commission agreed and recommended to President Ronald Reagan in 1983 that a 45% tariff be imposed on imported bikes with engine capacities of 700 cc or more. The tariff put in place was to last for five years, a period considered sufficient for Harley to reorganize and return to competitiveness. Given that Harley was the only U.S. manufacturer of large-engine motorcycles, the law was openly referred to as “the Harley Law.” Harley quickly revived its quality and cost competitiveness, and the company itself requested that the tariff be removed before three years had passed. Part of Harley’s motivation for having the tariff eliminated was, however, in recognition of how fruitless it had proven. Within six months of the tariff launch, the Japanese motorcycle makers introduced a motorcycle with a 696 cc engine for the U.S. market.

By 1985, the Harley Owners Group (HOG) became the largest factory-sponsored motorcycle owners’ group in the world.

International Expansion

Although Harley’s manufacturing was primarily U.S.-based, the company had exported internationally for a century, with the largest markets being Australia, Japan, and Germany. The oldest continuously operating dealership outside the U.S. was in Australia, established in 1918. Harley manufactured in Japan under license for a few years, but that ended in 1958. The major populous emerging markets — Brazil, China, India — were believed to represent the company’s future. Harley licensed its First sales distributorship in China in 2006.

Harley’s international strategy was export-based. The company would forecast sales volumes for the target market, then manufacture to forecast. The motorcycles would then be stocked and distributed in-country — often termed “o the shelf ” — by a Harley dealership. Dealerships were both company-owned and independently owned. Although this export strategy was a low capital cost approach, it allowed little customization or responsiveness to customer preferences. It did, however, avoid the time and cost associated with a pure manufacturing-to-order structure.

Over time, Harley recognized that to compete in individual international markets, it had to provide a wider product portfolio offered at different price points. Brazil was once such a market. After concluding that building a complete manufacturing plant in Brazil was too costly, it chose a hybrid approach. It would manufacture the motorcycle components in the U.S. and then assemble the motorcycle in-country. Harley opened its Brazilian assembly facility in 1999. The process, known as complete knockdown kits (CKDs), utilized cheaper local labor for the final assembly of motorcycle kits, allowing the company to reach lower price points. The CKD process had been widely used by automobile manufacturers globally for years.

Harley did similarly in India. In 2009, Harley began importing kits from the U.S. for final assembly in India as it had done in Brazil. This was a compromise, as the CKDs would allow U.S.-based manufacturing for controlling costs and quality but allow the use of lower-cost Indian labor for final assembly. The biggest problem was that the kits were subject to a 30% import duty. Harley also grudgingly acknowledged the different engine requirements of the Indian market, choosing to focus on the assembly and sale of smaller- sized engines — at least small for Harley. It also chose to use a dealership network in India that was locally owned, minimizing its own capital, while forming what it hoped would be the largest commitment to effective sales. Sales in India to date have been promising but not material to global results.

Today, Harley manufactures and assembles motorcycles in the United States (York, Pennsylvania, Milwaukee, Wisconsin, and Kansas City, Missouri), Manaus, Brazil, and Bawal, India, and in late 2018, it opened a new manufacturing plant in Thailand. It is currently in the process of closing its Kansas City facility. Harley utilizes an independently owned dealership network in the U.S., Europe, and Asia, via subsidiaries in Oxford, England, Tokyo, Japan, Sydney, Australia, Mexico, and Brazil.

Other global manufacturers — Suzuki, BMW, Yamaha, Honda, Kawasaki, Triumph — all continue to compete intensely in the U.S. large engine cruiser market. But despite the competition, Harley’s market share in the U.S. has held amazingly steady at 50% for many years. Harley’s second largest market, Europe, was highly competitive with a number of both European and foreign cycle manufacturers. Harley struggled to gain and hold a 10% share. The leaders in Europe — Suzuki (16%), BMW (15%), Yamaha (14%), Honda (12%), and Kawasaki (11%) — were large, established, and intensely competitive. Triumph (7%) and Ducati (6%) were always pushing Harley for pieces of its European market share as well.

Tariffs and Retaliation 2018

The rise of protectionism in 2018 presented new challenges for Harley-Davidson. U.S. President Donald Trump initiated a number of trade skirmishes by imposing tariffs on imported steel (25%) and aluminum (10%) from several countries, including the European Union. These tariffs would create costs for Harley, which imports steel inputs for their bikes. To make matters worse, the EU retaliated against the U.S. soon after, increasing the 6% import duty on motorcycles with engines greater than 500 cc by 25% — a direct hit on Harley-Davidson. Harley estimated the new duties would increase the price of the average motorcycle imported into the EU from the U.S. by $2,200.13

The company sold approximately 39,800 Harley-Davidson motorcycles to Europeans in 2017, making the EU’s tariffs potentially very costly. After considering a number of strategic options, Harley decided to shift some U.S. production out of the U.S. in order to gain entry into the EU market at the historically lower 6% import duty. Although Harley had not yet detailed its plans, analysts believed the new assembly facility in Thailand might be the primary beneffciary of the production shift.

Harley’s announcement prompted instant backlash. President Trump, who had up to this point touted Harley as the quintessential American company (an image Harley’s leadership was happy to embrace), tweeted his opinion about off-shoring production: “A Harley-Davidson should never be built in another country—never!”. President Trump’s opposition to Harley’s strategic move did not stop there; he went on to encourage a boycott of Harley-Davidson’s products. Harley-Davidson’s leadership now found itself and its future in the crosshairs, or crossroads, of international politics. It needed to explore additional options.

Questions

1- What challenges did Harley face in its efforts to reach consumers abroad? Did Harley’s efforts to reach foreign customers carry any risks? (10%)

2- What prompted the steel tariffs of 2018? How did the EU respond to their imposition? (10%)

3- How did Harley respond to the EU tariffs? What are the pros and cons of this strategy? (10%)

4- What did the Trump administration think of Harley’s new international strategy? Should Harley care about President Trump’s criticism? (10%)

Formalities:

· Wordcount: 2000-2500

· Cover, Table of Contents, References and Appendix are excluded of the total wordcount.

· Font: Arial 12,5 pts.

· Text alignment: Justified.

· The in-text References and the Bibliography have to be in Harvard’s citation style.

Submission deadline: Sunday, 24th of May 2020 at 23:59

It assesses the following learning outcomes:

· Outcome 1: develop a complex understanding of the main concepts of international economics and how to apply them;

· Outcome 2: understand and analyze the different global economic theories;

· Outcome 3: distinguish between the different international economic systems;

Rubrics:

	Exceptional 90-100	Good 80-89	Fair 70-79	Marginal Fail 60-69
Theoretical analysis (20%)	Student effectively employs a variety of relevant theoretical paradigms/models and data for analysis. Student engages with theory/data in a critical manner.	Student employs some relevant theoretical paradigms/models and data for analysis (a few key aspects might be missing). Student makes an attempt to engage with theory/data in a critical manner.	Student employs a limited range of theoretical paradigms/models and/or data for analysis (although some key aspects might be missing). Student may be unsuccessful in attempts to engage critically with theory/data.	Student employs insufficient/irrelevant theoretical paradigms/models and/or data for analysis. Student makes no attempt to engage with theory/data in a critical manner.
Critical evaluation (30%)	Student effectively engages in critical evaluation of all aspects presented in the brief.	Student makes a good attempt at engaging in critical evaluation of most aspects presented in the brief.	Student makes a fair attempt at engaging in critical evaluation of some aspects presented in the brief (argument might be weak).	Student makes an insufficient attempt to critically evaluate aspects presented in the brief.
Critical discussion & formulation of proposals (30%)	Student effectively leads discussion towards strong theory/data-driven proposals.	Student makes a good attempt at leading discussion towards theory/data-driven proposals.	Student makes a fair attempt at leading discussion towards theory/data-driven proposals.	Student fails to lead discussion towards relevant proposals.
Communication (20%)	Student includes all relevant sections, meeting professional standards of presentation. Correct referencing format.	Student includes all relevant sections, but falls short of professional standards of presentation. Largely correct referencing format.	Student includes most relevant sections, but falls short of professional standards of presentation. Some incorrect referencing.	Student fails to submit several relevant sections and/or falls significantly short of professional presentation standards. Largely incorrect referencing format.