Chapter 9. The Chickens Have Come Home to Roost

9.1 Section Title

Chapter 9 HEADLINE: The Chickens Have Come Home to Roost

This article discusses the history of the 25% tariff that still applies to U.S. imports of lightweight trucks. The author argues that this tariff caused some of the difficulties in the U.S. automobile industry today.

Although we call them the big three automobile companies, they have basically specialized in building trucks. This left them utterly unable to respond when high gas prices shifted the market towards hybrids and more fuel efficient cars.

One reason is that Americans like to drive SUVs, minivans and small trucks when gasoline costs $1.50 to $2.00 a gallon. But another is that the profit margins have been much higher on trucks and vans because the US protects its domestic market with a twenty-five percent tariff. By contrast, the import tariff on regular automobiles is just 2.5 percent and US duties from tariffs on all imported goods are just one percent of the overall value of merchandise imports. Since many of the inputs used to assemble trucks are not subject to tariffs anywhere near 25 percent—US tariffs on all goods average only 3.5 percent—the effective protection and subsidy equivalent of this policy has been huge.

It is no wonder much of the initial foray by Japanese transplants to the US involved setting up trucks assembly plants, no wonder that Automakers only put three doors on SUVs so they can qualify as vans and no wonder that Detroit is so opposed to the US-Korea Free Trade Agreement that would eventually allow trucks built in Korea Duty-Free access to the US market.

What accounts for this distinctive treatment of trucks? An accident of history that shows how hard it is for the government to withdraw favors even when they have no sound policy justification.

It all comes down to the long forgotten chicken wars of the 1960s. In 1962, when implementing the European Common Market, the Community denied access to US chicken producers. In response after being unable to resolve the issue diplomatically, the US responded with retaliatory tariffs that included a twenty five percent tariffs on trucks that was aimed at the German Volkswagen Combi-Bus that was enjoying brisk sales in the US.

Since the trade (GATT) rules required that retaliation be applied on a nondiscriminatory basis, the tariffs were levied on all truck-type vehicles imported from all countries and have never been removed. Over time, the Germans stopped building these vehicles and today the tariffs are mainly paid on trucks coming from Asia. The tariffs have bred bad habits, steering Detroit away from building high quality automobiles towards trucks and trucklike cars that have suddenly fallen into disfavor.

If Congress wants an explanation for why the big three have been so uncompetitive it should look first at the disguised largess it has been providing them with for years. It has taken a long time—nearly 47 years—but it seems that eventually the chickens have finally come home to roost.

Source: Robert Lawrence, guest blogger on Dani Rodrik’s weblog, posted May 4, 2009. http://rodrik.typepad.com/dani_rodriks_weblog/2009/05/the-chickens-have-come-home-to-roost.html.

Question 1

Question

Why hasn’t the U.S. repealed or at least reduced the 25 percent tariff?

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While it is not stated explicitly in this article, this is likely a result of the strong lobbying power from domestic automobile—specifically truck—manufacturers.

Question 2

Question

How would removing the tariff increase welfare in the U.S.?

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There are a few ways that removing the tariff would improve welfare. First, the price of trucks would go down which increases consumer surplus. Second, as alluded to in the article, the domestic automobile industry would likely increase efficiency substantially. The removal of the tariff removes the “wedge” between what consumers pay for trucks and what producers receive for trucks.

Question 3

Question

How would removing the tariff reduce welfare in the U.S.?

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Domestic producers will be worse off and unemployment would rise.

Question 4

Question

How would removing the tariff affect welfare abroad?

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Foreign producers of trucks will be better off, although this depends on how large the US market is relative to the world. If large then the removal of US tariffs would raise domestic demand and therefore raise the world price for trucks. Price falls for consumers of trucks in the US but rises for foreign producers.