Trump’s 'chicken tax' would kill, not save, automotive jobs

Rick Newman · Senior Columnist

Wed, Nov 28, 2018, 12:09 PM

Trump, enraged that General Motors plans to close four U.S. factories and ax 15,000 jobs, has threatened once again to impose a 25% tax on imported vehicles because he thinks that would protect American workers. Economists think otherwise, but Trump believes the “chicken tax” proves he is right.

The chicken tax is a 55-year-old presidential proclamation that established a 25% tariff on imported pickup trucks in 1963. The name comes from the nature of the trade dispute that led to the tariff. In 1962, a bloc of European countries raised the tariff on imported chickens, effectively killing all imports from the United States. President Lyndon Johnson retaliated with the tariff on pickups and a few other categories of imports. The truck tariff remains in effect and essentially blocks all pickup imports from outside North America.

Trump invoked the chicken tax in a Nov. 28 tweet, saying that a similar tax on imported cars would force automakers to build more vehicles in the United States. “Being studied now!” Trump wrote, echoing his proposal from earlier this year to slap a 25% tariff on all imported vehicles.

That would raise car prices and kill jobs, according to at least two serious studies of the proposal. The Peterson Institute for International Economics found that new 25% tariffs on all imported cars and car parts would cut U.S. auto production by 1.5% and destroy 195,000 jobs. If other countries retaliated with similar tariffs—as is typically the case—production would fall 4% and 624,000 U.S. jobs would disappear.

[See why Trump has the GM problem backward.]

The Center for Automotive Research in Ann Arbor, Mich., found that a 25% tariff on all imported cars would raise the average cost of a vehicle by $4,400. The cost of imports would go up because tariffs are essentially a tax that gets passed along to consumers. But prices of domestic cars not subject to the tariffs would go up too, because competing imports would suddenly be more expensive, giving manufacturers the leeway to raise prices. Higher prices almost always reduce demand and employment.

Foreign carmakers already build cars in the US

Trump sees it differently. He thinks high tariffs would force foreign automakers to build more vehicles in the United States. That might happen, but all major foreign automakers already build vehicles in the United States—because market forces, rather than trade policy or politics, give them an incentive to. Building cars in the market where they’re sold reduces shipping costs and exchange-rate risks, while also building goodwill toward the brand among domestic consumers.

Imports still matter, because they give manufacturers the flexibility to build finished products and components as efficiently as possible. That allows global automakers to be competitive everywhere, while offering buyers a good mix of quality and value. Obviously some companies still stumble—a la the GM and Chrysler bankruptcies in 2009—but up till now it’s been because of mismanagement rather than lousy government policy.

The chicken tax that’s still in place probably makes pickup trucks more expensive than they’d be without it, since there’s no foreign competition pushing prices down. It also prevents Americans from buying some foreign-made pickups that are popular overseas but not available here, because the tariff would either push prices prohibitively high or take all the profit margin away if companies like Volkswagen and Mazda imported them.

Pickups are unusual products, though, because the high cost typically generates large profits for automakers, allowing them to build them profitably in the United States, where labor costs are relatively high. Contractors, farmers, ranchers and outdoor enthusiasts traversing America’s vast spaces generate stronger demand for pickups than in most other countries, which is why foreign automakers such as Nissan, Toyota and Honda build pickups in the United States, along with GM, Ford and Chrysler’s Ram division.

It’s harder to make a profit building low-margin compact cars in the United States, which is why many compacts are imported. A new 25% tax on those imports would raise the cost of such vehicles, but not the profit margin. It might even shrink profit margins by reducing the pool of people likely to buy such a car. So instead of relocating small-car production to the United States, automakers might just stop selling such cars here. Then Trump would only have himself to blame when car factories close.

Confidential tip line: rickjnewman@yahoo.com. Click here to get Rick’s stories by email.

Read more: