Bargaining with the Chicken Tax

I found an article from the Detroit News from early August, I missed it while I was on vacation. It appears that the US government may be using their Chicken Tax as a bargaining chip with Japan. The Japanese market is basically closed to foreign vehicles, so the US are using the possible removal of the Chicken Tax to help crack that market.

For those of you who haven’t heard or read about the Chicken Tax before, I’ve included a link to Wikipedia for a lot of details. It basically boils down to tariff that was initially placed on Frozen Chickens by Germany in the early 1960’s, the US responded with a tariff on light pickups (and other things). Since the 60’s all of the tariffs except for light pickup trucks have been removed. The tariff for light pickups is 25%, this makes it very difficult for foreign manufacturers to compete with US built trucks. From the Detroit News article, it states that last year (2012) 1.9 million trucks were sold in the US and only about 200 of them were hit with the Chicken Tax, the majority of those 200 were specialty orders. Also companies such as Ford who were originally protected by the Chicken Tax, have to take steps to circumvent the Tax to avoid paying high tariffs on foreign built vans brought into the US.

When I was reading one blog commenting on the article, I looked at the comments and I found someone who identified himself as a US auto-worker indicating that this tariff shouldn’t be removed, but that tariffs should be increased. I have to completely disagree with this. I heard that VW recently invested in manufacturing in Brazil. I have no training in world economics, but to my untrained eye a simple solution exists. For countries that have a population base that can support manufacturing, local vehicle manufacturing is encouraged with a series of tariffs and credits. For example consider three car companies that all have global presence. Company A has manufacturing in Europe and refuses to build their cars anywhere else, they would be subject to tariffs when importing their vehicles to other countries. Company B has a few manufacturing sites in places such as Brazil who represent large local markets, for each vehicle produced in Brazil, they get a tax credit. These tax credits can be applied to reduce taxes on high end vehicles manufactured elsewhere. Company C is very similar to, except it choices of countries in which to build cars are slightly different. Companies would be allowed to trade tax credits. So Company B who has tax credits from Brazil would be able to trade them with Company C for Canadian Tax credits. Company B can then bring Brazilian built vehicles into Canada and use the tax credits obtained from Company C to reduce the tariffs. Probably a simplistic way of looking at it.

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2 Responses to Bargaining with the Chicken Tax

  1. Dan says:

    Hi,

    Really enjoy your blog. I wonder what this new deal with Europe will mean for the Amarok?

    http://www.cbc.ca/news/politics/ceta-canada-eu-free-trade-deal-lauded-by-harper-barroso-1.2125122
    Cheers

    • steve says:

      Thanks for the link, I’m currently on the road and saw this on a television while I was having my lunch today. I’ll do a bit of reading while I’m sitting in various airports tomorrow.

      Ultimately however I don’t think it will mean much, the Amarok unfortunately isn’t designed for the Canadian Market (yet), so unless there is something in the new agreement that specifically indicates that vehicles that meet European specs can be licensed in Canada without modification we will have to wait. However when the Amarok eventually arrives, we might see a slightly lower price because of reduced tariffs.

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