Chicken Tax Worked, U.S. Dominates Light Truck Sales

FactSet: How Would Higher U.S. Auto Tariffs Impact the Global Auto Industry?
Currently, auto imports are taxed at 2.5%. However, light trucks (pickups and SUVs) are subject to a retaliatory tariff instituted in 1963 by President Lyndon Johnson in response to European tariffs on U.S. chicken. The so-called “chicken tax” imposes a 25% tariff on all light truck imports, and despite calls over the last 55 years for its repeal (coming from outside the U.S. auto industry), the law still stands.

The Trans-Pacific Partnership (TPP) trade deal signed by President Barack Obama in 2016 would have gradually phased out the chicken tax for the signatories; however, President Donald Trump withdrew the U.S. from the TPP shortly after taking office in 2017. The recent trade agreement reached with South Korea is supposed to phase out the chicken tax on imported South Korean trucks by the year 2041. Canada and Mexico are currently exempt from the tariff under NAFTA, but given the recent extension of the steel and aluminum tariffs to these countries, this could change.

Since light trucks are already taxed at a 25% rate, it is important to consider the shifting composition of U.S. vehicle sales when looking at the impact of potential auto tariffs. Over the last several years, the U.S. auto market has seen a rapid shift away from cars and toward light trucks.

There are two key segments of the light truck market: pickup trucks and SUVs/crossovers. The chicken tax has distorted the U.S. pickup truck market by largely excluding foreign producers. With the U.S. vehicle market shifting away from autos and toward light trucks, the exclusion benefits the U.S. auto industry. The top three selling vehicles in the United States last year were all trucks, with Ford leading the pack by a mile, followed by GM (Chevrolet) and Fiat Chrysler (Dodge). Many observers believe that the chicken tax has stifled innovation by U.S. auto makers by limiting foreign competition.
It doesn't stifle innovation because foreign companies can avoid the tax by manufacturing a truck in the United States. Yet somehow the American companies still dominate.
However, consumers would be hardest hit by an auto tariff. Higher prices for automobiles would be another inflationary jolt and rising energy prices could make the tariffs especially painful (WTI crude has jumped by 38% in the last 12 months).
Tariffs don't create inflation. Banks and central banks create inflation. If the price of automobiles rises and it isn't financed by credit, consumers will spend less somewhere else. Or they can keep their automobile longer. The greater threat to the auto market is not tariffs, but rising interest rates, since many Americans already finance the purchase of a car.

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