The so-called "chicken war" of the 1960s continues to illustrate the peculiar rationality of protectionism and collective choices. It was revealed earlier this week that the U.S. government and the government of South Korea had agreed to maintain a 25 percent tariff on South Korean light trucks (pickups and vans) that was originally part of the "chicken tariff," also called the "chicken tax," introduced more than half a century ago. (See Kwanwoo Jun, "U.S., South Korea Strike Trade Deal; Seoul Exempt From Steel Tariffs," Wall Street Journal, March 26, 2018; and "U.S. Wins 'Modest' Trade Concessions from South Korea," March 27, 2018.)
Two days later, President Trump suggested that he may "hold up" the agreement to exert pressure on the South Korean government in its peace talks with its North Korean counterpart (Rebecca Ballhaus, "Trump Says He Might Hold Up South Korea Trade Talks to Pressure the North," Wall Street Journal, March 29, 2018). This further use of trade as a political weapon only adds to the strange history of the chicken tax.
The Chicken Tax, a History
In the case of the chicken tariff on light trucks, the main victims were and remain businesses and ultimately their customers.
In 1962, the European Economic Community (precursor of the European Union) doubled its customs duty on foreign poultry. The U.S. government retaliated with a tariff on brandy and a couple of food products (potato starch and dextrin). The American automobile industry, which was starting to feel the heat of European competition, jumped on the bandwagon and determined that a world-wide tariff on light trucks be included among the chicken tariffs. The retaliatory tariffs were eventually lifted, except for the light truck tariff, which has survived up to this day as the only remaining chicken tariff. (See this Feature Article for a Useful Summary; Doug Irwin mentions the episode in his recent Clashing over Commerce: A History of US Trade Policy.)
The chicken tariff hit Volkswagen's small pickup trucks and commercial vans, which were apparently feared competitors for the American automobile industry. I don't know if it also hit the Volkswagen camper, a favorite of the flower children. (Note that a tariff also makes secondhand units more expensive, as they are substitutes for brand-new ones.) Tariffs are not an "inclusive" policy, for they discriminate against consumers of the targeted goods. The victims change over time depending on political winds. In the case of the chicken tariff on light trucks, the main victims were and remain businesses, including small and independent businesses, and ultimately their customers.
It is not easy to prevent people from trading while maintaining the rule of law (or its appearance). The rule of law requires general laws that permit anything that is not explicitly forbidden. Invasive and complicated regulations that try to follow the rule of law necessarily have loopholes. The Harmonized Tariff Schedule of the United States (2018), Revision 2 covers 3,713 pages. Exploiting loopholes generates costs, but often less than the costs of the intended restrictions.
The buyers had to pay more, of course, but much less than if they had been charged the 25 percent chicken tax.
The chicken tax on light trucks provided a good example when it later came back to haunt Ford Motor Co., which built a commercial van at a company factory in Turkey and imported it into the United States. In order to meet the definition of a passenger car and avoid the chicken tax, the Ford factory added to its van rear side windows as well as back seats bolted in the floor and featuring regulatory safety belts.
Immediately after the vans were offloaded in Baltimore, the seats were promptly removed and the windows replaced by metal panels. The removed parts were shredded or melted and recycled. The buyers had to pay more, of course, but much less than if they had been charged the 25 percent chicken tax. Other loopholes were found. (See Matthew Dolan, "To Outfox the Chicken Tax, Ford Strips Its Own Vans", Wall Street Journal, September 23, 2009.)
Stephen Biegun, Ford's vice president for international governmental affairs, said at the time that the company complied with the letter of the law. "We are free-traders, full stop," he also said. I wish we heard this more often.
A 2012 agreement between the American and Korean governments provided that the chicken tariff on light trucks to be (potentially) imported from South Korea would be phased out in 2021. What the U.S. administration has just done is to bully the Korean government to extend the chicken tariff for an additional 20 years.
"I think this is an absolute win-win," Treasury Secretary Steven Mnuchin said, apparently referring to one component of the agreement, a steel quota on South Korean exports. In exchange for exempting South Korea from the new steel tariffs imposed last week, the agreement includes other barriers against this country, such as the extension of the chicken tariff on light trucks. Obviously, the agreement is not a win for American consumers.
Protectionism is the government of the big producers, by the big producers, for the big producers.
The main winners of the prolonged chicken tariff will be the U.S.-located producers of light trucks, whether they are American or foreign companies. Many of the latter installed manufacturing capacity in the United States in order to avoid the chicken tax. The bottom line is that light trucks cost Americans more than if they could buy them from where they want in the world.
Large automobile manufacturers are those who will continue to benefit from the chicken tax on light trucks. The small businessman who buys a pickup or a small commercial van is not advantaged nor harmed: he pays more, but the price of his products or services will rise consequently. Of course, he is harmed if he also uses his pickup or van for leisure purposes. So it is more exact to say that protectionism is the government of the big producers, by the big producers, for the big producers.
The basics of trade are not difficult to understand. Half a century ago, chickens crossed the North Atlantic because some individuals in Europe wanted to eat them and some Americans found it profitable to ship them. Similarly, light trucks may cross the Atlantic or the Pacific for the benefits of American buyers and foreign sellers if they are not subject to a prohibitive chicken tariff.
Reprinted from the Library of Economics and Liberty.
Pierre Lemieux is an economist affiliated with the Department of Management Sciences at the University of Québec in Outaouais, and a senior fellow at the Montréal Economic Institute.