Chicken tax

U.S. intensive chicken farming led to the 1961–1964 "Chicken War" with Europe.

The chicken tax is a 25% tariff on potato starch, dextrin, brandy, and light trucks imposed in 1963 by the United States under President Lyndon B. Johnson in response to tariffs placed by France and West Germany on importation of U.S. chicken.^[1] The period from 1961–1964^[2] of tensions and negotiations surrounding the issue was known as the "Chicken War," taking place at the height of Cold War politics.^[3]

Eventually, the tariffs on potato starch, dextrin, and brandy were lifted,^[4] but over the next 48 years the light truck tax ossified, remaining in place to protect U.S. domestic automakers from foreign competition (e.g., from Japan and Thailand).^[5] Though concern remains about its repeal,^[6][7] a 2003 Cato Institute study called the tariff "a policy in search of a rationale."^[4]

As an unintended consequence several importers of light trucks have circumvented the tariff via loopholes—including Ford (ostensibly a company that the tax was designed to protect), which imported the Transit Connect light trucks as "passenger vehicles" to the U.S. from Turkey and immediately strips and shreds portions of their interiors, such as installed rear seats, in a warehouse outside Baltimore^[1] — and Mercedes, which imported complete vans built in Germany, "disassembled them and shipped the pieces to South Carolina, where American workers put them back together in a small kit assembly building."^[8] The resulting resulting vehicles emerge as locally manufactured, free from the tariff.

Background

Largely because of post-World War II intensive chicken farming and accompanying price reductions, chicken, once internationally synonymous with luxury, became a staple food in the U.S.^[10] Prior to the early 1960s, not only had chicken remained prohibitively expensive in Europe, it had remained a delicacy.^[11] With imports of inexpensive chicken from the U.S., chicken prices fell quickly and sharply across Europe, radically affecting European chicken consumption.^[11] In 1961, per capita chicken consumption rose up to 23% in West Germany.^[11] U.S. chicken overtook nearly half of the imported European chicken market.^[11]

Subsequently, the Dutch accused the U.S. of dumping chickens at prices below cost of production.^[11] The French government banned U.S. chicken and raised concerns that hormones could affect male virility.^[11] German farmers' associations accused U.S. poultry men of fattening chicken artificially with arsenic.^[11]

Coming on the heels of a "crisis in trade relations between the U.S. and the Common Market,"^[11] Europe moved ahead with tariffs, intending that they would encourage Europe's post-war agricultural self-sufficiency.^[12] European markets began setting chicken price controls.^[11] France introduced the higher tariff first, persuading West Germany to join them—even while the French hoped to win a larger share of the profitable German chicken market after excluding U.S. chicken.^[3] Europe adopted the Common Agricultural Policy, imposing minimum import prices on all imported chicken and nullifying prior tariff bindings and concessions.

Beginning in 1962, the U.S. had accused Europe's Common Market of unfairly restricting imports of American poultry. By August 1962, U.S. exporters had lost 25% of their European chicken sales.^[11] Losses to the U.S. poultry industry were estimated at $26–28 million^[3] (over $210 million in 2014 U.S. dollars).

Senator J. William Fulbright, chairman of the Senate Foreign Relations Committee and Democratic Senator from Arkansas, a chief U.S. poultry-producing state, interrupted a NATO debate on nuclear armament to protest trade sanctions on U.S. chicken,^[3] going so far as to threaten cutting U.S. troops in NATO. Konrad Adenauer, then Chancellor of Germany, later reported that he and President John F. Kennedy had a great deal of correspondence over a period of two years, about Berlin, Laos, the Bay of Pigs Invasion, "and I guess that about half of it has been about chickens."^[3][11]

Diplomacy failure and the UAW

U.S. sales of Volkswagen Type 2 vans in pickup and commercial configurations were curtailed by the Chicken Tax.

Diplomacy failed after 18 months,^[4][13] and on December 4, 1963, President Johnson imposed a 25 percent tax (almost 10 times the average U.S. tariff) by executive order (Proclamation 3564) ^[14] on potato starch, dextrin, brandy, and light trucks, effective from January 7, 1964.^[14]

With Johnson's Proclamation,^[4] the U.S. had invoked its right under the General Agreement on Tariffs and Trade (GATT),^[12] whereby an offended nation may increase tariffs by an equal amount to losses from discriminating tariffs. Officially, the tax targeted items imported from Europe approximating the value of lost American chicken sales to Europe.^[15]

In retrospect, audio tapes from the Johnson White House, revealed a quid pro quo unrelated to chicken. In January 1964, President Johnson attempted to convince United Auto Workers' president Walter Reuther not to initiate a strike just before the 1964 election and to support the president's civil rights platform. Reuther in turn wanted Johnson to respond to Volkswagen's increased shipments to the United States.^[15]

The chicken tax directly curtailed importation of German-built Volkswagen vans in configurations that qualified them as light trucks, that is, commercial vans and pickups.^[15]

In 1964 U.S. imports of "automobile trucks" from West Germany declined to a value of $5.7 million—about one-third the value imported in the previous year. Soon after, Volkswagen cargo vans and pickup trucks, the intended targets, "practically disappeared from the U.S. market."^[4]

VW Type 2s were not the only vehicle line affected - Japanese automakers Toyota (with its Publica, Crown and Corona trucks), Nissan (Sunny truck), Isuzu (Wasp), and Mazda (Familia) sold coupe utility vehicles which were sold around the globe except for North America and the Caribbean.

Ramifications

Chevrolet LUV: imported from 1978–1987 in chassis-cab configuration (less truck bed) to circumvent the Chicken Tax

U.S. bound Ford Transit Connect: pieces of its interior are shredded to circumvent the Chicken Tax

The tariff directly affected any country (such as Japan) seeking to bring light trucks into the U.S. and effectively "squeezed smaller Asian truck companies out of the American pickup market."^[16] Over the intervening years, Detroit lobbied to protect the light-truck tariff,^[15] thereby reducing pressure on Detroit to introduce vehicles that polluted less and that offered increased fuel economy.^[15]

As of November 2010, the 1963 tariff of 25% still affects importation of light trucks. Robert Z. Lawrence, professor of International Trade and Investment at Harvard University, contends the chicken tax crippled the U.S. automobile industry by insulating it from real competition in light trucks for 40 years.^[17]

Circumventing the tariff

Japanese manufacturers initially found they could export "cab-chassis" configurations (which included the entire light truck, less the cargo box or truck bed) with only a 4% tariff.^[4] A truck bed would subsequently be attached to the chassis in the United States and the vehicle could be sold as a light truck. Examples included the Chevrolet LUV and Ford Courier. The "cab-chassis" loophole was closed in 1980.^[4] From 1978–1987 the Subaru BRAT carried two rear-facing seats (with seatbelts and carpeting) in its rear bed to meet classification as a "passenger vehicle" and not a light truck.

The U.S. Customs Service changed vehicle classifications in 1989, automatically relegating two-door SUVs to light truck status.^[4] Toyota Motor Corp., Nissan Motor Co., Suzuki (through a joint venture with GM), and Honda Motor Co. eventually built assembly plants in the U.S. and Canada in response to the tariff.^[1]

From 2001 to 2006, cargo van versions of the Mercedes and Dodge Sprinter were manufactured in assembly kit form in Düsseldorf, Germany, and shipped to a factory in Gaffney, South Carolina, for final assembly with a proportion of locally sourced parts complementing the imported components.^[18] The cargo versions would have been subject to the tax if imported as complete units, thus the importation in knocked-down (KD) kit form for US assembly.^[19]

Ford imported all of its first generation Transit Connect models as passenger vehicles by including rear windows, rear seats, and rear seatbelts.^[1] The vehicles are exported from Turkey on cargo ships owned by Wallenius Wilhelmsen Logistics (WWL), arrive in Baltimore, and are converted back into light trucks at WWL's Vehicle Services Americas Inc. facility by replacing rear windows with metal panels and removing the rear seats and seatbelts.^[1] The removed parts are not shipped back to Turkey for reuse, but shredded and recycled in Ohio.^[1] The process exploits the loophole in the customs definition of a light truck: as cargo does not need seats with seat belts or rear windows, presence of those items automatically qualifies the vehicle as a passenger vehicle and exempts the vehicle from light truck status. The process costs Ford hundreds of dollars per van but saves thousands in taxes.^[1] Chrysler has announced it will introduce the Ram ProMaster City, an Americanised version of the Fiat Doblò, in 2015 — building the vehicle at the Tofaş plant in Turkey, importing only passenger configurations and subsequently converting cargo configurations.^[20]

In 2009, Mahindra & Mahindra Limited announced it would export pickup trucks from India in complete knock-down (CKD) kit form, again to circumvent the chicken tax.^[5] CKDs are complete vehicles that can be assembled in the U.S. from kits of parts shipped in crates.^[5][21] The export plans were later cancelled.

Light trucks manufactured in Mexico and Canada, such as the Ram series of trucks manufactured in Saltillo, Mexico and Canadian built Chevrolet, GMC and Ford truck models, are not subject to the chicken tax under the North American Free Trade Agreement.

References

  8. Weinberg, Karl (2003) ). "Big Dixie Chicken Goes Global: Exports and the Rise of the North Georgia Poultry Industry" http://www.thebhc.org/sites/default/files/Weinberg_0.pdf

Further reading

• Talbot, Ross B. (1978). The Chicken War: an International Trade Conflict Between the United States and the European Economic Community, 1961–64. Ames, Iowa, United States: Iowa State University Press. ISBN 978-0-8138-0265-7.