By Tim Esterdahl
President Obama recently visited four Asian countries to discuss, among other issues, the status of the Trans-Pacific Partnership trade agreement. While most of the TPP issues were not a big deal to the pickup truck market, the continuing debate over the "chicken tax" is a huge deal. To briefly recap, the chicken tax is one of the most significant international tariffs the U.S. has imposed in the last 50 years. If it goes away, it could fundamentally change the truck market in North America by opening a floodgate for new compact and midsize truck offerings.
The Chicken Tax History
During the Cold War, the U.S. chicken industry aggressively grew and what was once considered a luxury became a staple of the American diet. American chicken farmers started exporting their product around the world, and other countries accused farmers of unfair trade practices and artificially altering the meat. In response, France and West Germany, looking to protect local chicken production and a perceived threat to the health of their citizens, placed a tariff on the U.S. chicken imports. The U.S. responded in 1963, under President Lyndon B. Johnson, by placing a 25 percent tariff on potato starch, dextrin, brandy and light trucks — yes, light trucks.
It seems odd that a tariff on potato starch and brandy should include light trucks, but it was signed into law at the same time the Volkswagen van was gaining popularity. This odd-looking van threatened U.S. manufacturing. Enter the United Automobile Workers, which saw the VW van as a threat to U.S. automakers and, by extension, bad for its members. The UAW took the threat so seriously that audiotapes from President Johnson's administration reveal the union threatened to strike prior to the 1964 elections. It wanted Johnson to respond to the increased shipments of the VW vans to the U.S. Johnson wanted to avoid a strike during the election and also get the UAW to support his civil rights platform. So a deal was struck, and the chicken tax includes a 25 percent tariff on light trucks (about 10 times greater than the average tariff, according to a 2003 Cato Institute study).
The tariff worked and in 1964, West Germany truck imports declined to one-third of the imported number from 1963. VW van sales and imports rapidly declined to insignificant numbers.
Cars.com photo by Mark Williams
During the past 50 years, the original tariff has been modified and removed on every product except for light trucks. Generally speaking, the thought here is the tariff will continue to protect U.S. domestic automakers from more aggressive Japanese and Germany manufacturers. Many believe the tax has played a large part in the domination of Ford, GM and Ram in the truck market; however, some critics are becoming more vocal. The same Cato Institute study called the tariff "a policy in search of a rationale."
It is a double-edged issue for U.S. automakers. On one hand, the tax keeps foreign pickup trucks out of the highly profitable U.S. market; on the other hand, those same U.S. automakers can't import their own trucks from other markets. However, U.S. automakers have become pretty creative in getting around the tax.
For example, Ford recently had a conflict with the U.S. Customs and Border Protection in regard to its Transit Connect. Ford used to build it in Turkey as a passenger vehicle (to avoid being defined as a "truck" and having to pay the 25 percent tariff) with rear windows, seats and seatbelts. Ford then shipped the Transit Connects to a facility in Baltimore where workers removed the rear window, seats and seatbelts and turned them into cargo vans. This strategy worked for years and saved Ford thousands of dollars per imported truck. Then customs stepped in and "requested" Ford stop. Now Ford has a new Transit Connect van, made in Spain, that adheres to the letter of the existing law.
It's worth noting that Ford isn't alone. From 2001 to 2006, Mercedes-Benz and Dodge Sprinter vans were built in Germany and used the same assembly/disassembly process to circumvent the added tax on their full-size cargo vans.
Changing Light-Truck Classification
Through the years, the classification of exactly what is a light truck and what isn't has evolved. This definition has caused the rise and fall of several different types of vehicles. Consider the Subaru Brat and its two detachable rear seats. Those bed seats helped classify it as a passenger vehicle and not a truck under the law. However, customs officials ended up changing that specific classification, and the Brat was effectively killed because of the added surcharge.
Also, the Chevrolet Luv and Ford Courier were built overseas, and a bed was added after they were imported. They weren't trucks without a bed right? Again, customs officials closed that loophole in 1980, which helped kill those vehicles.
Ultimately Japanese manufacturers like Toyota and Nissan built their own plants in the U.S. due to the tariff. While this seems like a win for the tariff, the further insulation of the U.S. automotive industry from direct global competition, thanks to the tariff, is a subject of debate among economists who contend it could and has crippled the industry.
Trade Agreements Impact
Astute truck fans will point out that many trucks are built in Mexico and Canada. This means they would be subject to the 25 percent tariff right? Wrong. The North American Free Trade Act has a clause that excludes the chicken tax. And now negotiators of the Trans-Pacific Partnership want the same exclusion.
If the chicken tax is dropped as part of the TPP, it could have some interesting ramifications. To begin, the business case for building limited-production vehicles for this market would change. Typically, when deciding whether to offer a vehicle in a given market, automakers talk about demand and then scale. For scale, they typically have to sell hundreds of thousands of units over a life cycle to offset total production costs. If truckmakers could import a vehicle instead of making a large investment in production, they could sell fewer vehicles, charge less money and still turn a respectable profit per vehicle.
Let's consider the possibilities here.
Ford: This one is pretty simple — the global Ford Ranger. While Ford contends it doesn't want the Ranger competing with the F-150 on its U.S. sales lots, a rebirth of the midsize truck market caused by dropping the chicken tax could change the cost/benefit analysis. Ford could import the truck to the U.S., and this would help the company avoid overtaxing its pickup or SUV factories.
GM: There's been a lot of media buzz lately about a Chevy Luv coming back to the U.S. While it's difficult to see that happening with GM's U.S. plants churning out much more profitable full-size SUVs and pickups, importing a smaller vehicle from Brazil or China could make sense. The Brazilian market already has the Chevy Montana — sort of a modern El Camino — and GM's Chinese operations are growing. GM's China chief has speculated current growth plans could include exporting vehicles made there to the U.S.
GM has been talking about taking risks and offering a unique product for more customers. A fourth pickup could fit nicely below the Chevy Colorado and GMC Canyon, offering customers more choices than any other truckmaker, very much like it does with its SUV lineup.
Hyundai: Yes, even Hyundai could get involved in the compact truck market. There were strong rumors last year about a Santa Fe-based pickup, and Hyundai has been talking for more than a decade about building a unibody, front-wheel-drive pickup. Sure, it wouldn't challenge Ford's dominance, yet it could be a profitable offering. Think it doesn't make sense? Consider the success of the Honda Ridgeline.
Jeep: A Jeep pickup has been rumored for years, and Jeep's top executives have said they want a truck. With a perceived rebirth of a midsize market, the business case gets better for offering it. And now that Chrysler has announced it will build three Jeep models in China there could be new synergies to take advantage of.
Mitsubishi: Mitsubishi is struggling in the U.S., and a midsize truck could help dramatically increase its presence. What would it look like? It could be the GR-HEV diesel-electric hybrid Mitsubishi showed at the 2013 Geneva International Motor Show. Although it is a bit wild looking, a compact/midsize diesel-electric hybrid would certainly grab mileage-conscious customers' attention and give the company a strong technology footing.
Ram: At the 2013 New York International Auto Show, then Ram Truck chief Fred Diaz spoke about the possibility of bringing the Dakota back to the U.S. market. While that seems like a long shot (and Diaz said as much), what about a Fiat truck? The Fiat Strada could finally be imported into the U.S., filling a niche similar to the Subaru Baja, and could significantly help Chrysler meet the stricter corporate average fuel economy requirements.
Scion: We also spoke with Scion Vice President Doug Murtha at the NYIAS. He said the chicken tax is a big part of why Scion doesn't have a pickup truck. Dropping the tax could make it easier for Scion to, hypothetically, borrow a platform from Toyota and restyle it for quirky-loving Scion customers. Scale would also be a concern, yet with Toyota's many manufacturing facilities around the world, it would simply be a matter of planning and timing before Scion could ship it to the U.S. in 500-unit bundles.
Toyota: For years Toyota fans have been calling for the Hilux to come to U.S. shores. Could dropping the chicken tax bring it to the market? Probably not. However, it doesn't seem so farfetched that Toyota could move the Tacoma production overseas and share a platform with the Hilux. This would alleviate the capacity issue facing the company at its San Antonio plant, and Toyota could dramatically increase the amount and variety of cab/bed configurations for the full-size Tundra — the more profitable truck.
Volkswagen: VW has said publicly for years the main reason it didn't bring an Amarok-like pickup to the U.S. is strictly due to the chicken tax. Currently VW has one production plant in the U.S.; investing in expanding it to include truck production doesn't make sense, especially when you consider how much scale and complexity it would need to add.
While VW contends the Amarok is too small for the U.S., and company executives seem mixed on whether it makes sense to offer it in a larger size, having no tariff could create a completely new business case. Depending on how VW priced it, the company could import a limited number of the trucks and see if customers respond.
The Amarok is currently built in Argentina; however, VW has several plants in China and could export the truck from one of those facilities if needed.
Other manufacturers: Without a chicken tax, many smaller manufacturers — like Honda, Daihatsu, Mahindra and others — could find ways to import distinctive pickups into the U.S. They would simply need an outlet to sell them through and a plant with a good amount of excess production capacity (that might be the biggest challenge). To help with production costs, we could see any one of these manufacturers making partnership deals with Ford, GM, Chrysler and others to offer rebadged products on familiar dealer lots. In the strange world of auto making, stranger things have happened.
Trans-Pacific Partnership Negotiations
All of the scenarios we've discussed could be included in the TPP negotiations. The trade pact aims to cut tariffs and set common standards on a slew of trade items between as many as 12 different nations. And depending on how you slice it, these countries cover more than 30 percent of the global economy. Currently, the holdup is centered on differences between Japan and the U.S. Negotiators are working hard to overcome these differences.
"We understand the challenges," U.S. trade representative Michael Froman said about talks with Japan, according to Businessweek. "These changes relate to fundamental reforms and the market opening of sectors in Japan that have traditionally been closed."
In the end, many believe the globalization of the auto industry and the proliferation of platform sharing (see the One Ford Plan and the global Mustang and Ranger) means the chicken tax may not be as important or beneficial as it once was. However, it still has a significant impact on the North American truck segment. With trade negotiators pushing for the TPP to be done by year's end, meaning the tax could potentially go away in the next two years, we could be looking at a dramatically changing truck landscape for the pickup customer. Will we be driving a Ford Ranger in the U.S. sometime soon? Who knows? One thing is for sure though: We need to keep a close eye on the ongoing negotiations.
Manufacturer images; stock photo of Air Force One