Episode 632: The Chicken Tax : Planet Money How the American auto industry is built on a trade dispute over frozen chicken parts.
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Episode 632: The Chicken Tax

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Episode 632: The Chicken Tax

Episode 632: The Chicken Tax

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SONARI GLINTON, HOST:

All right, Robert. This is really exciting. We're in midtown Manhattan right across from Bryant Park. And I wanted to try an experiment, which is ask people to name, off the top of their head, as many midsized sedans as they know.

UNIDENTIFIED MAN #1: Audi A7. BMW 5 Series. Ford Focus.

UNIDENTIFIED MAN #2: Kia Spectra. Chevy Impala. Dodge Charger.

UNIDENTIFIED MAN #3: BMW X5. BMW X3, the Fourth Series, the 435s and Nissan Altima?

ROBERT SMITH, HOST:

OK, I get it. Like, the answers sort of run the gamut. Like, we have foreign cars, American cars, lots of different cars.

GLINTON: Exactly. But let's start something a little less easy. Let's ask some of these people how many pickup trucks they can name.

UNIDENTIFIED MAN #4: Pickup trucks?

UNIDENTIFIED WOMAN #1: Pickup trucks? I...

UNIDENTIFIED MAN #4: Ford F-150s.

UNIDENTIFIED WOMAN #1: Yeah, definitely.

UNIDENTIFIED MAN #5: Well, I guess there's the Ford F-150.

UNIDENTIFIED MAN #6: Ford F-150? Yeah, the 550 - whatever it's called.

GLINTON: The Ford F-150, OK.

UNIDENTIFIED MAN #6: Yeah, right. Then you got the Ram, right? And then...

UNIDENTIFIED MAN #7: Ford F-150.

SMITH: I think I see where you're going with this, which is when you talk about trucks, you are essentially talking about American trucks - the Ford F-150, other American-made trucks. Nobody named a foreign truck.

GLINTON: Exactly. That's because the American trucks just dominate the space - I mean, absolutely, completely dominate the space. And there's a reason for that, Robert. The reason is chicken.

SMITH: And not just chicken, but frozen chicken parts shipped to Germany after World War II. Believe me, we'll explain.

GLINTON: Hello, and welcome to PLANET MONEY. I'm Sonari Glinton.

SMITH: And I'm Robert Smith. Today on the show - chicken, trucks - trucks and chicken, and how a trade dispute can change the entire world.

UNIDENTIFIED WOMAN #2: This episode of PLANET MONEY is supported by Igloo, whose goal is to make company intranets you actually like. Igloo has file-sharing, calendars, social newsfeeds and task management. It also has a responsive design that works great on any device. The platform is highly malleable, which means you can design it to look and feel like your company. Sign up for a free trial of a demo at igloosoftware.com/planetmoney.

GLINTON: OK, we are going to lay it out for you how a frozen chicken drumstick led directly to the awesomeness of the Ford F-150. It goes back to after World War II, in the late '50s, early '60s. And the European economy is finally getting better. And everyone is sort of helping each other in the world. This is an era of free trade.

SMITH: And Americans are going absolutely bonkers for a German import.

(SOUNDBITE OF AD)

UNIDENTIFIED WOMAN #3: Ein Volkswagen.

UNIDENTIFIED MAN #8: Ein Volkswagen.

UNIDENTIFIED WOMAN #4: Ein Volkswagen (speaking German).

UNIDENTIFIED MAN #9: (Speaking German).

BOB LUTZ: Beetles were everywhere in the late '50s and early '60s. And it became sort of almost a craze.

GLINTON: That is the voice of Bob Lutz. He's a car guy's car guy. He's worked for pretty much every car company - GM, Ford, Chrysler, BMW, GM again.

LUTZ: Everybody had to have one Beetle, two Beetles. They had to have a Beetle plus a Volkswagen bus. And it became a sort of a cult object, and I think everybody was worried about it.

GLINTON: Well, everybody who worked in the American auto industry was worried about it.

SMITH: Now, meanwhile over in Germany, they're having their own sort of trade invasion. This is not cars. This is, as we promised, the chicken parts because remember, up to this time, chicken was sort of a luxury in Germany. They were recovering from the war, and they had their own chicken manufacturers, but were really expensive. In comes frozen, American chicken, frozen, American chicken on the bountiful American farms shipped over to Germany. And all of a sudden in Berlin, you can have chicken every night for dinner. They are going crazy for it. In fact we looked at the stats. In 1961 alone, German chicken consumption went up 23 percent. If we were going crazy in the United States for the Volkswagen Beetle, the Germans were going crazy for American chicken.

GLINTON: Yeah, and that's the dream of free trade. They get cheap chicken; we get cheap cars. It's a bonus for everybody.

SMITH: Except for the German chicken farmers. The German chicken farmers look around, and their expensive chickens are losing out to these cheap American chickens. And so they do what farmers everywhere do.

GLINTON: They went to their government, and they said, protect us against this cheap chicken that's flooding the market. The German government responded, and they started a tax on American chicken up to 50 percent, which is huge.

SMITH: And the Americans are like, wait, wait, wait, wait - what? Germany, we just helped rebuild you after the war, and you want to start a trade dispute? You want to tax our chicken? Fine, we will find some German things that we can tax. It's basic playground logic, right? Tit-for-tat. So the U.S. plans its retaliation. They draft this idea aimed at Volkswagen. John Krafcik is with truecar.com.

JOHN KRAFCIK: So in December of 1963, Lyndon Johnson, who had just become president less than two weeks before, signed into effect this tariff - a 25 percent tariff on vehicles that were deemed to be primarily commercial goods-carrying vehicles.

SMITH: The chicken tax - they actually called it the chicken tax.

GLINTON: These are pickup trucks and commercial vans, and it's not just German pickup trucks. It's all foreign trucks. If you want to make a truck and ship it to the U.S., you got to pay 25 percent extra. It's called the chicken tax.

SMITH: And it changed the American car industry overnight. The first thing that happens is that foreign trucks are all of a sudden way too expensive to compete in this country. So, for instance, Volkswagen had this pickup truck. Basically it's a VW bus with a flatbed in back. And this was going to be their next big thing in America after the Beetle and the regular-sized bus. But once the chicken tax goes in, it is 25 percent more expensive. They pull it from the market. They're like, we cannot sell this car, this truck in America.

GLINTON: The American companies are obviously happy there's less competition. It also allowed the American car companies to sort of kick back and relax a little bit and not really innovate.

SMITH: Because of the chicken tax, American trucks basically stayed the same over the years. I mean, they got bigger. They got fancier. They certainly got more expensive. But without foreign competition, there weren't a lot of new ideas in the space. You know, you could imagine if Hyundai had had the opportunity to build - I don't know - some funky, fuel-efficient truck they brought to America, that would've inspired American manufacturers to be like, oh, I'm competing with Hyundai on that. But there was no foreign competition. There was no incentive.

GLINTON: Once you put a tariff on something, the innovation that would have gone into the product goes into getting around the tariff. And that's what the car companies started to do. Robert, things got really crazy really quickly. Toyota says, so we can't directly ship our trucks from Japan? I'll tell you what we'll do. We'll build them in parts - giant parts. They shipped them to the U.S. and then snapped those parts together, put them on a train, and there you go. They got around the chicken tax.

SMITH: Because technically, they were assembling the car. Even though all the parts were made in Japan, they were assembling it in the United States.

GLINTON: Yeah, tighten a couple of screws - made in America.

SMITH: Good to go.

GLINTON: And U.S. Customs was like, yeah, no. That's not going to play.

SMITH: And so I'm sure all the foreign car manufacturers at this point just gave up trying to get around the chicken tax.

GLINTON: Of course not because this is America, the most important market for any kind of vehicle. Of course they wanted to get their trucks in. Subaru, which is a great carmaker - they make SUVs. Why not make a truck? So they did in the '80s. I'm sure you remember the Subaru BRAT.

SMITH: The Subaru BRAT. My neighbor had one of these. It was amazing. From 50 feet away, it looked like a pickup truck. But when you got up close, there were these two flimsy, plastic seats just bolted into the bed of the truck.

KRAFCIK: The idea was, well, those seats are for people; therefore it must not be a vehicle that's designed to carry goods. I thought it was a very clever solution.

SMITH: The U.S. government did not think this was a clever solution. They imposed the chicken tax, and the BRAT went away.

GLINTON: As time goes by, and the global auto industry gets more interconnected and complicated, you can't parse out necessarily which is an American company and which is a foreign company because, say, a company like Ford makes cars and trucks on five continents.

SMITH: And all of a sudden, American companies started to encounter the same problem that foreign companies were, which is American companies had to deal with the chicken tax.

GLINTON: For instance, Ford makes a cargo van in Europe. It's called the Transit Connect, but they didn't want to have to pay the chicken tax. So what they did was they took this cargo van, put some seats where the cargo was supposed to go, shipped it to the U.S. and said, hey, that's not a cargo van; that's a passenger van. The chicken tax doesn't apply. Here's Sean McAlinden from the Center for Automotive Research.

SEAN MCALINDEN: And when they get here to the United States - to, let's say, Ohio - they rip the seats out, punch out the windows and cover them with metal panels and resell the vet vehicle as a freight van. And it's cheaper to do that than pay the tariff.

SMITH: After they took the seats out, they sent them back to Europe, put them in another van and shipped them back to U.S. to be taken out again, over and over and over again in this vicious, unvirtuous cycle. All of this trade gymnastics may sound like insanity. And maybe it is insanity. But at the end of the day, the chicken tax accomplished exactly what it was supposed to accomplish, which is the dominance of the American truck. American trucks own the road. And they have for 50 years. In fact, everyone agrees that American trucks are now so good, have had such an advantage for so long, that even if you got rid of the chicken tax, it would take years and years and years for the rest of the world to catch up with American trucks.

GLINTON: And that's the question I've been having for years. If American trucks are so good, why is the 25 percent chicken tax still in place? At the most recent Detroit auto show, I got to speak to Mark Fields. He's the brand-new CEO of Ford Motor Company. And right before I talked to him, he had just unveiled what almost every Ford executive would call the most important truck to come out of Detroit in 50 years. So I had to ask him, if your trucks are so awesome...

Why do you still need the chicken tax?

MARK FIELDS: Well, in terms of - you know, clearly when you look - we're free traders by design. We have been the best-selling vehicle in the U.S. for 33 years. Well, we want to make sure we're on a level playing field. And right now, around the world, not so level, depending upon things.

GLINTON: And you think it's fine. You want to keep it - do you need it, though? That's the question.

FIELDS: I think, you know, it's on the books right now. And, you know, that's the reality that we're dealing with.

GLINTON: Robert, let me translate that for you. I speak fluent auto executive. What he's saying is, we don't really need the chicken tax, but we aren't going to demand that we get rid of it. After all, it kind of benefits us. My thought, that went so well; why stop at one CEO? Let's go on to the next. So I talked to Sergio Marchionne. He's the head of the FCA Group, which is the owner of Chrysler. And this is where it gets weird because this company is a European company and an American company. So not only is it helped by the chicken tax; it's also harmed by it as well.

SERGIO MARCHIONNE: I'm the wrong guy to ask that question because I would not have the chicken tax. But that's just my view.

GLINTON: Why not? I mean, you're the right person to answer. You're in charge of an American car company that benefits.

MARCHIONNE: I am - no, but we benefit - when you run a global organization, the chicken tax is an incredibly protective measure to try and deal with, I think, an ill-perceived threat to the stability of the auto sector. I don't think it does much. But it exists. So it's going to take a while to try and take it out - take it off the table.

GLINTON: Finally, how...

MARCHIONNE: It's an interesting question. Why would you ask about the chicken tax? Of all the taxes you could be asking...

GLINTON: Because it's weird. It's weird that this tariff exists. I mean, why not compete on a completely even playing field?

MARCHIONNE: You sound pretty good to me. I like your story. I didn't say anything. I'm not the guy that invented the chicken tax. I comply with the chicken tax. Do I need the chicken tax? The answer is no.

SMITH: So Sonari, even with CEO double speak, I'm not hearing these guys saying, like, we are going to die as companies without the chicken tax.

GLINTON: Well, of course not because they have such an advantage in the minds of the people who buy pickup trucks. It would take forever to break that bond with the American pickup truck.

SMITH: And that's the funny thing about tariffs, which is once tariffs go into place, there's no real incentive to get rid of them. Even if you don't need them anymore, they stick around. And there's a really important reason for this, which is once you have a tariff, it becomes a bargaining chip for you in the next trade negotiations. So for instance, right now the U.S. is in the middle of this giant trade deal, the TPP - 12 countries, including Japan - 12 countries who would love for the U.S. chicken tax to disappear. And when we talked to John Krafcik, he said that you can be sure that during trade negotiations, this is something that they are talking about, the chicken tax.

KRAFCIK: This 25 percent tariff is being used, in a way, as a bargaining chip that benefits U.S. trade negotiators as they seek other concessions from other nations in other industries. So it may very well be that from an industry standpoint, there's no real love or need for it. I believe that's the case. I want to believe that's the case in my heart. But it's really a tool - a bargaining chip - for U.S. trade negotiators to affect a better total outcome across many industries.

SMITH: So for instance, California farmers grow some of the best rice in the world. They would love to ship their rice to a place that frankly loves rice, Japan. Except Japan has a tariff on rice, a protective tariff. And so there's a potential deal, a potential bargaining chip, whereby you can say, like, hey, we will drop this chicken tax on trucks, Japan, if you let our rice come in without a tariff.

GLINTON: So here we are back at the same place we were 50 years ago. Back then, we traded chicken for trucks. And now we'll trade trucks for rice.

(SOUNDBITE OF SONG, "CHICKEN TRUCK")

JOHN ANDERSON: (Singing) Chicken truck, chicken truck, behind it I'm stuck. Chicken truck, chicken truck, it's just my luck. Chicken truck, chicken truck...

SMITH: Let us know what you thought of today's program. Our email address, planetmoney@npr.org. On Twitter, we are @planet money, unless you'd like to separate that out and target us individually. I'm @radiosmith.

GLINTON: And I'm @Sonari. Today, our program was produced by Frances Harlow. And if you're interested in some more awesome podcasts, I'd suggest Alt Latino, which is a deep dive into the world of Latin alternative music and culture. You can find it at altlatino@npr.org and on the really awesome NPR One app.

SMITH: I second the NPR One app. I'm Robert Smith.

GLINTON: And I'm Sonari Glinton. Thank you so very much for listening.

(SOUNDBITE OF SONG, "CHICKEN TRUCK")

ANDERSON: (Singing) He slowed down, and I finally got around him on a big long hill just south of Tennessee. He had a...

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