Chicken tax

The Chicken Tax — actually a tax on potato starch, dextrin, brandy, and light trucks — was a 1964 response by the U.S. under President Lyndon B. Johnson to tariffs placed by France and West Germany on importation of U.S. chicken. The seventeen month period of tensions and negotiations surrounding the issue, which took place at the height of Cold War politics, was known as the Chicken War.

Over the next 46 years the tax ossified, remaining in place to protect U.S. domestic automakers from foreign light truck production (e.g., from Japan, Thailand), and concern remains about its repeal.

As an unintended consequence, several importers of light trucks continue to circumvent the 25% tariff via loopholes — including Ford, which imports light trucks as "passenger vehicles" to the U.S. from Turkey and immediately shreds portions of their interiors in a warehouse outside Baltimore.

Background

Prior to the early 1960s, chicken had been prohibitively expensive in Europe; it had remained a delicacy. With imports of inexpensive chicken from the U.S., chicken prices fell quickly and sharply across Europe, radically impacting European chicken consumption. In 1961, per capita chicken consumption rose 23% in West Germany. U.S. chicken overtook nearly half of the imported European chicken market.

Subsequently, the Dutch accused the U.S. of dumping chickens at prices below cost of production. The French government banned U.S. chicken, and raised concerns that hormones could affect male virility. German farmers' associations accused U.S. poultrymen of artificially fattening chicken with arsenic. In fact, U.S. chicken farmers, with Food and Drug Administration approval, had at the time begun practices of intensive chicken farming and had treated chicken feed with antimony, arsenic compounds or estrogen hormones to stimulate growth.

During a NATO debate, William Fulbright — Chairman of the Senate Foreign Relations Committee and Democratic Senator from Arkansas, a chief U.S. poultry-producing state — interrupted the debate on nuclear armament to protest trade sanctions on U.S. chicken, going so far as to threaten cutting US troops in NATO.

Konrad Adenauer later reported that he and President Kennedy had a great deal of correspondence over a period of two years, about Berlin, Laos, the Bay of Pigs, "and I guess that about half of it has been about chickens."

Intending that high tariffs would encourage Europe's post-war agricultural self-sufficiency, European markets began setting chicken price controls. 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. Europe adopted the Common Agricultural Policy imposing minimum import prices on all imported chicken, nullifying prior tariff bindings and concessions.

Beginning in 1962, the U.S. had accused the 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. Losses to the U.S. poultry industry were estimated at $26-28 million (over 1.8 billion in 2007 U.S. Dollars).

Diplomacy failure and the UAW

Volkswagen Type 2 vans in pickup and commercial configurations were curtailed by the Chicken Tax

Diplomacy failed, and in January 1964, two months after taking office, President Johnson imposed a 25 percent tax (almost 10 times the average U.S. tariff) on potato starch, dextrin, brandy, and light trucks.

The U.S. had invoked its right under the General Agreement on Tariffs and Trade (GATT), whereby an offended nation may increase tariffs by an equal amount to losses from discriminating tariffs. Officially, the tax targeted items imported from Europe as having the approximate dollar value to offset the lost American sales of chickens to Europe.

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's president Walter Reuther not to initiate a strike just prior 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.

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. In turn, the tariff also directly affected any other country seeking to export light trucks or commercial vans (such as Japan) and effectively "squeezed smaller Asian truck companies out of the American pickup market." Over the intervening years, Detroit lobbied to protect the light-truck tariff, thereby reducing pressure on Detroit to introduce vehicles that polluted less and that offered increased fuel economy.

Ramificiations

Ford Transit Connect: pieces of its interior are shredded to circumvent the Chicken Tax

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.

In response to the tariff, Toyota Motor Corp., Nissan Motor Co. and Honda Motor Co. built plants in the U.S., and as of 2009, the 1964 25% tariff still affects importation of light trucks.

Circumventing the tariff

To circumvent the tax, Ford currently imports all of its Transit Connect models as passenger vehicles by including very specific items, e.g., rear windows, rear seats and rear seatbelts. 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 simply by replacing rear windows with metal panels and removing the rear seats and seatbelts. The removed parts are then shredded and recycled. The process exploits the loophole in the customs definition of a light truck: as cargo doesn't 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 only hundreds of dollars per van, but saves thousands.

Similarly, from 2001 to 2006, cargo van versions of the Mercedes and Dodge Sprinter were manufactured in Düsseldorf, Germany, partially disassembled and shipped to a facility in Gaffney, South Carolina where they were reassembled. The cargo versions are subject to the tax if imported as a complete unit, thus the disassembly and subsequent reassembly.

In 2009, Mahindra & Mahindra Limited announced it will import pickup trucks from India in complete knock-down (CKD) kit form, again to circumvent the Chicken Tax. CKDs are complete vehicles that can be assembled in the U.S. from kits of parts shipped in crates.

From 1978-1987, the Subaru BRAT carried two detachable rear-facing seats (with seatbelts and carpeting) in its rear bed, to meet classification as a "passenger vehicle" and not a light truck. The later Subaru Baja featured a smaller "pickup" bed, four doors and four passenger seats, and was manufactured within the U.S.