Market Analysis

Taxing Chickens (and Trucks)

Free trade agreements have gained attention worldwide of late. Though the United States has made recent headway in embracing freer trade, it still lags woefully behind.

Followers of MarketMinder know our penchant for free trade. And while the ratification of trade pacts with Colombia, Korea and Panama last month gave us reason to celebrate, there’s still more for the US to do. Asian and European nations have turned up the heat—rapidly pushing through free trade accords to gain economic advantage wherever they can. For example, Pakistan recently reached an agreement with perennial enemy India to grant it “Most Favored Nation” trade status. Mind you, these are two countries that have warred three times since 1947.

In our view, the benefits of free trade are myriad (not the least because active trading partners have less incentive to come to militarized blows—no doubt on the minds of Indian and Pakistani trade officials). Other benefits? Free trade increases efficiency by allowing countries to specialize production where they have some advantage, gives consumers a wider choice of products (usually at lower prices) and increases aggregate overall trade between countries.

Still not convinced? Say you were an American poultry farmer and you were in the market for a light truck to help transport chickens. You went to your local car dealership looking for an American light truck. But confound it, every American truck you look at is seemingly more expensive than foreign counterparts. What gives?

Blame the chicken tax. What do trucks have to do with chickens? In the mid-1960s, the United States and some European nations were embroiled in a trade spat over, among other things, chickens. The result was a tax on American chickens imported into Europe and a tax on European light trucks imported into the United States. Supposedly, the tax on chickens would protect European consumers from (allegedly) hormone-laden American birds. The tax on light trucks was mostly retaliatory, but the politicians framed it as protecting American automakers from foreign competition. (Competition? Heaven forbid!)

Flash forward 50 years, some European nations still tax our chickens, and we still tax their trucks. But that’s not all. Between 1960 and now, some American automakers embraced globalization and found it advantageous (for a number of reasons—not just cost) to produce certain light trucks in Europe and import them back into the US. The result? For you, the poultry farmer looking to buy an “American truck,” the price might be as much as 25% higher due to the chicken tax—if not for a clever loophole. You see, imported passenger vehicles from Europe (defined as having back windows and seats) are not subject to the 25% chicken-backlash tariff, only light trucks. So an enterprising American manufacturer started building light trucks in Europe—with back windows and seats. They import these “passenger vehicles” to the United States, discard the back windows and seats, and sell them as light trucks. All to avoid the 25% tariff.

And all just a bit silly. What benefit do we possibly get from having US manufacturers install seats only to discard them, just to avoid a decades-old retaliatory tariff? Some might say, “Jobs! Removing seat belts and windows from the back of trucks imported from Europe creates jobs here!” OK, but wouldn’t it be cheaper to just end the tariff? Then avoid altogether the incremental cost of installing needless seats then removing said needless seats? (The costs of a tariff—wherever and whenever possible—are likely passed along by companies to be ultimately borne by you, Mr. Hypothetical Chicken Farmer.) But perhaps those jobs might be replaced with new jobs. Maybe in the chicken industry—which might experience increased demand due to the lower cost of American chickens in Europe. Efficiency! Job creation! Greater consumer choices worldwide! Free trade makes countries more productive by allowing people to specialize in advantageous endeavors and work together more efficiently, whether it’s building trucks or raising chickens.

Just one example of the many head-scratching tariffs US (and global) businesses labor under. In fact, the US ranks a not-so-terrible-but-not-so-stellar 37 (out of 180 countries) in trade freedom (according to a recent study). What’s more, according to the report, countries with the most trade freedom typically also have higher per capita GDP, lower incidences of hunger, cleaner environments and lower unemployment rates. (And much, much fewer discarded car seats.)

Truth be told, the three trade acts passed on October 21 are a step in the right direction. However, the United States currently still has 17 free trade agreements stalled in some form of negotiation or ratification. The Korea pact (as an example) took nearly five years to ratify. What was the big fear? It’s estimated to boost exports by as much as $11 billion. And some auto manufacturers have already said they’ll export US-made vans to Korea. Seems like a win-win-win. Let’s hope they like our chickens, too.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.