Tariffs for the Long Haul[1]

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“We just saw how a tariff can be used to increase producer surplus at the expense of a loss in consumer surplus. There are also many other indirect costs of tariffs: They can lead trading partners to retaliate with their own tariffs (thus hurting exporting producers in the country that first imposed the tariff); they can also be fiendishly hard to remove later on even after economic conditions have completely changed, because they help to politically organize the small group of producers that is protected from foreign competition. … Finally, large tariffs can induce producers to behave in creative—though ultimately wasteful—ways in order to avoid them.

Subaru Solution Tariffs for the Long Haul

Before opening production facilities in the United States, Subaru got around the tariff on light commercial trucks by bolting two plastic seats to the open bed of its pickup truck (Subaru BRAT) exported to the United States. Thus, the BRAT was classified as a passenger vehicle thereby avoiding the tariff.

In the case of the tariff known as the “Chicken Tax,” the tariff lasted for so long (47 years and counting) that it ended up hurting the same producers that had intensively lobbied to maintain the tariff in the first place![2] This tariff got its name because it was a retaliation by U.S. President Lyndon Johnson’s administration against a tariff on U.S. chicken exports imposed by Western Europe in the early 1960s. The U.S. retaliation, focusing on Germany (one of the main political forces behind the original chicken tariff), imposed a 25 percent tariff on imports of light commercial truck vehicles. At the time, Volkswagen was a big producer of such vehicles and exported many of them to the United States. As time went by, many of the original tariffs were dropped, except for the ones on chickens and light commercial trucks. Volkswagen stopped producing those vehicles, but the U.S. “big three” auto and truck producers were then concerned about competition from Japanese truck producers and lobbied to keep the tariff in place. Japanese producers then responded by building those light trucks in the United States. …

As a result, the latest company to be hit by the consequences of the tariff is Ford, one of those “big three” U.S. producers! Ford produces a small commercial van in Europe, the “Transit Connect,” which is designed (with its smaller capacity and ability to navigate old, narrow streets) for European cities. The recent spike in fuel prices sharply increased demand in some U.S. cities for this truck. In 2009, Ford started selling these vehicles in the United States. To get around the 25 percent tariff, Ford installs rear windows, rear seats, and seat belts prior to shipping the vehicles to the United States. These vehicles are no longer classified as commercial trucks but as passenger vehicles, which are subject to the much lower 2.5 percent tariff. Upon arrival in Baltimore, Maryland, the rear seats are promptly removed and the rear windows replaced with metal panels—before delivery to the Ford dealers.”

 

[1]From Paul Krugman, Maurice Obstfeld, and Marc Melitz, International Economics: Theory and Policy (10e, 2015), Pearson. Page 216.

[2]Dolan, Matthew, “To Outfox the Chicken Tax, Ford Strips Its Own Vans,” Wall Street Journal, September 23, 2009.