Does the Chicken Tax Imply Prices Lower for Domestic than for Foreign Pickups?
I just finished writing a review of Bas van der Vossen and Jason Brennan’s recent book, In Defense of Openness: Why Global Freedom is the Humane Solution to Global Poverty. (It should be in the Spring issue of Regulation.) The economics of this book is good, but here is a questionable minor point. The authors write:
Suppose Jason typically buys American pick-up trucks, because he wants to avoid the 25% tariff on imported trucks.
This is not correct. The tariff on light trucks—the so-called Chicken Tax, which I discussed in a previous post—cannot be avoided by buying domestic. In the general case, as I explained in another blog, a tariff equally increases the price the imported good and of its domestically-produced equivalent. Domestic producers want the tariff precisely in order to be able to increase their prices and sales. They will charge what the market will bear, that is, as much as the sellers of the imported good charge tariff included.
Let me illustrate with steel. The 25% steel tariff imposed by the U.S. government on different countries between March and June confirms the theory. The price of all steel, foreign and domestic, has increased in the United States, as can be seen from a Wall Street Journal report of November 23 (“Steel Tariffs and Hot Economy Take Toll on Infrastructure Projects”):
Through October, the price of diesel fuel was up 27%, asphalt-paving mixtures were up 11.6% and steel-mill products were up 18.2%, all compared with a year ago, according to the Bureau of Labor Statistics. Tariffs of 25% on steel imported from China and other countries imposed in June have given domestic steel makers leverage to raise their own prices, say analysts. …
Bill Boynton, a spokesman for the New Hampshire Department of Transportation, said the state has seen a surge in steel prices since this summer of about 30%. The Ohio Department of Transportation paid 19.1% more for structural steel in September, compared with a year ago.
The price increase calculation depends on the dates chosen. Data from the Bureau of Labor Statistics show an increase in steel prices of 14% since February, the month before the tariffs were announced in early March (see the chart below, and click on the image to view a larger format). Over the same period, data from the SteelBenchmarker show an increase of 10% in the U.S. price of hot-rolled band (a benchmark steel output), while the world price decreased by 11%. These data are consistent with an increase in American steel prices of 15%-20%.
The difference with the tariff percentage should be accounted for by the fact that the tariff hits steel before marketing and distribution costs, by timing factors, possibly by terms-of-trade effect (tariff-induced lower U.S. demand exerting downward pressure on the world price exclusive of the tariff), and other influences.
Back to pickup trucks. For the same reasons as in steel, we would expect the 25% tariff on pickup trucks (in force for more than five decades) to translate into an equivalent increase (minus marketing and distribution cost) in the price of both imported and domestically produced pickups. It is not true that the American consumer has a choice between what he considers equivalent pickups at two different prices, with imported ones priced higher than domestic ones; he has to pay the same price for both. This is not surprising: no consumer (except a minority willing to pay for their political or esthetic preferences) would pay a premium for a Japanese over an American pickup with equivalent features and options (including brand reputation).
Note however an important difference between the pickup market and the steel market. In the former, the 25% tariff is so high that it discourages all imports and gives the entire domestic market to domestic manufacturers, the Big Three. No foreign-made pickups are exported to the United States on a commercial basis (see a list of foreign-manufactured pickups at https://en.wikipedia.org/wiki/List_of_pickup_trucks). The only way for a foreign manufacturer to get around the prohibitive tariff is to establish manufacturing facilities in the United States or elsewhere in the NAFTA zone, as Toyota, Honda, and Nissan have done. This increases domestic supply compared to a situation with no imports and with no manufacturing facilities by foreign manufacturers in the NAFTA zone, and pushes domestic prices back down, but not all the way to the world price.
How do we know that foreign manufacturers’ facilities in the United States don’t push back the domestic price to the world price–in which case the tariff would have no effect on price? Because if manufacturing in the United States did not cost more than elsewhere, foreign pickup manufacturers would have produced their pickups in the United States without the tariff, and would not need a tariff to continue doing so. Obviously, there are some costs in the United States and other NAFTA countries that make manufacturing certain lines of pickups here more expensive. In America and Canada, powerful trade unions come to mind; in Mexico, it may be lower productivity.
The prohibitive pickup tariff thus imposes to American buyers a premium that is positive but below 25%. More data and analysis would be needed to provide a narrower estimate, and I am not aware that this exercise has been done; but I suspect the premium is closer to 25% than to 0%. Look at it another way: the premium is equal to the additional price the Big Three can charge because they face less competition thanks to the prohibitive tariff. But whatever its exact value, the premium charged to consumers is the same for all pickups sold in America.
I don’t think this conclusion is changed by the fact that foreign producers are into smaller pickups than the full-size ones that most Americans buy (see Anton Wahlman, “GM Gains 2% Market Share And Takes U.S. Pickup Truck Sales Crown From Ford,” Seeking Alpha, July 9, 2018). Many foreign producers would adapt their offerings to the American market if they could access it without a prohibitive tariff. The adaptation would take some time for full-size pickups, but compact pickups would rapidly start competing. Supply responds to demand. More competition means lower prices.