Ford can only afford to give up on cars because of American protectionism

Bigger must be better.
Bigger must be better.
Image: Reuters/Brian Woolston
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In 1963, the US launched what remains among the biggest trade barriers on its books: a 25% tariff on foreign trucks, in retaliation against European duties on American chickens.

Now, you might say, the effects of this infamous “Chicken Tax” have come home to roost.

Ford, the company that pioneered the planet’s first mass-market car, is going to stop making cars—mostly.

“Given declining consumer demand and product profitability, the company will not invest in next generations of traditional Ford sedans for North America,” Ford said in its earnings report (pdf) yesterday, April 25. It will instead concentrate “on products and markets where Ford can win.” That means trucks, SUVs, and crossovers (which is car-speak for “littler SUVs”). The iconic sports car Ford Mustang will also survive the cuts.

This isn’t exactly surprising. Americans really dig gas-thirsty chrome behemoths. They also happen to be much more profitable than passenger cars.

Ford is a case in point. In 2017, Ford sold four of the top 20 bestselling cars in the US. Only one—the Fusion, at #19—was a sedan.

Ford’s not the only one killing off its little cars. General Motors is winding down production of the Chevrolet Sonic, a passenger car, and may scrap the Chevy Impala, according to the Wall Street Journal (paywall). A few years back, Fiat Chrysler scrapped the Chrysler 2000 sedan and the Dodge Dart to concentrate on pickups and SUVs.

What’s more interesting is why trucks and SUVs are so vital to US automakers—and what that implies about Detroit’s competitiveness.

The Chicken Tax—the 25% tariff that president Lyndon Baines Johnson passed in 1963—was initially aimed at blocking a popular German export, Volkswagen’s iconic van (which may or may not be the Mystery Machine of Scooby-Doo fame).

It wasn’t supposed to be permanent. But it gave Detroit a competitive edge over foreign companies in producing trucks and vans. (By comparison, the US only charges a 2.5% import duty on regular foreign cars.) So the tariff stuck around.

To this day, the bestselling vehicles in America are all pickup trucks made by US automakers. Thanks to the Chicken Tax, they can charge US consumers more than they would if they were exposed to competition. And that boosts Detroit’s margins.

There’s a solid argument to be made that protectionism can help economies, nurturing domestic industries until they develop the capacity, technology, and know-how to compete globally. (US founding father Alexander Hamilton was one prominent champion of this idea.)

But that’s not what’s going on with the Chicken Tax. The cushy US truck oligopoly is an accident of 1960s diplomacy. It hasn’t helped Detroit thrive globally. Instead, it’s induced a default reliance on gas-guzzlers among the Big Three carmakers (Ford, GM, and Chrysler). That’s allowed their foreign competitors to dominate the fuel-efficient passenger car market.

The pitfalls of the Chicken Tax became alarmingly apparent in 2009. When oil prices spiked in the mid-2000s, demand for big trucks plummeted. To stay afloat, GM and Chrysler received high-profile taxpayer bailouts. (Ford also requested government funding.)

With yesterday’s announcement, Ford drives home the economic legacy of the Chicken Tax. The profits of pickup protectionism are allowing Ford to cede the market for small, fuel-efficient cars to foreign rivals. That might be a sound strategy while gas prices stay low, buoying truck demand. But there are signs that those prices are ticking up again.