In his 1998 Origin of Competitive Strength, Akira Kawahara states that Detroit’s auto makers started experiencing financial woes in the 1970s because “they failed to reinvest their profits, their products had deteriorated, their production facilities were outdated, and their quality and productivity had become inferior to those of Japanese auto makers.” To this impressive list of reason, I think we should add one more: the frozen chicken tax.
In 1964, the European Union imposed a tariff on frozen chickens coming from the United States. The US, prompted by American auto makers, then imposed a 25 percent tariff on imported trucks. The tariff was targeted at West Germany (which had urged the EU to adopt the Chicken Tax) because the most imported trucks were, at the time, coming from West Germany.
At the same time, and at behest of an already-struggling Detroit, Congress exempted SUVs, light trucks and minivans from its safety and emissions standards of 1975. These cars were also excluded from the Gas Guzzler Tax Congress passed in 1978. The result was that the protected SUVs, light trucks, and minivans were less expensive to manufacture, less expensive to buy, and very profitable for Detroit. By the year 2000, SUVs, light trucks, and minivans accounted for approximately two-thirds of American auto manufacturers’ profits.
At the same time, these rules meant that if the Japanese or European auto makers hoped to compete at all in the US market, they had to invest in researching and developing as well as mass-producing smaller, fuel-efficient vehicles like the Toyota Prius. This innovation allowed European and Japanese manufacturers to capture the emerging green market and to sell their products domestically, where due to exorbitantly high gas prices, fuel-efficient cars were in great demand.
It also meant, of course, that when the bottom fell out of the gas guzzler market, European and Japanese auto makers were well-positioned to reap the benefits of the Chicken Tax while Detroit is now reeling from the very protectionism they had demanded for the past four decades.
