So what does the fate of a once-booming chicken-and-egg industry in my birth state of New Jersey have in common with the evolution of the US auto industry? A 25% tariff, that’s what.
We begin today’s missive with a link to a January 29, 2025, CATO blog post that describes, with seven fascinating charts, what is coming to the US auto industry, given the chaotic Trump 2.0 tariff war. (Our previous commentaries on tariffs and the misguided war with Canada are linked in the reading list at the bottom.) Here’s the first chart. What implications do you see lying ahead for the US auto industry? The full post is not to be missed.
“Seven Charts Showing How Canada/Mexico Tariffs Would Harm the US Auto Industry (and American Car Buyers),” https://www.cato.org/blog/seven-charts-show-how-us-tariffs-would-harm-american-auto-industry
Now let’s turn to a lesson on tariffs from a history with which I am personally familiar.
I was born and raised in Vineland, NJ, which was once known as the “egg capital of the world.” I can remember the festival in downtown Vineland, where the “world’s largest frying pan” was in use.
In those days, Vineland had a huge number of poultry farms. Chickens and eggs were big business. For a delightful history about how this happened I recommend Speaking Yiddish to Chickens: Holocaust Survivors on South Jersey Poultry Farms by Seth Stern
https://www.amazon.com/Speaking-Yiddish-Chickens-Holocaust-Survivors/dp/1978831617. I remember the author’s mother from my high school days.
The history of the chicken industry’s demise in NJ starts with a 25 percent tariff imposed in 1964, and not just on chickens. That same tariff also profoundly shaped the US auto industry. DataTrek’s Nick Colas and Jessica Rabe tell this story. (I’m a personal subscriber to DataTrek’s daily service and wholeheartedly recommend it to readers. See https://datatrekresearch.com/hard-data-experience-investment-edge/?v=0b3b97fa6688. It is well worth the cost.)
Here’s “The Chicken Tax” from the February 27 DataTrek Morning Briefing, which I share with Nick and Jessica’s gracious permission.
STT: The Chicken Tax
Trade wars are much in the news, so this week’s Story Time Thursday tells the tale of one of the longest running tariffs in US history. It is called the “Chicken Tax”, and we’ll discuss it in our usual 3-point format.
#1: In January 1964, then-US President Johnson imposed a 25 percent tariff on imports of several foodstuffs (brandy, dextrin, potato starch) and light trucks. This was in response to a new European tariff on chickens, of all things. Here’s why this happened:
- In the years after World War II, the American poultry industry became the world’s low-cost producer. By the early 1960s, it had almost 50 percent of the European market.
- Farmers wield considerable political influence on the continent even to this day, so enacting a tariff on chickens was a very popular measure at the time.
While the food-related tariffs were eventually reduced, the 25 percent tax on imported light trucks remains to this day. It originally targeted vehicles like the Volkswagen Microbus and small pickups/vans made by Daimler-Benz. Both were growing in popularity across America when the tariff was introduced, the former with younger consumers and the latter with tradespeople. The new tariff curtailed demand for the VW product (now a highly collectible vehicle because of its relative rarity) and pushed Daimler-Benz to focus on passenger cars rather than small trucks.
#2: The most important long-term effect of what became known as the “Chicken Tax” was that it both saved and eventually killed the domestic US auto industry. This is not hyperbole. I (Nick here) first heard of it while covering the auto industry as an equity analyst at the old First Boston in the 1990s. I have thought a lot about this topic since.
The original tariff on light trucks targeted European carmakers as retribution for the chicken taxes, but it applied to any vehicle imported into the US. As Japanese car makers started to make inroads into the US market in the 1960s and 1970s, they focused on passenger cars, where tariffs were just 2.5 percent. The South Korean automakers followed in the same vein 20 years later, and for the same reason. Not only were these vehicles similar to the ones sold in their home markets (streamlining manufacturing), but weak currencies and efficient manufacturing processes made them very profitable to export.
Because of the “Chicken Tax”, US automakers had the pickup truck and (later) the minivan and SUV American market to themselves for many years. That allowed them to cavalierly cede the passenger car market to the imports, a process that started in the 1970s. Light trucks were growing in popularity in the 1980s/1990s, and the Big Three dedicated themselves to expanding this protected and therefore high profit segment. The 1991 Ford Explorer, the 1991 Grand Cherokee, and 1992 Chevy Suburban were all consciously designed to be passenger car substitutes. Low gas prices and family-friendly size made them all tremendous hits with buyers.
This behavior neatly fits Clayton’s Christensen’s model of innovative disruption, with the Big Three as the doomed incumbents and the Japanese/South Korean makers as the successful upstarts. Because of the “Chicken Tax”, US car companies had a high margin niche of the market in which to retreat. As a result, they were never forced to compete head-on in passenger cars. If the playing field had been level, they would have been forced to right-size their cost structures and focus on making their products attractive enough to hold market share. That did not happen.
It’s easy to wag fingers now, but put yourself in the shoes of an auto company CEO in the 1980s, 1990s or early 2000s. Your company loses thousands of dollars on every small passenger car, breaks even on mid-sized vehicles, and maybe makes $5,000/unit on luxury cars. Conversely, every large pickup, minivan, or SUV delivers at least $10,000/unit in profits, and often more. The facilities that made large luxury SUVs in the 1990s were known as “billion-dollar plants” because that’s what they made in pretax profits every year.
This phenomenon is why Christensen’s mental model is truly brilliant: it explains why good companies make bad mistakes. It’s not that an incumbent business’ management team is dumb or ill-informed. In fact, they are doing the right thing by ceding low-margin business and focusing on higher-profit opportunities. But… Those seemingly “smart” near term decisions can have dire long-term consequences.
In the end, the “Chicken Tax” only delayed the inevitable. Foreign car companies developed their US dealership systems and grew market share on the back of passenger car offerings. When they got to critical mass, they started building assembly plants in North America. Products made there were not subject to tariffs. Ever wondered why Daimler’s first US plant made SUVs rather than their famous cars? Now you know.
#3: The “Chicken Tax” is an excellent example of how difficult it is to assess the impact of tariffs on the US economy and business over the long term. Much of the commentary we read focuses on macroeconomic issues like inflation or the effect on corporate cost structures and profits. While those are important, the real issues revolve around long run corporate strategy. As the example we’ve discussed today shows, tariffs can have a very long shadow indeed.
Finally, here’s a history reading list about eggs and Vineland and other things that may pique interest of readers.
IMO, the Trump chaos is now starting to reveal its cost, and this is only at the earliest stage. We already see market-based indicators suggesting a coming economic slowdown. Will it turn into a full-blown recession? We are going to find out. More from me about that in later commentaries.
I’m going to have an egg salad sandwich for lunch.
Reading List
Recommended from The Kotok Report
“Tariffs: Oh, Canada!”
https://kotokreport.com/tariffs-oh-canada/“Tariff War Continues”
https://kotokreport.com/tariff-war-continues/All previous Kotok Report commentaries on tariffs can be found at The Kotok Report.
Around the Web
Tariffs
“Trump vows to take back ‘stolen’ wealth as tariffs on steel and aluminum imports go into effect,”
https://www.ktalnews.com/news/politics/ap-trumps-25-tariffs-on-all-steel-and-aluminum-imports-go-into-effect“Backgrounder: What Are Tariffs?”
https://www.cfr.org/backgrounder/what-are-tariffs“Trump has touted Gilded Age tariffs, an era which saw industrial growth together with poverty,”
https://www.pbs.org/newshour/politics/trump-has-touted-gilded-age-tariffs-an-era-which-saw-industrial-growth-together-with-poverty“The Chicken Tax: A US Car Importer’s Perspective,”
https://www.wcshipping.com/blog/the-chicken-tax-us-car-importers-perspectiveVineland History
“I grew up Jewish on a chicken farm. This book gets it right,”
https://forward.com/yiddish-world/540644/i-grew-up-jewish-on-a-chicken-farm-this-book-gets-it-right“Arthur Goldhaft: Pioneering Vet Put ‘a chicken in every pot,’”
https://cumberlandcountynj.gov/Arthur-goldhaftThe price of eggs in 2025
“Egg prices are rapidly falling so far in March,”
https://www.cnbc.com/2025/03/13/egg-prices-are-rapidly-falling-so-far-in-march.html“USDA offers relief from record-high egg prices, but beware of a new round of sticker shock,”
https://www.foxbusiness.com/media/usda-offers-relief-from-record-high-egg-prices-but-beware-new-round-sticker-shock
