Back in May of 2024, we wrote a weekly commentary called: “We Can’t Import Cheap Homes; But We Could Import Cheap EV Cars.” In that weekly we argued that since the U.S. auto industry, does not want to build small cars because it is not competitive, then we should open the lower-end EV automobile industry to imports from China. The weekly was in response to former President Biden’s tariff on Chinese EV imports of 100%. The measure also included a 50% tariff on solar cells, and a 25% tariff on electric vehicle batteries, critical minerals, steel, aluminum, etc.
Our argument was based on the fact that our automobile industry was not competitive in small cars (sedans) and had pivoted to the production of large, and very expensive, ‘light trucks.’ Many of these light trucks are gas-guzzling vehicles that are probably only driven in U.S. markets but are not very competitive in other continents. This means that it is very difficult to export them to other countries. More recently, in our February 7, 2025, weekly, which we titled “Fiscal Revenues from Tariffs? We Have Been There Before!,” we talked about a tariff provision we have had since the 1960’s ‘Chicken War,’ which has been called the ‘Chicken Tax,’ a 25% tariff on imported light trucks.
Although there are other reasons for our automobile industry’s tilt towards the production of ‘light trucks,’ we will argue in this weekly that one of the biggest reasons for the tilt (see graph on the previous page) has been as a consequence of the Chicken Tax, that is, the imposition of the 25% tax on the importation of light trucks.1 We argue that the U.S. automobile industry lost its desire to compete in the small passenger car market and concentrated on the production of those automobile segments where the US government provided protection to sustain higher profits over the long run. And, of course, these higher profits were possible due to the shield provided by the Chicken Tax.2
Once again, as we have said in the past, tariffs may be a good policy instrument to fix temporary issues in a specific market but keeping the protection for a long period of time acts against the industry’s competitiveness and sustainability and typically fosters even more protection. That is, tariffs reduce competition and increase the costs of entry into an industry, making that industry less competitive.
Again, there may be good arguments to protect an industry temporarily from unfair competition. In our case, it may be a good idea to protect the new EV industry from competition until our automobile industry becomes more competitive. However, protecting our automobile industry from EV competition when the industry is not interested in producing low-cost EVs for mass consumption because they rather produce for the high-end EV market while also taking advantage of the Chicken Tax, is not a good reason for imposing tariffs on cheap EV automobiles. In this case, tariffs should be imposed if there is an understanding between the government and the automobile sector that the tariff is temporary and conditional on re-engaging in the low-end EV sedan market until they can compete in the global economy.
1 Other probable reasons include regulatory reasons, like the Energy Policy and Conservation Act (EPCA) and the Clean Air Act (CAA) which, together have set lower fuel economy and emission standards than those imposed on passenger cars.
2 See “The Big Three’s Shameful Secret,” by Daniel J. Ikenson, CATO Institute, July 6, 2003. https://www.cato.org/commentary/big-threes-shameful-secret
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Consumer Price Index is a measure of inflation compiled by the US Bureau of Labor Statistics. Currencies investing is generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising.
Consumer Sentiment is a consumer confidence index published monthly by the University of Michigan. The index is normalized to have a value of 100 in the first quarter of 1966. Each month at least 500 telephone interviews are conducted of a contiguous United States sample.
Personal Consumption Expenditures Price Index (PCE): The PCE is a measure of the prices that people living in the United States, or those buying on their behalf, pay for goods and services. The change in the PCE price index is known for capturing inflation (or deflation) across a wide range of consumer expenses and reflecting changes in consumer behavior.
The Consumer Confidence Index (CCI) is a survey, administered by The Conference Board, that measures how optimistic or pessimistic consumers are regarding their expected financial situation. A value above 100 signals a boost in the consumers’ confidence towards the future economic situation, as a consequence of which they are less prone to save, and more inclined to consume. The opposite applies to values under 100.
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GDP Price Index: A measure of inflation in the prices of goods and services produced in the United States. The gross domestic product price index includes the prices of U.S. goods and services exported to other countries. The prices that Americans pay for imports aren't part of this index.
Employment cost Index: The Employment Cost Index (ECI) measures the change in the hourly labor cost to employers over time. The ECI uses a fixed “basket” of labor to produce a pure cost change, free from the effects of workers moving between occupations and industries and includes both the cost of wages and salaries and the cost of benefits.
US Dollar Index: The US Dollar Index is an index of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of U.S. trade partners' currencies. The Index goes up when the
U.S. dollar gains "strength" when compared to other currencies.
Import Price Index: The import price index measure price changes in goods or services purchased from abroad by U.S. residents (imports) and sold to foreign buyers (exports). The indexes are updated once a month by the Bureau of Labor Statistics (BLS) International Price Program (IPP).
ISM Services PMI Index: The Institute of Supply Management (ISM) Non-Manufacturing Purchasing Managers' Index (PMI) (also known as the ISM Services PMI) report on Business, a composite index is calculated as an indicator of the overall economic condition for the non-manufacturing sector.
Consumer Price Index (CPI) A consumer price index is a price index, the price of a weighted average market basket of consumer goods and services purchased by households.
Producer Price Index: A producer price index(PPI) is a price index that measures the average changes in prices received by domestic producers for their output.
Industrial production: Industrial production is a measure of output of the industrial sector of the economy. The industrial sector includes manufacturing, mining, and utilities. Although these sectors contribute only a small portion of gross domestic product, they are highly sensitive to interest rates and consumer demand.
The NAHB/Wells Fargo Housing Opportunity Index (HOI) for a given area is defined as the share of homes sold in that area that would have been affordable to a family earning the local median income, based on standard mortgage underwriting criteria.
Conference Board Coincident Economic Index: The Composite Index of Coincident Indicators is an index published by the Conference Board that provides a broad-based measurement of current economic conditions, helping economists, investors, and public policymakers to determine which phase of the business cycle the economy is currently experiencing.
Conference Board Lagging Economic Index: The Composite Index of Lagging Indicators is an index published monthly by the Conference Board, used to confirm and assess the direction of the economy's movements over recent months.
New Export Index: The PMI New export orders index allows us to track international demand for a country's goods and services on a timely, monthly, basis.
Gold is subject to the special risks associated with investing in precious metals, including but not limited to: price may be subject to wide fluctuation; the market is relatively limited; the sources are concentrated in countries that have the potential for instability; and the market is unregulated.
The Conference Board Leading Economic Index: Intended to forecast future economic activity, it is calculated from the values of ten key variables.
Source: FactSet, data as of 12/6/2024
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