Why Is Free Trade Good For The Economy? 'Chicken Tax' Could Raise Price Of Trucks Imported From Mexico

If President Donald Trump were to follow through on his plans for “tweaking” the North American Free Trade Agreement, he could bump up the cost of some American pickup trucks, vans and SUVs by as much as 25 percent with the renewed imposition of a tariff known as the “Chicken Tax” on Mexico.

Levied in retaliation to an early iteration of the European Union in 1962 for its high taxes on American chicken exports, in what became known as “the Chicken War,” the tariff sought to protect U.S. truck manufacturers from competition abroad and penalize foreign automakers by levying an astronomical tax on the imported light trucks.

While many companies have historically circumvented the rule in Europe and Asia, the U.S. eliminated the use of the tariff in trade with Canada and Mexico with the establishment of NAFTA in 1994. All that could soon change, the Wall Street Journal pointed out Wednesday. Coupled with House Majority Leader Paul Ryan’s proposal to stop companies from deducting the costs of imports from their corporate taxes, the tariff could severely harm automakers.

“If you’re paying the Chicken Tax tariff, and you also can’t take a tax deduction on your imports, that would be the worst of both worlds,” Brian Johnson, an auto industry analyst at Barclays PLC, told the Journal. Toyota Motor Corp., General Motors Corp. and Fiat Chrysler Automobiles “would definitely get hurt,” he added.

Mexico is America’s third-largest goods trading partner, according to the Office of the United States Trade Representative, with $295 billion worth of products imported to the U.S. in 2015. “Trucks, buses and special purpose vehicles” make up the second largest category of imported goods from Mexico, totaling more than $29 billion, according to the U.S. Census.

Despite worries that Trump would discard NAFTA, Fiat Chrysler, Toyota and GM all planned to expand their manufacturing efforts and shares of cars built in Mexico by 2020, according to a Jan. 18 report by the industry forecaster LMC Automotive. That means that if Trump followed through on his protectionist plans, Americans can expect the prices of those cars—especially the light trucks—to skyrocket.