China's car market is the world's largest, and one of the most lucrative, so it's no surprise that it has become a flashpoint in the simmering trade battle between the United States and China.
President Trump continually has called out China for its high tariffs and barriers to entry, but China isn't alone in zealously protecting its domestic auto market. Many countries seek to shield their automakers from full-on foreign competition — including the U.S., when it comes to trucks.
Tensions between the U.S. and China over autos are relatively new — Chinese cars only recently good enough for the American market, says Mary Lovely of the Peterson Institute for International Economics. But she adds that that is changing rapidly, "a scary proposition."
U.S. trade officials are pressing China about the barriers to their market, she says — specifically a 25 percent tariff on imported cars. In a somewhat conciliatory speech this week, China's President Xi Jinping pledged to cut that levy.
The U.S. has a much lower tariff of just 2.5 percent on imported cars — but has a tariff ten times higher on foreign-made trucks.
"We haven't exactly examined our own house," says Lovely.
From chicken to trucks, from Germany to China
In the car business, that long-lived tariff is called the "chicken tax."
Its roots are in a trade dispute between the U.S. and Germany in the early 1960s, initially focused on frozen chicken parts. The dispute was dubbed the Chicken Wars, and it's the topic of a short film by NPR's Planet Money team.
In the early 1960s, German consumers began to crave American frozen chicken. When consumption shot up, German farmers lobbied and got a 50 percent tax on imported chicken.
The U.S. responded by putting a 25 percent tariff on all foreign-made light industrial vehicles, including pickup trucks and commercial vans.
Over time, the tax on the frozen chicken went away — but the tariff on all foreign trucks has not. It even got extended as a part of trade deal reached between the U.S. and South Korea.
Lovely says the trade dispute over frozen chicken "was a tit-for-tat type of situation similar to what we're seeing right now between the United States and the Chinese."
The spat with Germany faded away, but the tariff on truck imports has shaped the American auto industry, making it much more focused on building lucrative pickup trucks.
"Manufacturers came to depend on it to maintain healthy profit margins," says Lovely. "And so it just never went away."
Lovely says if the U.S. is serious about asking the Chinese to open their markets, then "we're going to see some pressure on that 25 percent truck tariff that came out of the Chicken Wars."
Chinese tariffs, European brands, Southern plants
The very public trade dispute between the U.S. and China has been marked by threats and counter-threats, as well as moments when the prospect of an all out trade war seems to recede. That was the case this week when China's President Xi Jinping spoke of the benefits of globalization and further opening China's economy.
Only a few days earlier the Chinese government had ratcheted up the tension, threatening to double their tariffs on imported SUVs to 50 percent. It's uncertain if China will follow through, but if it does if it does the biggest losers could be German carmakers such as BMW and Mercedes Benz that build their SUVs in the U.S., in places like Spartanburg, S.C., and Tuscaloosa, Ala.
Rebecca Lindland with Kelley Blue Book says while people may not be very sympathetic to those to those luxury brands, "they should be quite sympathetic to the local workers and the dealers that would be negatively impacted if those two companies in particular really started to go through financial pain."
Lindland says the problem with trade wars are the unintended consequences. If the Chinese tariff gets imposed, Lindland says companies such Mercedes and BMW that build and export in the U.S. will cut production, "which means cutting staff, cutting wages — cut, cut, cut ... that's all I see in the future."
That future, where both China and the U.S. follow through with their most severe threats, is a worst case scenario. Charged rhetoric or trash talk is common in trade disputes.
China's President Xi Jinping this week lowered the temperature, saying he's open to reducing tariffs on imported cars. Maybe the SUV threat is a bluff, and instead of raising barriers, trade negotiators will agree to lower them.
But that likely will require U.S. concessions as well — and China and every other country that builds trucks will be eyeing the chicken tax.
MARY LOUISE KELLY, HOST:
Let's look at another flash point in this trade dispute with China - cars. China is the biggest car market in the world and one of the most lucrative. It's also one of the toughest to crack for foreign manufacturers. President Trump has called out China for its high tariffs and barriers to entry, yet China is not alone in protecting its domestic automakers. The U.S. does it, too, as NPR's Sonari Glinton reports.
SONARI GLINTON, BYLINE: China really doesn't export cars to the U.S. Mary Lovely of the Peterson Institute for International Economics says, until now, Chinese cars haven't been good enough for the U.S. market, but that is changing rapidly.
MARY LOVELY: And so we see on the horizon that China may be able to do that, and that's a scary proposition. And now we're saying, let's see, is it really fair that they have these barriers in their own market?
GLINTON: But at the same time, we have...
LOVELY: We do.
LOVELY: Yes, we haven't exactly (laughter) - we haven't exactly examined our own house. Yes, we do on light trucks. We do.
GLINTON: Now, Lovely is referring to what's called in the car business the chicken tax - yes, chicken tax. Now, this started with a trade dispute between the U.S. and Germany in the early '60s over frozen chicken parts, called the chicken wars. Now, my colleagues at Planet Money loved the chicken wars so much that they made a short film.
(SOUNDBITE OF ARCHIVED BROADCAST)
ROBERT SMITH, BYLINE: You want to tax our chicken? Fine.
(SOUNDBITE OF MUSIC)
SMITH: Fine. We will find some German things that we can tax. So in 1963, the U.S. goes and puts a 25 percent tariff on foreign trucks. That includes commercial vans, light trucks and regular, old pickups. And Germany wasn't the only one affected. The U.S. applied it to all foreign-made commercial vehicles.
GLINTON: Now, the tax on frozen chicken - that went away. But the 25 percent tariff on foreign trucks has not. And this would all be kind of funny if it weren't for consequences.
LOVELY: And it was a tit-for-tat situation, similar to what we're seeing right now between the United States and the Chinese.
GLINTON: Again, Mary Lovely.
LOVELY: Unfortunately, that truck tax became quite popular. And manufacturers came to depend on it to maintain healthy profit margins, and so it just never went away.
GLINTON: And Lovely says the truck makers don't want to give up their advantage.
LOVELY: And so they're not going to let that go easily. If it becomes a case where we are serious about asking the Chinese to open up their market further in autos - say, by reducing their 25 percent tariffs on full vehicles that are exported to the Chinese market - then we're going to see some pressure on that 25 percent truck tariff that came out of the chicken wars.
GLINTON: The Chinese government recently threatened to double their tariffs on imported SUVs to 50 percent. And the irony here is that the biggest losers could be German carmakers, like BMW and Mercedes, that build their SUVs in the U.S. - in places like Spartanburg, S.C., and Tuscaloosa, Ala. Rebecca Lindland is with Kelley Blue Book, and she says that would hurt American workers in the South.
REBECCA LINDLAND: They'll have to cut down their exports, which means cutting down the plant production, which means cutting staff, cutting wages - cut, cut, cut. That's all you see. That's all I see in the future if this goes into effect - is cuts.
GLINTON: Now, there's a lot of trash talk in trade disputes. And China's President Xi Jinping - this week - lowered the temperature. He says that he's open to reducing tariffs on imported cars. And lowering those barriers, though, won't come without a cost, so China and every country that builds cars will be eyeing the chicken tax. Sonari Glinton, NPR News.
(SOUNDBITE OF DJ MITSU THE BEATS' "A LITTLE PIANO") Transcript provided by NPR, Copyright NPR.