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Can the chicken tax be used to resolve an olive war?

The chicken tax has effectively insulated US carmakers for more than 50 years

by
Garry White

04.02.2019

This week's escalation in the "olive war" between the US and Spain may be a taste of things to come. As hopes mount that a resolution of the trade dispute between China and the US could be in sight, there are concerns in Europe that a truce struck six months ago could end should tensions between Washington and Beijing ease.

European wine, agriculture, luxury goods and vehicles could once again be in Donald Trump's sights - and Europe is right to be concerned. Earlier this week, the Trump administration confirmed it had received a request from the European Union for consultations at the World Trade Organisation (WTO) to fight a tariff of almost 35pc on Spanish olives that have already been imposed. This followed a conclusion by the US International Trade Commission - which is said to be independent and bipartisan - that olives from Spain were unfairly dumped in the US and they were also unfairly subsidised. However, the request for talks got a strong rebuff from the US. "It would be unfortunate if the WTO were to encourage the type of unfair and market-distorting trade that was at issue in this case," said Robert Lighthizer, US trade representative. "We believe that the EU's case is without merit, and we intend to fight it very aggressively."

Agriculture is shaping up to be a major area of contention should President Trump turn his trade guns on Europe. Earlier this month, the Trump administration said it wanted duty-free access for US industrial goods and the elimination of tariffs and non-tariff barriers. It also wants comprehensive access to the EU's markets for its own agricultural products. This will be a red line for the EU as it will be seen as a threat to the Common Agricultural Policy.

A couple of weeks ago, US officials said a pledge by President Trump and European Commission President Jean-Claude Juncker, issued after talks last July, to lower trans-Atlantic trade barriers also included agriculture. The EU insists that this is categorically not the case and the agreement related to industrial products alone. "It [was] said very clearly, without doubt - and I was in the room where it happened so I know this - that agriculture would not be in," said Cecilia Malmstrom, European trade commissioner. If protections for Europe's farmers were removed, the backlash is likely to make France's recent gilet jaunes protests look like a pleasant evening stroll. The EU's negotiators know this - and so do the Americans.

The US administration is keen to point out tariffs imposed by others. It says the US tariff on foreign automobiles is only 2.5pc with 10pc levied in Europe. China's import tariffs on cars stand at 25pc, after an increase in August in response to tariffs imposed by President Trump. However, there is an interesting wrinkle here the EU will be keen to use as a bargaining chip. The US has actually enacted a punitive 25pc tariff on light-truck imports since it was introduced by Lyndon B Johnson in 1964. These types of vehicles, generally pick-up trucks, are huge sellers in the US auto sector. So, it is not strictly true that the US has relatively low tariffs and opens its markets to the world, as claimed by President Trump. Indeed, the dispute between the EU and US on vehicles and agriculture has a long history - and the so-called "chicken tax" on light trucks could be helpful for EU negotiators.

Pick-up trucks provide the core profitability of the US car industry and this protectionist tariff has been a massive help for US players such as Ford and GM. In 2017, pick-ups accounted for 16.4pc of all vehicles sales in the US. Total sales that year rose 5.6pc to 2.37m trucks, according to industry research group Autodata Corp. The chicken tax has effectively insulated US carmakers for more than 50 years. Its introduction was a response to tariffs placed by France and West Germany on imports of US chicken, but the tax has often been referred to as "a policy in search of a rationale". It is arguably responsible for the parlous state of the US car industry, as manufacturers focused too heavily on gas-guzzling vehicles which are falling out of favour due to their environmental impact.

The US Commerce Department has until Feb 17 to publish its report on the national-security implications of auto imports that could justify tariffs on foreign cars. This suggests that talks with the EU could reopen in the next few weeks, should President Trump feel comfortable with the way talks with China are progressing. He may even want to open a second front in his trade battle. The EU is willing to discuss opening its markets to US industrial goods, including the sensitive issue of auto imports, but it is clear that agriculture is not going to be on the agenda. Should the US insist that wine, meat and crops are part of any agreement, it may be hard to find any common ground. Markets are likely to react particularly badly to these events - and we all know Trump is a very keen stock market watcher. Europe should use the chicken tax as leverage to help dissuade President Trump from pushing Europe too hard on agriculture. The status quo may serve both sides best. Plus ça change.

version of this article appeared in Friday’s Daily Telegraph.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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