Stephen Wilmot
Appearances
WSJ What’s News
Two Rulings Deal Blow to Key Trump Policies
What the history of the chicken tax shows is that it really means there aren't any imports of vehicles which are taxed at 25% because it's impossible to make them competitive at that level.
WSJ What’s News
Two Rulings Deal Blow to Key Trump Policies
Well, it all started in 1962 when what was the predecessor organization to the European Union created the Common Agricultural Policy. And that involved increasing tariffs on American poultry. And Germans in particular had been buying increasing amounts of chickens from American farmers.
WSJ What’s News
Two Rulings Deal Blow to Key Trump Policies
And then suddenly the tariff increases hit the volumes that they were exporting to Western Germany in particular very hard. exports plunged in the first half of 1963. So there was a lot of diplomacy, but eventually Lyndon Johnson did hit back with retaliatory tariffs of 25% on trucks, on goods vehicles specifically. And that was very specifically targeted at West Germany because Volkswagen
WSJ What’s News
Two Rulings Deal Blow to Key Trump Policies
was exporting its so-called Type 2 minivan to the US. And what the tariff did was it blocked just the goods vehicles. So Volkswagen continued to grow very strongly in the US with the camper van and with the Beetle, but its goods vehicles were hit. And so the chicken tax, as it became known, had a huge impact on the exports of goods vehicles from West Germany to the US.
WSJ What’s News
Two Rulings Deal Blow to Key Trump Policies
One similarity is the rate. 25% seems to be a golden number. It was the rate for the chicken tax. And it's also the rate that Trump is talking about with automotive tariffs expanded to all US vehicle imports, passenger vehicles, as well as goods vehicles. And that's a high level.
WSJ What’s News
Two Rulings Deal Blow to Key Trump Policies
So it really, what the history of the chicken tax shows is that it really means there aren't any imports of those vehicles which are taxed at 25% because it's impossible to make them competitive at that level. You don't get trucks imported to the US. They're all essentially made in the US with very few exceptions.
WSJ What’s News
Two Rulings Deal Blow to Key Trump Policies
There is this really colourful history of so-called tariff engineering that the chicken tax engendered. One classic example is Subaru, which used to import these small light trucks with seats facing backwards on the flatbed so that it could classify them as passenger vehicles for customs purposes.
WSJ What’s News
Two Rulings Deal Blow to Key Trump Policies
Another example is Mercedes, which used to ship its sprinter vans to the US in kits and then kind of reassemble them.
WSJ What’s News
Two Rulings Deal Blow to Key Trump Policies
So I think one lesson is that it does work in a sense. There are no imported goods trucks in that category, essentially. So it has kept production of pickups in the U.S., But it hasn't worked in raising any revenue, whereas the 2.5% tariff on passenger cars does raise quite a lot more money because it's not such a disincentive to pay.
WSJ What’s News
Two Rulings Deal Blow to Key Trump Policies
Another lesson really is just how long-lasting and unpredictable the consequences can be. It ended up essentially protecting Detroit from an influx of Japanese cars more than a decade later. And the chief lesson, therefore, is humility in terms of what the consequences of this will be. Potentially tariffs can become very hard to unwind for that reason.
WSJ What’s News
Auto Stocks Drop as Trump Plans 25% Tariff on Car Imports
Well, I think this really was about the worst case scenario for global automakers and the US trading partners. So we have seen quite a strong negative share price reaction. The German players are down 4% to 5% in Europe this morning. That followed falls on Asian stock markets. The worst affected was Hyundai.
WSJ What’s News
Auto Stocks Drop as Trump Plans 25% Tariff on Car Imports
which isn't surprising because it's actually one of the companies that ships most to the US. It always used to be Japan that was number two, but South Korea has taken it over. And one of the reasons for that is, well, Hyundai and Kia have been extremely successful in the US.
WSJ What’s News
Auto Stocks Drop as Trump Plans 25% Tariff on Car Imports
And because their success is relatively recent, they haven't localized as much of their production as the Japanese players who are more mature in the market.
WSJ What’s News
Auto Stocks Drop as Trump Plans 25% Tariff on Car Imports
Well, absolutely, there could be retaliatory tariffs. The US's trading partners haven't yet said what they might be, but they're saying they're preparing things. So we're likely to see some kind of tit for tat response. The share price reactions do show some kind of scepticism on the part of investors that this is for real.
WSJ What’s News
Auto Stocks Drop as Trump Plans 25% Tariff on Car Imports
For example, UBS was estimating recently that the German automakers profits could be impacted by 10 to 20%. Well, we haven't seen their share prices fall by that amount, right?
WSJ What’s News
Auto Stocks Drop as Trump Plans 25% Tariff on Car Imports
Absolutely. I mean, they have the choice to put prices up to keep their margins, but that has an impact on demand. Analysts are sort of saying... Anything between $5,000 and $10,000 could be added to the price of a car. Clearly, carmakers could choose to absorb the tariff hit to some extent. BMW is one of the carmakers that's been most transparent about this so far.
WSJ What’s News
Auto Stocks Drop as Trump Plans 25% Tariff on Car Imports
It said that it will maintain its prices in the US until early May, and then it will reconsider. So there are short-term responses and long-term responses in this.
WSJ What’s News
Auto Stocks Drop as Trump Plans 25% Tariff on Car Imports
Yeah, it's fair to say that the UAW has been one of the most consistent voices in favour of President Trump's tariff policy, despite the historic alignment of the UAW with the Democratic Party. And that reflects a very long held belief in trade union circles in Michigan that the North American free trade agreements have been bad for US auto workers.
WSJ What’s News
Auto Stocks Drop as Trump Plans 25% Tariff on Car Imports
Pretty much everyone else points more to the added costs that you get with tariffs. But there is a grain of truth in what Trump has said, that the offshoring stopped during his first term and you got more factory investment since. That there is some nuance in there because the shift to electric vehicles have also triggered a wave of investment.
WSJ What’s News
Auto Stocks Drop as Trump Plans 25% Tariff on Car Imports
So Mercedes-Benz has, for example, invested a lot in Tuscaloosa, BMW in Spartanburg, Hyundai. As they've been successful in the US, they've been onshoring more and more of their production. They still import a lot and that's the big problem for them. and Trump's tariff policy could accelerate some of those investments, and we could see further announcements in that vein.
WSJ What’s News
U.S. Stocks Fall, Wiping Out More Than $3 Trillion in Market Value
In the European trading morning, we got, for example, the drinks makers Diageo and Campari. Their stocks rose because there had been fears that their Mexican tequila imports to the US, which account for quite a dominant chunk of the US businesses these days, would be hit by tariffs because of the current exemption for US MCA compliant goods.
WSJ What’s News
U.S. Stocks Fall, Wiping Out More Than $3 Trillion in Market Value
That's goods that comply with the free trade area rules in North America. that that exemption would end. And so the fact that it wasn't led to a bit of a relief for some sectors. Another one was pharma because pharmaceutical products were exempted.
WSJ What’s News
U.S. Stocks Fall, Wiping Out More Than $3 Trillion in Market Value
As the trading day has evolved, that's changed a bit because the liquor companies have started to trade down and that's because a consensus is starting to build that actually these tariffs could be recessionary. And obviously, that's not good for liquor companies. But pharmaceuticals are a traditional safe haven trade because people continue to buy drugs even in recessions.
WSJ What’s News
U.S. Stocks Fall, Wiping Out More Than $3 Trillion in Market Value
These are often considered consumer staples. They sell goods that people tend to buy, whether in good times or in bad. Nestle sells pet food, formula, coffee, so things that people won't stop buying in a recession. Philip Morris, obviously, cigarettes, a classic recession trade. And Anheuser-Busch beer, Budweiser, which is considered a bit more of a staple product.
WSJ What’s News
U.S. Stocks Fall, Wiping Out More Than $3 Trillion in Market Value
alcoholic drink than tequila, for example, which goes into high-end cocktails that you might consume in bars. So investors rotate into these consumer staple stocks in anticipation of a recession, in anticipation of consumers trading down into cheaper, more basic product categories.
WSJ What’s News
U.S. Stocks Fall, Wiping Out More Than $3 Trillion in Market Value
Yes, a sea of red at the moment. It started the day with a slightly more nuanced reaction, I would say. Adidas in European trading was one of the big losers early on in the European trading day, following Nike in post-market trading in the US. And that's obviously because they imported a lot of shoes from Vietnam and Vietnam got hammered with particularly high reciprocal tariff.
WSJ What’s News
U.S. Stocks Fall, Wiping Out More Than $3 Trillion in Market Value
And Southeast Asia was, in general, the kind of big loser from the announcements. But then as the day is built, the stock market pain has spread, essentially, and the recession trade is built so that everything that is generally macroeconomically sensitive has started to sell off. So bank financials, property stocks, things that have nothing to do with tariffs.