U.S. Auto Policy is the Definition of Insanity

For 61 years, a 25% tariff — a “Chicken Tax” — has protected the U.S. auto industry. In addition, the federal government has directly restricted vehicle import and has financially bailed out the major U.S. car companies three times. What the government achieved has been to turn GM, Ford, and Chrysler (the “Big Three”) from global icons to global “also-rans”, whose combined U.S. market share has declined from a peak of 91% in 1965 to 38% today.[1]

The point of this article isn’t to criticize the auto companies or their workers. I have two points. First, I’d like to show you how quickly and addictively protectionism dilutes competitiveness simply through the rational, profit-maximizing behavior of those being protected. As in the case of an adult child, while there may be occasional rationale for a parent to provide transient support, the experience with protectionism always seems to be one of long-term dependence. Second, I aspire to show how protectionism has warped and reduced consumer choice and wealth, and how it has fostered national self-doubt far beyond the protected industry. The story is an entertaining one. It is also a warning relevant to our current infatuation with government interventions, and it is a story of optimism.

It all started in the 1950s, when the iconic German Volkswagen (“VW”) Beetle and vans made their way to the United States.[2] Over the subsequent 10 years, these vehicles became known as the favorite of hippies and counterculturists. More importantly, Americans broadly embraced these economical vehicles – officially the VW Type 1 Beetle and Type 2 microbus/van – in large numbers.[3] This threatened Detroit’s share of the light-truck and small van segment. The Big Three and the then-powerful United Auto Workers (“UAW”) union looked for ways to get relief via the federal government.

The efficiency of American poultry producers gave Washington the excuse it needed. In the early 1960s, the newly formed European Economic Community, the precursor to the European Union, imposed steep tariffs and price controls on imported American chicken. President Lyndon Johnson retaliated and, effective January 7, 1964 [4], imposed higher import duties on four European products. Three were edible and seemed relevant to chicken retaliation: potato starch, the starch derivative dextrin, and brandy. The fourth was, surprisingly, the typically non-edible category of “automotive trucks,” which were hit with a 25% import duty — the “Chicken Tax.”

You see, President Johnson, eyeing the 1964 election, had a vested interest in placating the UAW. He was asking union president Walter Reuther to avert a threatened auto strike and also to support his highly controversial civil rights agenda. In return, Johnson agreed to include “automotive trucks” in the retaliatory tariff package. What transpired over the following decades — not years, mind you, but decades — was startlingly in line with exactly what an economist or fair-minded businessperson would predict.

The Chicken Tax achieved its aim immediately. In 1964, the first year of its implementation, the value of West German “automotive truck” imports into the U.S. fell by one-third.[5] Volkswagen’s Type 2 pickups and vans – the primary targets – practically disappeared from the U.S. market soon thereafter, as did emerging products from Japanese manufacturers.[6]

Other trends quickly established themselves and endure to this day, sixty years later. The Big Three naturally focused on model types where U.S. chicken had pecked away at foreign auto competition. Soon, pickup trucks became a point of emphasis, and in 1981 the Ford F-Series pickup truck became the best-selling vehicle in the US of any type (not just of pickups).[7] The Chevy Silverado’s predecessor was close behind, and Chrysler’s Dodge Ram pickup also fared well. Incredibly, every year since 1981, the F-Series and the Silverado have remained the top-selling models of any type in the United States.[8] Americans had few foreign alternatives, and the domestics focused on selling ever-larger, more powerful vehicles.

Unfortunately, but not surprisingly, the Chicken Tax led to decades-long cycles of the Big Three being sickened by foreign competition and events, and then medicating with a growing addiction to more protectionism and government intervention. Let’s explore.

In 1969, the Cuyahoga River, close to Cleveland, Ohio, choking on chemical pollution, caught on fire for the umpteenth time.[9] Time Magazine, the leading weekly publication of the time, printed surreal photographs of massive flames floating on the river’s water and spewing thick black smoke. Randy Newman, best known today as the creator of music for Pixar movies like Toy Story and Cars, wrote a song titled “Burn On.” A rise in environmentalism was triggered, and one result, the spectacularly successful Clean Air Act signed by President Nixon on December 31, 1970, regulated pollutant emissions from automobiles. Separately, in 1973, Middle Eastern conflicts led to a spike in energy prices — the “Oil Shock” — which in the case of automobiles led to the 1975 introduction of fuel-efficiency requirements under President Ford. These Corporate Average Fuel Economy, or “CAFE” standards, were first implemented in 1978 and continue to this day.[10]

Two conflicting outcomes resulted from the Clean Air Act, the CAFE standards, and the Oil Shock.

The short-term positive for the Big Three was that the Act and CAFE were not immediately applied to the “automotive truck” category. Given these vehicles were exempt from fuel economy and clean-air compliance costs [11], they were more attractive to consumers than they otherwise would have been.

On the negative side, and in the aftermath of the Oil Shock, the Big Three paid dearly for their lack of high-quality, fuel-efficient offerings. Americans transitioned quickly toward the more economic, fuel-efficient Japanese sedans that had been making their way to the U.S. since the early 1970s. In addition, the Big Three were having major quality problems with their vehicles. By 1979, Chrysler was bankrupt and was directly rescued by President Reagan’s administration.[12] GM and Ford survived, but the whole industry needed yet another dose of protection, which Reagan provided in 1981 by getting Japan to agree to “voluntary” restrictions on the number of units they imported into the United States.[13] Reagan also provided protections for iconic motorcycle manufacturer Harley Davidson. The tariffs started at 45% and were set to decline to 10% in year 5. Harley recovered, and requested the tariffs be terminated one year early.[14]

In the auto market, the story was much different. The voluntary restrictions, amplified by the Chicken Tax, contributed to foreign brands establishing major manufacturing operations in the U.S., and we’ll put some numbers to it a bit later. Note that I say “contributed” to foreign brands establishing a major U.S. presence. I don’t say “caused,” which is a conclusion others reflexively get to . My view and experience is that most global manufacturers like having operations in significant end-markets. This helps them gauge consumer tastes better, build political clout, take advantage of local strengths, and hedge currency risks. As modern-day examples, look at Korean phone and semiconductor manufacturer Samsung and German conglomerate Siemens. Samsung has 20,000 employees and a semiconductor manufacturing plant in the United States [15], and Siemens employs 45,000 people [16] in this country.

It’s rational to think that the foreign auto brands would also see plenty to like in the U.S. without arm-twisting. Compared to the Big Three, foreign companies located their plants in states with lower costs, higher tax incentives, and non-unionized labor. I’m not convinced that government arm-twisting deserves most of the credit for the establishment of foreign-owned U.S. auto manufacturing, but I’m not denying it was likely a significant contributor. The one thing we didn’t get for sure was a globally competitive Big 3. What we got were three companies that could rely on juicy, protected products favorable to their existing strengths, rather than being forced to develop the strengths necessary for changing times. In any case,, for the sake of the argument, let’s agree with those people that insist tariffs and government actions are mainly responsible for foreign plants establishing in the US. If it takes a government-driven distortion, then those same people will have to admit that this increased costs to consumers. As we will see later, these costs are exorbitant.

Another point is that, almost comically, the federal government derives almost no revenue from the Chicken Tax. Recall that 75% of the $700 billion annual auto market in the U.S. is pickups and SUVs, most of it theoretically subject to the Chicken Tax. According to the WSJ, as best as can be identified, last year the Treasury collected about $100 million of related tariffs.[17] this category. In other words, the suppliers adjusted to the Chicken Tax and other protections long ago, and costs associated with these distortions are being directly and opaquely borne by American consumers.

Now, let’s get back to our story as of the late 1980s. The intense competitive heat of the economy-car segment that was popular during the period forged the best global auto players, but the Big Three never became competitive in the segment. In fact, the opposite happened. Falling gas prices and increasingly large pickup trucks helped usher in the supersizing of American preferences for all passenger vehicles, leading to a migration of share from sedans to SUVs. The Big Three could not have been luckier. SUVs, due to their large weight, were mainly classified as “automotive trucks.” Just like pickup trucks, they were mostly protected by the Chicken Tax, and also for many years not as stringently regulated for their tailpipe emissions and fuel economy.[18] Another bonanza of profitable, large, imported-protected vehicles ensued. Efficiency and competitiveness could — once again — wait.

Well, at least it could wait until 2008, when, led by the failure of Wall Street firms Bear Stearns and Lehman Brothers, the U.S. economy took a sharp turn for the worse. Roughly a quarter century after President Reagan’s bailouts and import protections, like a bad sequel that offers mostly a tired re-hash of the original, Chrysler went bankrupt again. For plot variety, GM went bankrupt as well.[19] To its great credit, Ford came through on its own through a massive, prescient loan facility. Once again, the President of the United States, in this case President Obama, got personally involved with very large financial assistance up and down the auto industry, saying “I'm confident that if each is willing to do their part, … this restructuring … will mark … an auto industry that is once more out-competing the world; a 21st century auto industry that is creating new jobs, unleashing new prosperity, and manufacturing the fuel-efficient cars and trucks that will carry us towards an energy-independent future.”[20]

None of this came to fruition. The Big Three gradually set aside production of sedans, typically the most fuel-efficient offerings. Today, the Big Three combined make four sedan models for this country: the Chevy Malibu, Cadillac CT4 & CT5, and the Dodge Charger. The Big Three’s 44% U.S. market share at the time of the Obama bailouts had declined to 38% in 2024.[21] And forget about “out-competing the world.” In their home market of the U.S., Toyota and Honda each have about the same share as GM and Chrysler, respectively. Hyundai, representing the later entrants from South Korea, has the same approximate share as Ford.[22]

Soon after the bailouts of 2008/2009, in 2012, the next major (and ongoing) transition in the auto market began, with the introduction of an electric sedan called the “Model S.” This time, the Big Three, like everyone else, lost out to an American company, an American upstart called Tesla. This country can compete, but in its own entrepreneurial, chaotic way. And Tesla makes its cars for the U.S. mainly in California. Its factory in the San Francisco Bay Area manufactured 560,000 cars in 2023 [23], one of the largest outputs of any auto plant in America. Despite sixty years of protected profits, none of the three incumbents came remotely close to establishing American leadership in electric vehicles (“EVs”).

The upcoming big transition in automotive technology is likely the one to autonomous driving. GM has made a valiant effort with its various Cruise-branded offerings, but in terms of fully autonomous driving, it’s another American company, Google’s Waymo division, which is at the head of the class in terms of raw technology. Here we have another American company, in the automotive space, leading change as a globally competitive player.

Now, it’s reasonable to say, “Who cares about sedans, EVs, and the self-driving stuff? I don’t see many of these things on the road anyway.” The problem is that these statements are increasingly a uniquely American perspective, and the American perspective is increasingly less relevant for global competitiveness. China unit sales in 2024 were 26 million, almost twice that of the United States [24] and growing rapidly. Growth in regions such as Southeast Asia and the Middle East, along with the already large markets of Japan and Europe, has shrunk the centrality of the U.S. market. The tastes in all these other markets are more like each other than America’s: higher percentage of sedans, of smaller vehicles, and of electric or hybrid vehicles. In China, where two-thirds of the world’s EVs are made, EVs as a percentage of new vehicle purchases topped 50% for the first time in July 2024.[25] Therefore, the Big Three, by tying their fate to the tariff-protected, America-centric products, have less to offer others (GM being somewhat of an exception in China), and it shows in their results. Ford derives 2/3 of its revenues from North America and Mexico. GM and Chrysler’s numbers are more complicated but have similarly high home-market concentration. Compare this with the two largest auto companies in the world: Toyota and VW get two-thirds of their revenues outside of their home markets of Japan and Europe, respectively.

Of life-threatening risk to the Big Three and everyone else is a new class of foreign competition. Chinese auto manufacturers are producing beautiful vehicles at extremely competitive prices, such as the BYD Atto 3, which is a well-featured electric SUV available for about $35,000 in Europe despite stiff tariffs. People used to talk about “Tesla speed” as a standard to aspire to, but now they talk about “China Speed.” Instead of helping the country learn to compete, the U.S. government is administering more of its protectionism narcotic, and we should expect the same lethargic and muscle-wasting results. To start, President Biden imposed 100% tariffs on Chinese EVs.[26] President Trump’s broadening of tariffs is taking the “sticking our head in the sand” approach from bad to worse. Shielded from exposure to these offerings, the average American not only suffers a reduction in choice and increases costs, but also is not alarmed as much as it should be about the need to improve American competitiveness. When I talk to European and Japanese auto companies, they sometimes talk of needing some protection from Chinese autos, but they always talk about needing to muscle up and to learn from Chinese OEMs, and fast. Compare this to the CEOs of both GM and Ford recently embracing more tariffs.[27]

A major cost of this protectionism is an unjustified loss of American self-confidence. The problems of the Big Three, especially given that automobiles are such a visible part of life and American culture, have fostered a sense of defeatism about American manufacturing. We’ve come to assume that without protection, subsidies, and government intervention, we will be “losers” at making things. With all the noise President Biden’s and Trump’s administrations made around subsidies and tariffs, I hardly need to provide evidence of American self-doubt.

Now, you may be saying, “Hey, where’s the optimism you promised us?” Let me tell you, it’s all around us. We don’t need to conflate American industrial competitiveness with the Big Three’s problems. Look anywhere, and the answers jump out at you.

First, the Big 3 themselves have proven that when they have to, they can deliver the goods. In the pickup truck and SUV segments, they invested heavily, built a quality product with a devoted following, and benefited from class-leading market share year after year in pickups, and a pretty good presence in SUVs. Yes, they have the Chicken Tax protection, but at least they are soundly beating out the competition. Furthermore, after a deserved shellacking for the quality and reliability of their vehicles in the 1970s and 1980s, Big Three quality now mostly holds its own.[28]

For further evidence that U.S.-based manufacturing can be competitive, get a load of this statistic: of the top 10 vehicle plants in the U.S., five are foreign marquees, making millions of vehicles for both domestic sales and export. Toyota’s largest plant in the world is in Kentucky [29] where it makes Camry sedans. Toyota exports to dozens of countries from the U.S..[30] BMW’s largest plant in the world is in South Carolina. Most of its SUVs, from the X3 to the X7, are made in the United States substantially for export, making BMW the largest exporter of autos from the U.S. by value.[31] Volkswagen and Mercedes manufacture SUVs and EVs in the U.S., with substantial exports, including to China. In fact, the top four U.S. exporters by value [32] are typically Toyota, Ford, BMW, and Mercedes. And remember Tesla and the 500,000 cars a year it makes in California? Barron’s, a financial publication affiliated with the Wall Street Journal, estimates Tesla exported a hundred thousand vehicles in 2023.[33]

Here are more American transportation success stories. Cummins, based in Indiana, is globally a top producer of commercial truck engines, including plenty for heavy-duty pickup trucks. With $34 billion of revenues in 2024, it has substantial U.S. manufacturing facilities. Paccar, based outside of Seattle, also with $34 billion of 2024 revenues and $4.2 billion of net income, is one of the world’s largest and most profitable manufacturers of commercial vehicles, with plenty of U.S. facilities. Daimler Truck, based in Germany, has major manufacturing operations in the United States.

Outside of ground transportation, Boeing, who benefits from government export credits roughly in the same manner as non-U.S. producers do from their own governments, produces about half of the world’s passenger aircraft, mostly made around Seattle and in Charleston, South Carolina. Applied Materials, the world’s largest manufacturer of semiconductor capital equipment, has its largest manufacturing facility in Austin, and 85% of its revenues come from outside the United States. Intel, until it stumbled recently for reasons of its own doing, was a globally competitive, bleeding-edge semiconductor manufacturer. You’re all familiar with the overwhelming global strength of American software and internet services such as Meta, Google, and Microsoft.

None of this is to say that the Big 3, and American companies in general, haven’t faced trade barriers overseas. China is frequently accused of targeting specific industries in its five-year plans and doing anything and everything to take over the related global markets — think solar panels in the 2010s. Within the auto industry, first Japan in the 1950s through the1970s [34], and then South Korea in the 1970s and through the early1990s, provided protections for their auto industries. Another example is the EU, which has across-the-board 10% tariffs on auto imports.[35] Most recently, the EU found evidence that the Chinese government subsidizes auto companies, which led to the imposition of substantial tariffs on Chinese EV imports into Europe.[36] German and several other EU countries opposed these tariffs. The difference with the U.S. is twofold. First, the Japanese and South Korean manufacturers have managed to graduate from needing to be protected, whereas the Big 3 never seem to have done so. In Japan and South Korea, the protections were about getting the space to get better, not to get relief. For example, both countries encouraged industry-wide cooperation to enable technology investment and economies of scale. Second, at least from what I’ve seen, the Big 3 spend much more time asking for protection and favors rather than screaming bloody murder just as much to freely access foreign markets as to protect their home markets. This is what the Germans do. Also, trade barriers overseas apply to everyone, not just the Big Three. Once you realize BMW is the #1 exporter of vehicles from the United States, it’s hard to empathize with Ford CEO’s claim that President Trump’s more tariffs are needed to finally provide a level playing field.[37]

Despite all this history in the U.S. and elsewhere, aggressive arguments are being made for more government intervention in the auto sector and elsewhere. The main arguments seem to be about a return to greatness, manufacturing employment, and national security considerations. All the evidence shows that the objectives will either not be or will diminish prosperity.

As far as greatness is concerned, as we’ve seen, the Chicken Tax and subsequent interventions didn’t create globally competitive U.S. auto champions — quite the opposite. This experience is exactly in line with what the British experienced by resorting to protectionism after World War II. The history is beautifully summarized by Oxford Professor Carl Benedikt Frey in a May 27th, 2025, article in The Economist magazine titled “Want to Destroy American Business? Protect it.” While there are sophisticated, economically technical arguments for protectionism, the best of them combine a short duration with an active attempt to import know-how. Another good example is how U.S. industry in the late 1800s benefitted greatly from importing British know-how. A more recent example is how China has done this very effectively by, for example, forcing foreign players to joint-venture with and transfer knowledge to their domestic entities. Whatever other favoritism the Chinese government may have exercised, most of their industries certainly don’t need it now. If the result of the Chicken Tax had been a world-beating Big 3 after some years, would I really be writing this paper? Arguments for long-term protectionism just don't have examples of concomitant long-term national prosperity. It’s instructive to me that very left-of-center economists, like Paul Krugman, who won a Nobel Prize in the economics of trade, and who amongst other things advocates for universal, government-run healthcare, is an advocate of widespread (but not absolute) free trade.

Furthermore, the romantic view of a manufacturing job being the best path to a middle-class life for those with no college degree became a fiction years ago.[38] In fact, as also shown by The Economist in its June 10, 2025, edition, factory-floor workers are paid less than skilled tradespeople, mechanics, and machinery operators such as drillers and crane operators [39], not to mention public services professionals such as police and firefighters. In any case, 10% of the U.S. workforce is in manufacturing, so protecting this small group of people comes at the expense of the other 90%. Intuitively, this is why protectionism hurts countries more than it helps. The example applies just as well to the auto industry itself: about 1 million Americans work in auto and auto parts manufacturing, while 4 million work in sales and after-sales services.[40] The costs are exorbitant. Let’s assume that the 25% Chicken Tax influences half of American vehicle sales — so about 8 million units — at a conservative $2,000 per vehicle. The implied $16 billion dollars a year of waste, divided by a generous assumption that 250,000 manufacturing auto jobs are protected (one quarter of all auto manufacturing jobs!), and we are “saving” each job for $64,000 per year. This is a year of college education, every year, forever. Here, I will waive my Fifth Amendment rights to avoid self-incrimination. I confess that both my methodology and math are probably way wrong. One key piece of evidence against me: conservative think tanks evaluating the first Trump Administration’s 2018 tariffs on imported washing machines calculated the cost of each job saved at $800,000 to $900,000 per year.[41] The think tanks behind these numbers, like the Peterson Institute and the American Enterprise Institute, are fairly ideological free traders — as is their source of funding — so take their numbers with a grain of salt, but the numbers are directionally the same across the ideological spectrum.

Lastly, if national security is an issue, the sheer costs of broad protectionism encourage a far more targeted approach. As a simple example, the government can purchase a number of defense-specific vehicles every year, say 100,000, and force the same number into retirement or storage. Insist on top-to-bottom domestic production and/or designs resistant to wartime supply disruptions. It’s cheaper than global tariffs, more targeted, and makes for a more modern military fleet. This simple, direct solution makes the national security arguments for protectionism look either silly or an obvious ruse for favoritism. Not to mention that if we have policymakers that can’t deal with Canada as a friendly source of steel, or Japan and Germany as friendly sources of vehicles, or South Korea as a friendly source of ship manufacturing, we need policymakers with better social skills and a clearer sense of history and economics.

It’s worth reiterating that my intention is not to criticize the Big 3 or their employees. Instead, I’m simply highlighting the highly predictable and factual history of the rational, profit-maximizing behavior of companies whose incentives are distorted by government interventions. Furthermore, the auto industry is not unique in having the scales tilted in its favor at significant public expense. Remember the Obama-era rescues of the auto companies? Concurrently, there was a far more costly and questionable set of interventions that favored financial institutions.

And so my friends, I hope I’ve kept — in an entertaining fashion — the promises I made at the beginning of this article. First, to show you how quickly and durably the protections change the markets to which they are applied, leaving companies weaker and consumers poorer. Second, how these weakened companies engender national self-doubt and a fear of facing competition. If more manufacturing is viewed as critical — and I’m not sure it is broadly more important than wealth creation — I am sure we are missing critical skills and capabilities, as the Big Three did in the 1960s and since. But we should have confidence in America, based on decades of unmatched innovation and observed success, including in manufacturing. We can build the skills and capabilities, and we can get there in a way that is uniquely American and globally competitive. We can avoid things like Chicken Taxes and focus instead on the things that tend to make our companies eagles. When we let them fall where they may, the chips tend to fall in America’s favor.