In 1964 the new US president was angry about European trade. Specifically about chickens. In response to Europe’s poultry trade barriers, Lyndon B Johnson imposed a 25% tariff on light trucks.
That “chicken tax” is still in place 60 years later. The rules have contributed to the Ford’s F-Series pickup truck’s unbroken 42-year run as the bestselling vehicle in the US, and have locked European manufacturers out of a hugely profitable market for two generations. The chicken tax could also serve as a model for Donald Trump’s second term in the White House.
The US president-elect’s promise of imposing baseline tariffs of 10% on all goods imports has already sent shivers around the world’s manufacturers. Few industries are more exposed than Germany’s carmakers: the share prices of Volkswagen, BMW, Mercedes-Benz and Porsche have dropped by between 4% and 7% since it became clear on Wednesday morning that Trump would win the US presidency.
Tariffs are applied on the cost of goods when imported. If a 10% tariff were then passed on to American buyers, Audi’s US bestseller, the Q5 SUV, would cost about $3,500 extra on top of its $45,400 starting price.
But just when German industry needs a strong advocate, its government has fallen into turmoil. The coalition led by the chancellor, Olaf Scholz, collapsed on Wednesday after three years in power, casting doubt over who will lead Europe’s largest economy as the EU prepares for trade negotiations with Trump.
Trump’s love of tariffs is no secret. He recently told Bloomberg: “To me the most beautiful word in the dictionary is tariff.” And he has been categorical about his intentions to slap tariffs on EU imports.
“They don’t take our cars, they don’t take our farm products, don’t take anything. You have a $312bn deficit with the EU. You know, the EU is a mini – but not so mini – is a mini-China,” Trump said during his campaign.
The German car industry would immediately be affected by tariffs, compounding an already dire situation for the likes of VW which is wrestling with deep cost cuts. The US is VW’s second largest export market after China; the group sold 713,000 vehicles in the US in 2023 of which 243,000 were manufactured in Germany, primarily premium and luxury vehicles.
Hildegard Müller, the president of the German Association of the Automotive Industry (VDA), said the US remained “very important for Germany as a production location”.
However, she noted that the US “has been increasingly focusing on its own interests for several years now, and this trend will probably continue”.
Müller called on Berlin and Brussels to “build on their joint strengths with the US in economic policy” to create prosperity between allies on both sides of the Atlantic.
In the same way as China has begun investing in Europe – particularly in Hungary – Germany has been investing in the US as it became more protectionist under Trump 1.0 and Joe Biden. Last year a record 908,000 German-branded vehicles were manufactured in the US, half of which were exported.
Carmakers’ responses to tariffs will depend to a certain extent on their factory footprints. The BMW chief executive, Oliver Zipse, shrugged off the tariff threat on Wednesday.
“In the United States, I would think we almost have a perfect setup for the time to come,” he said, arguing that BMW already made its most popular US-market cars there. “There is some natural cover up against possible tariffs or whatever.”
Yet the German car manufacturers’ existing factories in the US do not appear to have readily available spare capacity to simply absorb production shifted from Germany to avoid tariffs.
Volkswagen had capacity for another 20,000 cars on top of the 160,000 produced last year at its sole US car plant in Chattanooga, Tennessee, according to the automotive data company MarkLines.
Mercedes-Benz has about the same spare capacity in Alabama, where it made 280,000 cars in 2023. BMW might be able to produce another 40,000 in South Carolina on top of last year’s production level of 410,000.
Even if carmakers can shift production to the US – to the likely delight of Trump – it would horrify many Germans. About 780,000 people are employed in the politically powerful German automotive industry. They will not let work move abroad without a fight.
“It will lead to shifts in production,” said Rico Luman, an economist at ING, an investment bank. “It may get more regionalised also from a strategic point of view. That’s not good news for the sector in Germany.”
The tariff threat could hardly come at a worse time for German workers, with manufacturers across the world complaining of falling profits, and Europe dealing with a flood of electric vehicles from China. Volkswagen – already planning to close German factories for the first time ever – is particularly vulnerable.
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Its Audi and Porsche subsidiaries have big US sales but no factories there, and VW imports thousands of its smaller, cheaper cars from Germany. Morningstar DBRS, a credit rating agency, said starting more American production was “a transition that would likely be costly and take years to become operational”.
Trump’s victory has therefore rattled German trade unions. IG Metall, which will play a key role in the VW negotiations, said the US election was “a clear message to Germany and Europe to further develop their own strengths, resilient relationships with each other and with other countries”.
The union said Germany’s government needed to invest to strengthen industry – a distant prospect, with its own election likely in March.
It is not just German carmakers who will be watching Trump nervously, with a threat of 100% tariffs on imports to the US from its free-trade partner Mexico. The three big carmakers in Detroit are General Motors, Ford and the Chrysler owner Stellantis (which also imports cars from European brands such as Peugeot and Fiat). Together they produced 1.6m cars between them last year in Mexico, according to MarkLines. Europe’s manufacturers made 800,000 in Mexico, while Asian companies produced 1.4m.
“Everybody hates taxes and tariffs,” said Adrian Mardell, the chief executive of JLR, which owns the Jaguar, Land Rover and Range Rover brands. Britain’s largest automotive employer exports a quarter of its output to the US. “This is the environment we are in. Of course all of us would dislike an environment where we go into larger tariffs.”
There have already been indications from countries outside Europe that Trump’s tariffs could achieve the most obvious goal: wresting back jobs from abroad. South Korea’s trade minister said on Wednesday he expected companies from his country to invest more in the US if Trump imposed higher tariffs.
A person close to Toyota said steep tariffs by Trump on Mexican imports could prompt the automaker to move production of a vehicle like the Tacoma pickup to San Antonio, Texas. A Toyota spokesperson declined to comment.
Trump has other ideas to help the American car industry. He has said he planned to begin rescinding Environmental Protection Agency and Transportation Department rules that force companies to lower their average emissions – on his first day in office.
He is considering removing tax breaks for US-made electric vehicles, a bête noire for him despite his friendship with Elon Musk, the chief executive of America’s dominant electric carmaker, Tesla.
Those plans are supposed to help Detroit’s big three. However, analysts led by Chris McNally at Evercore ISI, an investment bank, said the changes would cost General Motors $3bn and Ford up to $1bn in lost subsidies.
There is a consistent irony in Trump’s automotive proposals: while carmakers in Europe will suffer under tariffs, and rivals in China are already essentially locked out of the US market, American businesses will also face steep costs, and consumers are likely to see increased prices.
That has been the effect of the chicken tax. Europe’s carmakers may have been locked out to the benefit of US workers, but Americans have paid more for their pickup trucks.