The German chicken industry was left decimated by the Second World War. And as a result, chickens became something of a luxury, produced at high cost by just a few domestic operators.
In the late 1950s, American chicken farmers saw this opportunity and began to export frozen American chickens by the tonne. Cheap, frozen, American chickens flooded the market and were widespread throughout Germany within just a few months. German chicken consumption grew 23 percent in 1961 alone!
While American chicken exports was a great news story for American farmers and German households, it was bad news for German chicken farmers who were unable to compete. As all good incumbents do, they protested and lobbied the German government to impose a 50 per cent tariff on all American chicken imports — which they did.
American responded with a tariff of their own. In 1963, the American government imposed a 25 per cent tariff on vehicles that were primarily for carrying commercial vehicles (pickup trucks, like those being produced by Volkswagen). This became known as the Chicken Tax. The Chicken Tax was to be repealed as part of the Trans Pacific Partnership, but after the Trump Administration withdrew, it still remains in place today.
The introduction of the Chicken Tax changed the American auto industry overnight. Foreign trucks became too expensive to compete and disappeared from the market. Smaller Asian truck companies were squeezed out, and were never able to garner a foothold.
The Chicken Tax also kept the industry the same for more than half a century. Today, while American consumers have the choice of 19 different car manufacturers if they want to buy a “compact crossover” and 14 for a midsized sedan — they only have a choice of six pickup trucks. The pickup segment “has the least competitive intensity of any segment in the industry.” The Toyota Hilux hasn’t been available in the US since 1976. There is no Mitsubishi Triton, no Mazda BT-50, and no VW Amarok. There is the Ford F-150 and not much else. Furthermore, while there have been dramatic improvements, pivots, alternatives and developments in other market segments, pickup trucks have largely remained unchanged. Automakers have not needed to experiment with small-volume production runs of trucks in different sizes, bed and cab configurations or alternative storage and packaging designs. And the real shame is that immediately prior to the implementation of the tax, the sector was synonymous with diversity.
The Chicken Tax is a great example of how protectionism stifles innovation. Because the industry was protected, they never felt the pressure to find efficiencies or create value. It is amazing how great this pressure becomes when you start losing market share to foreign competitors that are producing a greater variety of higher quality products at lower cost.
The importance of trade exposure to innovation is made in clear in the chart below. The chart compares the extent to which domestic-only and internationally-operating firms are innovating for some 16 countries (sadly no Australian data exists). The data is a little old, but nonetheless we can see that the degree of innovation occurring in internationally-operating firms is far greater than in domestic-only firms (except in Korea). (Read more about the causal relationship of innovative firms that export vs exporting firms that innovate here.)
In the midst of increasing calls for protectionist policies, we must remember that when it comes to innovation, trade is a positive force. Protectionism mutes the competitive forces that drive productivity and creativity, but trade acts as a loud speaker.
In-house innovators for domestic and international markets, 2002-2004
Source: OECD 2008.
TALES FROM THE LONG TAIL 
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