Al Root

President Donald Trump's 25% tariffs on Canada and Mexico are scheduled to go into effect in a few days. History shows they could backfire in ways investors can't even imagine.

Auto investors are focused on the potential for import levies to raise prices for consumers -- killing new car demand -- and raise prices for auto makers -- killing profits. But there are other, longer-term risks from policies designed to protect local production. Investors shouldn't forget about them, either.

Auto makers have spent the past 30-plus years treating North America as one region. Millions of cars sold in the U.S. each year are sold in Canada and Mexico, and some 50% of the parts in a car assembled in the U.S. likely came from those two countries.

That's changing. With tariffs looming, it's time to tell "the tale of one of the longest running tariffs in U.S. history. It is called the Chicken Tax," DataTrek Research co-founder and former Wall Street auto analyst Nicholas Colas wrote in a Thursday report.

In 1964, President Lyndon Johnson imposed a 25% tariff on several goods from Europe, including pickup trucks, in response to European tariffs on U.S. chickens.

The U.S. has always been a low-cost producer of agricultural products, so the European tariff didn't really hurt U.S. farmers. The impacts on the auto industry, however, were more significant.

"The most important long-term effect of [the tax] was that it both saved and eventually killed the domestic U.S. auto industry," added Colas.

The tariffs certainly helped domestic auto makers make money on trucks. There was less competition as foreign auto makers initially focused efforts on sedans, where tariffs were minimal. But the levies also caused U.S. auto makers to cede U.S. market share in cars to foreign auto makers.

It's hard to blame U.S. management teams behind the decision. Why make $2,000 or less selling a small sedan when you could make $10,000 selling a truck? That thinking, however, reduced America's ability to make money in overseas markets. They didn't have the product or cost structure to compete in the European market, where trucks and SUVs simply aren't as big a deal.

Falling market share also meant below-average growth. That relegated the U.S. car industry's shares to lower valuations: Investors today still deal with price-to-earnings ratios in the single digits, Colas tells Barron's.

For instance, legacy auto makers Ford Motor, General Motors, and Chrysler parent Stellantis trade for about 4.5 times estimated 2026 earnings, down from about 5.5 times next year's earnings a year ago. In comparison, the S&P 500 trades at 20 times 2026 earnings.

"The Chicken Tax is an excellent example of how difficult it is to assess the impact of tariffs on the U.S. economy and business over the long term," Colas added.

There are other examples of the unintended consequences of trade policy. President Richard Nixon's 1973 soybean export ban spooked Japan into investing in Brazilian production.

In 1970, the U.S. produced roughly 30 million metric tons of soybeans. Brazil produced closer to 1.5 million tons. In 2025, Brazil will produce closer to 170 million metric tons, compared with America's 120 million.

Projecting the long-term effects of Trump's tariffs isn't easy. But protecting domestic industries typically doesn't yield cost structures that are competitive on the world stage, and it doesn't lead to world-leading PE ratios, either.

The acute problems of tariffs are real. According to Ford Motor CEO Jim Farley, the tariffs can potentially wipe out billions in near-term profits by raising costs on the domestic industry. The impact on America's ability to compete globally shouldn't be ignored.

Uncertainty is never good for stocks, either. Through midday Friday trading, shares of Ford Motor, General Motors, and Stellantis were down about 8% on average since the Nov. 5 election. The S&P 500 is up about 2%.

Write to Al Root at allen.root@dowjones.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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February 28, 2025 14:03 ET (19:03 GMT)

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