This is how Ford Motor Co. tries to get around the half-century-old “chicken tax.” It’s also a lesson in the long legacy of tariffs — and the unexpected ways that companies do everything possible to get around them. These creative workarounds are likely to become more common after the United States on Friday hit $34 billion in Chinese goods with tariffs, inviting retaliation by China on American goods — all part of an escalating global trade spat.
The chicken tax is a 25 percent U.S. duty slapped on pickup trucks and work vans produced outside North America — 10 times the 2.5 percent duty on imported passenger vans. The tax is a relic of a mostly forgotten trade war from the early 1960s, when Europe tried to stop a flood of imported U.S. chicken and, in retaliation, President Lyndon B. Johnson imposed the big tariff aimed at European automakers such as Volkswagen.
That’s what makes the rear seats so important.
By removing the rear seats and converting passenger vans into cargo vans immediately after they officially enter the country, Ford has avoided an estimated $250 million in U.S. tariffs over the years. Customs officials have cried foul. The automaker says it’s just following the colorful practice of what trade lawyers call “tariff engineering.” Now, the two sides are locked in a federal court battle that American importers are closely watching.
The outcome could prove influential as companies study how to deal with the fallout from tens of billions of dollars of new tariffs being enacted by the United States and other countries as part of a widening trade conflict.
In recent months, the Trump administration has pushed a flurry of new tariffs, including on imported solar panels and washing machines, imported steel and aluminum, plus more than 1,000 products from China. Other countries have responded with duties against American products, such as yachts, tanning beds and cranberries headed for the European Union.
“It’s not simple, but people are doing this, looking for ways get around the tariffs,” said Lawrence Friedman, a customs and trade lawyer in Chicago who has been hearing from curious clients. “That is definitely happening.”
Deborah Stern, a lawyer in Miami specializing in trade and customs compliance, said she has been advising clients to carefully review their product lines.
“There’s plenty of gray area in tariff classifications,” Stern said. “It’s far more of an art than a science.”
Stern said she sees how manufacturers of fitness trackers might avoid the 25 percent U.S. tariff targeting goods from China that began Friday. Many fitness trackers are classified by U.S. regulations as accelerometers. Those are included on the tariff list. But smartwatches — such as the Apple Watch and the Fitbit Surge — are not.
The distinction hinges, in part, on how reliant the products are on Bluetooth wireless transmission functions, said Stern, who said she expects fitness-tracker companies to try to get their products reclassified as smartwatches to avoid the new tariff — even if it means redesigning them.
Friedman said companies will scrutinize their supply chains in light of the new and shifting tariff schedules. A U.S. mopmaker might decide to switch to wood handles because of the tariffs on imported steel and aluminum, Friedman said. Companies that source products from China might look to see whether it is cheaper to find another country.
“Tariffs are usually very hard to change. We don’t tend to unilaterally change them,” said Douglas Irwin, an economics professor at Dartmouth College who studies U.S. trade policy. “If you can change your product in a small way, it can affect the tariff rate,” Irwin said. “There’s potentially millions of dollars at stake.”
Tariff engineering has a long history.
In the 1880s, the Supreme Court ruled it was acceptable for a sugar importer to intentionally darken refined sugar with molasses to lower the grade and secure a lower duty. Three decades later, the court took up the case of a company accused of trying to evade a 60 percent duty on strung pearls by instead shipping loose pearls with holes pre-drilled for stringing. Those faced only a 10 percent duty.
The importer’s intent was clear — avoiding the tariff — but the court ruled that customs agents could consider only a product’s condition at the time of importation, not what happened to the product later on, as long as there was no “disguise or artifice.”
Companies regularly tweak their products to lower import duties. For example, some athletic shoes, such as Converse All-Stars, come with just enough fuzzy cloth on the rubber soles to qualify them as lower-duty slippers. In the early 1980s, the United States imposed a tariff on motorcycles with engines larger than 700 cubic centimeters in a bid to protect U.S.-based Harley-Davidson, so Japanese companies turned to making 699-cubic-centimeter motorcycles instead.
The 1964 chicken tax is credited with keeping foreign-made pickup trucks off American roads — because pickups are considered to be cargo vehicles, like cargo vans. The tax also is the reason behind the Subaru Brat, a bizarre-looking car-truck hybrid popular in the 1980s and famous for having two rear-facing plastic seats in the truck bed. Those seats allowed the Brat to be imported under the 2.5 percent passenger-truck duty instead of the 25 percent cargo-truck duty.
The rise of SUVs raised new questions for customs agents, who ruled that they are passenger vehicles.
Other automakers have also looked to skip past the chicken tax. Chrysler imports its Ram ProMaster vans from Turkey as passenger vans and then converts some of them in the United States into cargo vans, a Chrysler representative said.
Mercedes-Benz used to build its Sprinter cargo vans in Germany, then shipped the chassis separate from the rest of the vehicle to the United States. In 2016, Mercedes said it would eventually build the Sprinter van at a plant in South Carolina.
Ford says it has never tried to hide what it was doing with its Transit Connect van. In 2009, shortly after the automaker started importing the vehicle, there were media reports detailing Ford’s tactics for avoiding the chicken tax, what customs would come to derisively describe in court filings as “a scheme” and “a transparent attempt to disguise the true nature” of their vehicles.
In court papers, Ford claims the government knew for two years what it was doing before a customs agent incorrectly assumed the automaker was cutting corners by never installing a rear seat. Ford claims that a customs agent emailed headquarters to brag about “a huge case!” and, after being told that it was a mistake, decided to keep pursuing it rather than back down.
Customs officials and Ford declined to comment, citing the ongoing litigation.
In court filings, the government complained that the Ford cargo vans did not come with all of the same design features found in its true passenger vans, pointing to a “cost-reduced” rear seat that seemed designed to be thrown away.
Last year, the U.S. Court of International Trade sided with Ford and its tariff engineering. But the government appealed the ruling in federal court, where the case is just getting started. Ford has been paying the chicken tax since customs decided its cargo vans were no longer exempt in 2013. But Ford sounds optimistic after its win in the trade court.
“If we prevail on appeal,” Ford wrote in a legal note this year, “we will receive a refund of the contested amounts paid, plus interest.”