Principle #4 of Mankiw's 10 Economic Principles states that "people respond to incentives." I found an interesting article on Greg Mankiw's Blog titled, "People Respond to (Perverse) Incentives." It talks about something referred to as the "chicken tax," and how it affects the decisions at Ford. Mankiw writes:
"In the early 1960's, Europe put high tariffs on imported chicken, taking aim at rising U.S. sales to West Germany. President Johnson retaliated in 1963, in part by targeting German-made Volkswagens with a tax on imports of foreign-made trucks and commercial vans."
The tax by Johnson is what is now referred to as the "chicken tax." Mankiw writes about the resulting actions:
"Several times a month, Transit Connect Vans from a Ford Motor Co. factory in Turkey roll off a ship here, shiny and new..." they then arrive at a factory in America where, "the fabric is shredded, the steel parts are broken down, and everything is sent off along with the glass to be recycled."
These tariffs still exist today, with a high tax of 25% to the Ford Motor Company on these imported vans.
"The company's wiggle room comes from the process of defining a delivery van." Delivery vans do not have windows or seats in the cargo area, "so Ford ships all its Transit connects with both, calls them 'wagons', instead of 'commercial vans'. Installing and removing unneeded seats and windows costs the company hundreds of dollars per van, but the import tax falls dramatically, to 2.5 percent, saving thousands."
The definition of an 'incentive' is "something which encourages a person to take a certain action" (Cambridge Online Dictionary). The incentive for Ford to rip out hundreds of dollars worth of materials from brand-new vans is to avoid paying thousands more. The incentive is money--saving costs.
I find it interesting that these 50 year old tariffs are still kept by both sides. This action is also controlled by an incentive: the chicken market for Europe is still kept fairly local, and the commercial van market in the U.S. is strong.
I normally wouldn't look at this situation and immediately think, Oh, both parties are making their decisions because of incentives. This was a new way of viewing peoples' reasoning for me, and has caused me to look at other situations differently.
Although they are being recycled, tearing out the extra materials seems like a huge waste to me. They may be saving money, but materials are being up much more than is needed. This seems like an environmental concern to me. Many times with incentives, people take risks of harm to themselves or others if the benefits of the incentive seem greater to them or hold more importance.
My quotes are found from Greg Mankiw's blog, and my thoughts are based on personal experience and past talk about incentives in both psychology and econ. class.
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I still cannot decide if I lean more positively or negatively with incentives. They try to mean well most of the time, but it seems like people can easily find the loopholes in them, or they switch which market they were designed for, and in doing so defeat their purpose.
ReplyDeleteI suppose this case could be used as an argument for unrestricted trade in order to remove what seems to me as inefficiency in the trade, and I assume this is the reason Mankiw would bring it up. I certainly agree that this is an instance of inefficiency and a seemingly arbitrary tariff, but should not be seen as an indictment of protectionist policy as a whole. And Ford could simply assemble the vehicles over here to begin with...
ReplyDeletethis reminded me briefly of the milk dumping that went on during the great depression due to a milk surplus. it seems rather unjust to use up so many resources irresponsibly. this is another case of then the market is so disconnected from rationality and logic that it proves how it would be dangerous to believe blindly in the 10 principles.
ReplyDeleteTo me this shows that countries are for globalization as long as it benefits them, which is where incentives come into play. It shows that unrestricted free trade is not always the interest of countries looking to preserve select markets because competitors and do better. This was also seen after the recession hit when countries started protecting their interests as opposed to believing in the free market, in the end people love incentives.
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