How Tariffs Make Us More Clever

Hoping to sidestep higher tariffs. Apple shifted some Chinese manufacturing to India. Instead (or in addition), other firms hope to get an exemption.

But there is a third more creative alternative.

Tariff Creativity

Jackets

Let’s start with a clever jacket story.

During the 1980s, jackets with removable sleeves were in style. It all happened because the number of jacket imports were limited by a U.S. quota. Then though, a rather resourceful jacket maker decided to send an order of vests with zippered armholes in one box and a supply of sleeves in another one. Since neither vests nor sleeves were subject to any import restrictions, they poured into the U.S. Soon however, U.S. Customs proclaimed that any part of a jacket would be counted as the whole item.

X-Men

Rather like jackets with and without sleeves, Marvel had to be sure that X-Men were not human. They cared because according to Customs officials, any figure (like Barbie) that clearly represents a human being is a doll with a 12% tariff. If not, then as a toy, its tariff is 6.8%.

During 2003, when the U.S. Customs office said action figures are dolls, Marvel took them to court and won. Similarly, because Luke Skywalker could resist the force and was captured by a Wampa, a court also said he was a toy. By contrast, G.I. Joe was declared a doll.

Perhaps though, Snuggies are the best story.

Snuggies

Snuggies wanted to be sure it is a blanket.

The Snuggie:

From: the Washington Post

When Snuggies were first imported from China, U.S. Customs officials called it a garment. Disagreeing, Snuggies said it was bringing blankets into the country. The name mattered because of the tariff.

When items enter the U.S., Customs officials use the Harmonized Tariff System to select a tariff. The go-to document for duty rates, the HTS has lists and lists of product groups. Because Snuggies was classified in a garment product group that included leotards and bathing suits, its rate was 14.9%.

But Snuggies’ importers believed it should have gotten the 8.5% blanket duty since, on its box, the Snuggie label said, “a blanket with sleeves.” Similarly, its trademark application referred to fleece blankets and throws.

During February 2017, a U.S. Trade Court agreed with Snuggie. Saying U.S. Customs officials were wrong, the Court told us that the Snuggie was a large piece of “fabric providing a warm covering.” It was a blanket.

Our Bottom Line: Incentives

Tariffs can create perverse incentives. In 1882, we got brown sugar when white sugar imports were taxed. One hundred years later, the U.S. government tried to protect Harley Davidson through a tariff on motorcycles with 700-cc and larger engines. But then the Japanese started exporting a 699-cc version for the U.S. Ford also got creative when, by adding seats to a truck (25% tariff) it could say it was a car (2.5% tariff).

You can be sure the President’s new tariffs will create new incentives.

And then, a blanket with sleeves from China could even become a fleece sleeping bag.

My sources and more: We have to go back to my first textbook, Economics Our American Economy for the jacket story (and its source, “The Sweater Trade” from The New Yorker, January 1988.) Next, this Radio Lab podcast wonderfully describes the X-Men battle. And then, for extra Snuggie story details, you might enjoy these articles at Quartz, the Washington Post and the NY Times. However, I should thank NPR for inspiring today’s post.