The thing that hath been, it is that which shall be. . .

Dodging Tariffs in the 21st Century

As an economist who strongly believes in ‘Free Trade,’ I find myself often confronted with people who disagree with me either for political reasons (which I refuse to speak to,) or out of an (accidental or intentional) ignorance of history. I am not criticizing people for not being versed in the the particulars of, say, the Tariff of 1883, however, I have always felt it important to acknowledge that the news is chock-full of people attempting to pull-off something (policy or scheme) that did not work the previous times it was attempted. I feel the aphorism ‘nothing new under the sun,’ speaks directly to the heart of this matter. A person can be excused for not recognizing that the current international trend in anti-globalization mirrors similar trends dating back hundreds of years; however, without this knowledge, people live with uncertainty and are caught off-guard when they read of the policies and their outcomes, often stating ‘no one could have predicted that!’

I am reminded of this almost daily.

In a front page article in today’s Wall Street Journal, titled Trade Fight Spurs Tariff Dodges, With 18,927 Options, we find that, in the face of trade restrictions, U.S. importers are resorting to fraud to evade classifications that would make their goods subject to the tariff. The article gives the example that plywood originating in China is subject to a tariff, this gives the Chinese supplier an incentive to mark the shipping container with the classification code (called a Harmonized Tariff Schedule, or HTS code) for a product that is tariff-free.

So, in the face of a trade restriction, importers & exporters attempt to classify the good in such a way to not be subject to said restriction. Are we surpised? We shouldn’t be.

Three stories:

Story 1: At the end of the U.S. Civil War, the U.S. was concerned with reconstruction and needed to protect domestic industry. To this end, the U.S. Congress put into place a complex system of protectionist policies, which in 1882, a commission appointed by President Arthur recommended be reduced. The result was the Tariff of 1883. Without going too deeply into the specifics of the tariff, one item of note, imported fruit was exempt from tax. This lead importers of tomatoes to file for an tariff exemption, due to the fact that tomatoes are classified as fruit. In 1893, the U.S. Supreme Court ruled, in Nix v. Hedden that, for the purposes of the tariff, a tomato is a vegetable, and therefore is not exempt from tax.

Story 2: The U.S. differentiates between ‘dolls’ and ‘toys.’ Dolls are representations of human beings, toys, are not. In 2003, the company Toy Biz filed suit against the United States in the U.S. Court of International Trade, claiming that the ‘action figures’ that they produce, based on Marvel Comics characters, do not represent human beings, and therefore should be exempt from the tariff on dolls. Toy Biz won, and the HTS no longer distinguishes between dolls & action figures.

Story 3: One, hopefully, would not wear their Halloween costume to work or out to a nice dinner; however, in 2017, in Rubie Costume Company v. United States the U.S. Court of International Trade ruled that a Santa Claus costume could not be classified as ‘festive’ clothing (which would be free of tariff) but instead, given that it was ‘well-constucted’ must be classified as ‘wearable apparel.’ This means that a Halloween costume is only exempt from tariff if it is of low-quality.

So, while the specifics enumerated in the Wall Street Journal article are a cause for concern, no one should be surprised that, in the face of trade restrictions, once again, people are using product classification to avoid paying.