Toy Biz Inc., v. United States. 2003. United States Court of International Trade. PDF file.
Politics makes for strange bedfellows—and strange policies. This is the story of three trade policies and the harm they cause.
The Uncanny X-Men Versus the Amazing Harmonized Tariff Schedule
Heroes of comic books and the silver screen, the X-Men are given super powers by their mutations. The theme of both the comics and the movies is that, despite their mutations, they just want to be seen and treated as humans. It makes for interesting commentary on bigotry and intolerance. In Toy Biz Inc. v United States,1 a toy company producing X-Men toys sued the U.S. government to obtain preferential tariff treatment. By doing so, it put itself in the awkward position of arguing that, in fact, the X-Men aren't people at all—they're "animals or other non-human creatures (for example, robots and monsters)." The licensed producer of X-men toys was contradicting the central moral lesson of the X-Men!2
Why did the company take this position? Because the tariff for dolls (which represent human beings) is 12%, while the tariff for toys (which do not represent human beings) is 6.8%. The court found for Toy Biz, concluding that "these action figures do not represent human beings and are therefore not properly classifiable as 'dolls'." I'm sure that the X-Men would be even more upset to read that
... the 'X-Men' figures are marketed and packaged as 'mutants' or 'people born with `x-tra' power.' That they are denoted as such by the manufacturer or the importer lends further credence to the assertion that they represent creatures other than (or more than) human beings. (Toy Biz Inc. v. United States, 2003)
So, in the end, Toy Biz Inc. successfully argued that the X-men were not human and that the lower tariff rate for toys should apply.
This tariff is harmful. There is some small cost to X-Men fans, who suffer from hearing that their favorite heroes have been judged non-human by a real-world court. Heartbreaking, perhaps, but there are far more-serious costs.
First, the higher tariff on dolls drives up their price and causes people to purchase fewer dolls. High tariffs not only hurt consumers of these dolls, but also cause some domestic resources to be shifted to producing dolls, which is wasteful—these resources would be better used to produce something else.
For more on tariffs and protectionism, see Jagdish Bhagwati, Protectionism, in The Concise Encyclopedia of Economics.
Second, the court case itself was a waste of resources, caused by an inefficient tariff discrepancy. Lawyers, judges, customs officials, and corporate personnel wasted time and effort that could have been spent on something more productive. Simply reducing the doll tariff to the same level as the toy tariff would have saved everyone a lot of trouble. Reducing both tariff rates to zero would have saved even more.
The Chicken Tax
In the early 1960s, the German and French governments imposed tariffs on U.S. chicken. In 1963, President Lyndon Johnson and Congress retaliated with tariffs—the so-called "Chicken Tax"—on foreign starch, dextrin, brandy, and light trucks. All of these tariffs were eventually removed, except for the light-truck tariff (which originally was intended to target Volkswagen vans). There doesn't seem to be a well-documented explanation for why this tariff survived while the others did not. Perhaps the concentrated U.S. auto sector found it easier to organize and lobby.
Whatever the reason, the United States, as a result, still has a tariff of 25%3 on "motor vehicles for the transport of goods" with a gross weight between 5 and 20 metric tons. Most passenger vehicles have a tariff of 2.5%, unless they come from one of several countries that are exempt.4
This tariff is interesting because foreign and even domestic auto manufacturers found ways to avoid the Chicken Tax. For example, Subaru wanted to import its small two-seat pickup, the Brat.5 So Subaru added carpeting, two seats, and seat belts to the bed of the truck, turning it into a passenger-focused vehicle as far as customs officials were concerned. Upon taking delivery, many owners simply removed the extra seats.
Mazda built a light pickup for Ford called the Courier and avoided the Chicken Tax by exporting everything but the bed of the truck. The bed would be installed in the United States. This was known as the "cab chassis" configuration, and it avoided the chicken tax until 1980, when Congress closed the loophole. GM also imported a light truck in the cab chassis configuration called the Luv.6
"Once they arrive in the United States, Ford rips out and recycles the windows, the seats, and the rear seat belts."
The most ridiculous result of the Chicken Tax is surely the Ford Transit Connect, which is produced in Turkey and Spain. All Transit Connects are imported with rear windows and rear seats with seat belts, making them passenger vehicles. Once they arrive in the United States, Ford rips out and recycles the windows, the seats, and the rear seat belts.7 Ford also blocks the rear windows with solid panels. Doing this transforms them into light trucks.8
These policies cause several costly economic consequences. Every worker installing seats and windows in a Transit Connect could be producing valuable goods and services instead. The same goes for each of the workers removing those same seats and windows. The tariffs give producers an incentive to waste resources to provide consumers with the cars they want. And, of course, even if recycled windows, seats, and seat belts have some value, it would have been even cheaper not to have produced them in the first place.
Foreign producers take other costly actions to avoid the Chicken Tax, including moving production of light trucks to the United States. These foreign firms are not moving production here to produce better or less-expensive trucks than they could produce overseas; they are simply trying to avoid a tariff that makes it very difficult for their products to compete. Consumers would enjoy cheaper and/or better trucks if production could take place wherever it is most efficient, rather than being shoehorned into the United States. This increased domestic production of trucks is wasteful, as well, as it means that resources must be moved from some other, more-valuable use into truck production.
The domestic automakers support the Chicken Tax because it gives them an advantage over imported trucks and import brands produced domestically. However, it's not even clear that the tariff is beneficial to Ford any longer. Does the tariff exist solely due to lobbying by GM and Chrysler? For whatever reason, the Chicken Tax survives and continues to waste resources.
Adding Insult to Injury
Our third tale of trade shenanigans starts in the 1930s, when the U.S. government began subsidizing cotton production (as well as many other agricultural products). It has continued to do so in various forms—direct payments, subsidies to crop insurance, counter-cyclical payments, etc.—ever since.9 The cotton subsidies reached $3.7 billion in 2005, but have fallen substantially since then. In 2012, they were around $561 million.10
In 1995, the United States joined the World Trade Organization (WTO) and agreed to submit to international courts to resolve disputes over trade policy, including disagreements over trade policies governed by the General Agreement on Tariffs and Trade (GATT). In 2002, in the "DS267" dispute,11 farmers in Brazil, a major cotton producer, took the U.S. government to court over its cotton subsidies, arguing that the subsidies were prohibited by treaties the U.S. government had signed. Although several other countries joined the case, Brazil seems to have been in the driver's seat.
In September 2004, the WTO panel ruled in favor of Brazil. The U.S. government appealed the decision, and in March 2005, the appellate body found for Brazil again. In February 2008, the U.S. government announced that it would appeal again, and, finally, in August 2009, the U.S. government ran out of appeals. Told that it had to eliminate the subsidies, the U.S. government scaled back some forms of cotton subsidies. Unfortunately, because the cotton industry was too politically influential, Congress refused to eliminate all the subsidies. As a result, Brazil was authorized by the WTO to bring punitive tariffs against U.S. goods. Brazil's government imposed tariffs on a variety of goods imported from the United States, including tires, pharmaceuticals, automobiles, and cotton products.12
This worked, causing the U.S. producers of these goods (except for the cotton farmers, of course) to complain to the U.S. government, pressing it to eliminate the cotton subsidies. The U.S. government responded quickly—but not by eliminating the remaining subsidies. What did the government do?
It offered to subsidize Brazilian cotton farmers, to the tune of $147.3 million per year, if they would drop their objections to the subsidies to U.S. farmers.
The Brazilian cotton farmers agreed in 2010, and these subsidies continued until just before the 2014 Farm Bill was passed. The new Farm Bill eliminated some of the subsidies to U.S. cotton farmers, but kept a taxpayer-funded insurance program. The Brazilian cotton farmers again objected, and Brazil's government again threatened tariffs.13
This time, the U.S. government bought its way out with a one-time $300 million subsidy to the Brazilian Cotton Institute, the farmers' industry organization. The Brazilian cotton farmers have since dropped their claim.
From an economist's point of view, the problem with the U.S. cotton subsidies is that they encourage the production of more cotton than is efficient. That is, the subsidies encourage U.S. cotton farmers to produce more cotton than is justified by the cotton's value to consumers and the opportunity cost of the resources used in its production. Some of the resources that produce cotton have a more valuable use elsewhere in the economy—perhaps in growing some other agricultural product. Instead of producing those other, more-valuable goods, these resources are wasted.
To make matters worse, these subsidies must be paid for with taxes. Taxes create deadweight losses. That is, just as a subsidy creates too much of an economic activity, a tax destroys economic activity, resulting in too little of it.
And, finally, to add insult to injury, paying off Brazilian cotton farmers requires even more taxes, for no productive purpose at all.
Why does this happen?
The discrepancy between tariffs on dolls and tariffs on toys is difficult to explain, and I will not try. Perhaps there is some interesting history there. The Chicken Tax and the cotton subsidies seem more straightforward: a concentrated special interest group—the domestic industry—benefits significantly from barriers against foreign competition. Consumers and foreign firms, being dispersed and overseas, respectively, find it more difficult to organize and lobby the government to oppose these policies. As a result, the special interest group wins the lobbying battle, and consumers and foreign competitors lose.
For more on rent seeking, see Michael Munger, "Rent Seek and You Will Find." Library of Economics and Liberty, July 3, 2006.
These are examples of what economists call "rent seeking."14 Interestingly, Anne Krueger's seminal article on the subject also focuses on particularly inefficient trade restrictions.15 In each of our stories, a firm or group of firms seeks a special legal privilege or favor that cannot be competed away by the ordinary functioning of the economy. Obtaining this favor wastes resources, and the policy that provides this benefit wastes resources.
These are not the only noteworthy tariffs in the 2016 Harmonized Tariff schedule. Corsets are taxed at 23.5%. Girdles and panty-girdles are taxed at 20%. There are similar tariffs on many clothing items. Brooms made wholly or in part from broom corn are taxed at 32% because of a long, successful campaign by American broom manufacturers. Tariffs on foreign footwear are as high as 37.5%. Amazingly, these are left over from the Smoot-Hawley Tariff of 1930.16 Japanese leather products are taxed at 40%. I haven't found an explanation for this, but Japan has a heavily protected domestic leather industry; perhaps this tariff is retaliatory. Peanuts have a combination quota-tariff system; if the amount imported exceeds the quota, a tariff of 131.8% to 163.8% (depending on whether the peanuts are shelled or unshelled) is imposed.
There are surely many more interesting and convoluted stories lurking in the Harmonized Tariff Schedule that are yet to be told. We should keep in mind that they are all tragic tales of woe and waste.17
They also applied this argument to Spiderman and The Fantastic Four, but this isn't as hypocritical as the slight against the X-men's humanity.
Note that the basic tariff on all goods from North Korea and Cuba is 25% for those goods that can be imported from those countries. Many are banned outright. To put it another way, the U.S. treats foreign light trucks in a similar manner to imports from North Korea and Cuba.
Jordan Golson, "Cheap American Chicken Gave Us This Weird Subaru Pickup", Wired, December 10, 2014.
Oddly, Ford does not ship these parts to Turkey to be put on the next shipment of Transit Connects. The transportation costs may be too high to allow this, but it means that these materials, and the effort that went into making them, are almost entirely pure waste.
Matthew Dolan, "To Outfox the Chicken Tax, Ford Strips Its Own Vans", The Wall Street Journal, September 23, 2009.
"Cotton Production and Support in the United States", Library of Congress, Congressional Research Service.
Some details on the amount and composition of cotton subsidies are in "Cotton Subsidies", Environmental Working Group.
Dispute Settlement 267, United States—Subsidies on Upland Cotton. 2014. World Trade Organization.
"Brazil Releases List of US Goods for Retaliation in Cotton Dispute", Bridges 14 (9), International Centre for Trade and Sustainable Development.
Steve Baragona, "Brazil Says US Farm Bill Violates Trade Rules", Voice of America, February 20, 2014.
David R. Henderson, "Rent Seeking", The Concise Encyclopedia of Economics, Library of Economics and Liberty.
Anne Krueger, "The Political Economy of the Rent-Seeking Society", The American Economic Review, 64 (1974: 291-303). PDF file.
Mark Perry, "The U.S. has imposed protective shoe tariffs on Americans for decades, even with no domestic shoe industry to protect", Carpe Diem, American Enterprise Institute, November 14, 2012.
The tariff stories presented in this piece have all been told in podcast form as well.
*Michael Hammock earned his Ph.D. in economics from Emory University. He focuses on economic pedagogy, and is the coauthor (with J. Wilson Mixon) of Microeconomic Theory and Computation: Applying the Maxima Open-Source Computer Algebra System (New York: Springer, 2013). He teaches at Florida State University.