Planet Money - SUMMER SCHOOL 5: Trade & Santa

The economics of free trade and what happens when governments get involved.

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Hello and welcome to Planet Money summer school the supply or your intellectual to man. This is class number 5 trade and Santa Claus. I'm Robert Smith by now. You are in the educational Groove, you're sitting in the front of the classroom. You're raising your hand, even though I can't see you and the final exam and graduation day are in less than a month start planning this party joining us on the educational microphones today our planet money resident Economist. Yeah. Yes. It seems like just as a little bit further off the mic then Betsy. I don't know whatever he's doing is perfect. How are you? How are you oriented? Spoke to Mike. She is told that quite often when a little competitive Justin wolfers Betsey Stevenson. Welcome back great to be here today. Tried so far. We talked about a lot of Market phenomenon.

Talked about Amazon the whole country level which we think about trade as we listen to this episode will the easiest way to get to the whole country level is to go back and start the simple level of two people. So looks like that's the only way we trade a lot in our family. She does the Texas she's much better at that and I do all the it until we reassign those tasks to the person who can do the most efficiently and the fact that our household runs more efficiently when she's doing taxes and when I'm running it we call that gains from trade now I want you to listen is to just think about one thing. What is suddenly someone do an invisible line down the middle of my household bases on one side of that invisible line and I'm on the other the kinds from tried didn't go away. What if we called that invisible line a border?

The gains from trade didn't go away. But now when I'm doing Betsy tighty and she's doing my taxes, wait a minute Justin land and Betsy land. That's right when Justin Land Is providing an IT support the betseyville that counts as an export from my country to her house and then when Betty helps with my income taxes that that's kind of is an import from Betsy land to just Inland imaginary world is a world of free trade you both benefit and that invisible bordering your home doesn't matter but in the real world borders do matter in which of the Border different countries can make different rules. They can put guards at the border. And and one thing they love to do is charge attacks on everything that goes back and forth across the border at era Justin give us a quick definition of tariffs a tariff is a tax on Imports, but a lot of people get confused and they think that just the people in the foreign country are paying those two

Says we're going to learn is no tears are really just a way for us to collect revenue from ourselves from ourselves. Tariffs are all around us think of all the products you have that are made in another country. You might have paid a tariff on Imports and not even know it or maybe the US government negotiated with another country. So that that product has no tariff. This is a huge subject of international law and the Goshi ation and there so many fights over who pays what today to illustrate this weird world of tariffs. We're going to play parts from an episode that first aired in 2015. He was hosted by Jacob Goldstein and Stacey Vanek Smith. I agreed to help them start off the episode by meeting up with Jacob in Brooklyn on a Saturday morning dressed as Santa Claus hears us having fun with that Robertson freeway. I am wearing red pants a red Overcoat of black belt. I'm just

What am I wearing? You are also where I never thought I'd see me neither, but we are surrounded by I'm trying to get my belt to work. You haven't felt trouble. Yes long sleeve some embroidering here is beautiful gold embroidery and and and letting you know, this is SantaCon New York City 2015, its annual tradition. You best machete get drunk and danced a little know you're here. I'm sure for a nerdier economic recent more exciting reason there. Is this International dispute going on right now over this question. What is a fantasy?

Train play Nobody summer school, we consider a lawsuit over a Santa suit. It gets to the heart of how International Trade works and the strange tax is known as tariffs and stay tuned after the story went, show us if there is a whole universe of hidden fights over tariffs the shape almost everything we buy the sandals are going to the bar right here, and I'm going to go try not to go back to have fun man.

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Ho ho ho seems a little lamb on the nose.

What do you think of the suit a good fit? Good luck for me? I mean

Stacy Robert disappeared into SantaCon has not been seen from since you are graciously agreed to close to share with me. What do you think? You look very sharp?

Okay. Yes, tell me about the soup. I got it at a place called Ruby's. It's a custom shop out on Long Island. So you got some sooner costume. Rubies. Are you got to touch me not to stop at the Star Wars?

Ice take out. These are like really spectacular Star Wars custom. Like there's this big old Darth Vader suit that looks like it was actually what V Darth Vader Wharf around the corner from where we stand now. What are we looking at costumes? A lot of a lot of different price levels plays out on this wall right in front of us on this wall right in front of us and it's a fight over tariffs. Most of the suits are made overseas Mark Imports them. And of course when he Imports them yes to bring him through customs and depending on what he's important. Sometimes you have to pay a tariff. You have to pay a tax whether he has to pay that tariff and how much he has to pay is laid out in the harmonized Tariff schedule of the United States Army schedule. It is 99 chapters long and at least tens of thousands of specific items, but it doesn't list everything. There is no line item that says costumes or Santa suits so there has been this long-running fight.

Where do costumes belong in the Tariff code Mark beige hasn't answer to that question. He says there is a section of the code section 9505 to be precise. That is perfect for synthesis is called festive articles. I printed out the page here. You could just read some of the stuff in there. Okay, Christmas ornaments of glass of wood nativity scenes and figures there of artificial Christmas trees. Is it just Christmas stuff this section also include stuff like party favors and confetti and streamers and all this stuff. Best of Articles come into the country duty-free. No tax Mark import costume. So of course duty-free is good for him and according to the government some Santa suits like the cheap ones in front of us in the store. There is no question. They are festive articles type of fabric the back close with velcro. This one is effective article, but then Mark showed me a different suit right on the same display a nicer suit the pants.

Cancel it. Like they made out of a plush material. You have a jacket which has a zipper has white fur cuffs white fur, It's got this night lining and customs. Look at this nice or Santa suit and says to mark this is not a festive article you made this so nice. This is closed and clothes go under a different part of the Tariff code two important. This suit Mark has to pay a 32% tax on the jacket and a 29.2% tax on the pants that there's a pair of gloves in a white Santa gloves those come in at 10% Mark thinks this whole thing is ridiculous. Clearly. It's a festive article. This is the epitome of a of a festive article. I mean when else other than Christmas are you going to wear this? It's nice I can put on this red fur jacket. It's a little bit chilly today. That's like the perfect weight for you know, 50 degree weather, right? But what is the last time you went around?

Calling the Santa suit clothes. Mark says makes it a lot more expensive for him and for customers to pay $80 for 10 or $15 of that $80 would be tax. There is a lawsuit over this issue a lawsuit over the question of what is a Santa suit the person bringing the lawsuit is him. It's markbass. The suit is Rubie's Costume Company versus the United States. Basically Mark playing their government. Come on a Santa suit is a festive article. But when I ask Mark about the lawsuit, he doesn't really want to get into the details. He actually points to this guy in a suit and tie. We've been following us around the store his lawyer. That's John bessica customer special power attorney for many many years. So right how did we get to a world where a lawyer needs to be present to have a conversation about a Santa suit, and I don't think this rhetorically I actually called up an expert Douglas Irwin.

Comic historian at Dartmouth NS. How do we get there? And he says the story starts with the beginning of the US government passed by Congress in 1789 was Turf legislation has ever passed ever was a tariff on what everything he was in his office when I called as far as I can tell over the phone every copy of the Tariff code ever written kind of at hand and he said back then back in 1789. The Tariff code was simple and that many different things in the world know like everything is so much that much stuff you read to me from that first terrify. He said it's just three pages distilled Spirits molasses malt cast iron all leather Candor Todd all clothing ready-made 7/2 percenter. There. It is simple reason that this was the second law Congress ever passed the government needed the money. There was no

Income tax back then but there were ships full of stuff coming into Boston to New York and Charleston. And so if the government looks at those ships and set all right, you want to unload them here? Give us some money that first tariff didn't mention festive articles. There wasn't much of a festive article industry back then so Douglas Irwin started going back through old tariff code looking for when festive articles first appeared eventually. He got to 19220. I think that's doing is festive articles. Okay, here's what it says doll heads toy marbles toy games toy containers toy favors toy souvenirs Garland festooning and Christmas tree decorations. There it is. That's what becomes festive articles. So the Tariff code is getting bigger and bigger and more and more complex goes from that original three pages to if I've got it, right I think now it's 3681 pages, but in all those pages, there is no line for costumes. So now you have these two categories that Customs might go in if they're closed then

How to pay tariff if your festive articles no tariff and as a result of this you have this endless fight that has been going on for decades and who was on the other side of this fight who in the world was arguing that Santa suits and costumes or closed the answer is pretty pretty fun pretty delightful back in the 90s on the other side was Mark beige was Rubie's Costume Company. He has completely switched sides and you were on the other side then write solutely clearly not like a philosopher of the Tariff code is not arguing over the metaphysics of Santa suits. He's a businessman and back in the 90s when he was on the opposite side. He was in a pretty different business at that time. He was not important you making them here in the United States. We worry domestic 100% domestic manufacturer and of course, if your domestic manufacturer if you're making costumes in this country you want importers to have to pay a terror.

Mixer costumes more expensive so that is why markbass was on the other side and the government has also flip flops on this issue a lot in the last few years. A lot of the costumes that used to be categorized as festive articles. The government has changed its mind about them. It's a I don't know actually those are closed. I also asked Customs about this I said, you know, why why are you making this change? They didn't comment but Mark's lawyer the guy who was with us he used to work for custom and he said, you know Customs is mostly just a bunch of people trying their best to put things into categories to follow the rules. The categories aren't always clear the people working at Customs change a new people come in and they say, you know that Santa suit that we used to call the festival tonight. I think it's actually close and here is why the story is about more than just Santa suits Santa suits are one little fight in one little corner of the Tariff code and the Tariff code is giant did Sauza pages long there tons of complicated rules and where there are complicated rules and money at stake. There are people for hire.

Hope you figure out how to play the game. It's called tariff engineering engineering. That's a real thing for sure. Absolutely. This is Michael Kohn of engineer and trade lawyer engineering is not just suing the government arguing that something should be in one category another figuring out how companies can build things differently how they can actually tweak their products so that they get a better deal in the Tariff code. There's one really famous example, where a Shoe Company Incorporated some kind of fabric into the sole of a shoe just to move the shoe from one tariff category to another there's a similar kind of trick with costumes and that is if you use a velcro closure instead of the zipper or button it's less likely to be counted as clothing more likely to be a effective article duty-free. In fact concealment festive articles have been a big deal in his world. It's not just costumes. I mean there been cases for years over, you know, if you have a a mug or a placemat or tablecloth and you put up Jack

Turn or Santa Claus on it. Does it count as a mug replacement or tablecloth or is it effective article and there are other things that you don't even see one client came to Michael Kohn and wanted to import this big industrial machine and configured out if you split up the machine into two separate artspace. We take it apart split up into two separate shipments right on two separate ships. Come pick it up in the Tariff would be a lot lower. There was a lot cheaper more than paid for myself. This is totally legal and it is a totally logical response to that has tens of thousands of line items and different tariffs for each one. Yeah, but obviously, it doesn't feel good right as logical but if you step back and look at the work cone is doing here. It's not doing anything for economy. Right? I mean we want company spending time and money figuring out. What is the best machine we can buy or what does costume actually be better with a zipper or with velcro to figure out how to minimize your tariff bill. It doesn't

Air Products better. I know you know I asked about this would we be better off if your job went away very painful answer is yes, for real. You really think that I'm sure most Economist agree that the benefits of tariffs and trade barriers are greatly outweighed by the cost of them and most tariffs have either gone away completely or gone way down back in the 1960s, for example, the average tariff on the stuff. We imported was around 7% today. It's one and a half percent. But the Tariff code is still a big complicated Book of Rules and the case over the Santa suit Rubie's Costume Company versus the United States is likely to go to trial next year. You can picture in your mind of courtroom. And there's John dussek Ruby's Customs lawyer pointing at a red plush Santa suit and telling the judge festive article and then another lawyer a government lawyer pointing at the same suit and saying it's wearing apparel. It's closed. The lawsuit is over a particular suit. It's over the premier plush 9 Piece.

Santa suit, which of course I tried to buy when I went out to meet Market release. Of course, I think this is the same. So I got the six piece. Basically the same thing doesn't have the beard or the wig or the pleasure. It's and it's right back, but you know the jacket that had the pants come on.

Jacob Goldstein and Stacey Vanek Smith from an episode that we first released back in 2015 after the break theme normally composed Planet Money economics professors get upset. They become Grinch like if you will about tariffs and how they distort economies.

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We're back with our Economist in Residence. Justin wolfers and Betsy Stephenson. Are you steaming mad? Are you are you upset at the inefficiency of the Santa suit and the Tariff world? I was about to say the same thing when I listen to this episode. I just think what a waste of time and resources in and legal time and end and appeals and appeals and and going over decades and decades and you imagine this happening for a Santa Claus suit because we we think it's funny and that's why we did it about this but this is happening for every thing that we import. It's actually amazing. If you ever seen one of those women shirts that has a tiny little pointless pocket just around the waistline. You think why would you have a pocket right there attend out that if you make you a shirt with a pocket need a waste line at a track solo a timer for act as a result a lower tariff rate because the whole thing that company

They're trying to do is operate within a set of really Byzantine rules around what kind of tariff you're going to face because it's cheaper to make Amazon ship with the tiny pocket then to make the sorts of shirts that people would want that maybe don't have tiny Pockets near the waistline the fact that is just a tax. It's because what we know is the higher the tax goes the bigger the loss to society in terms of reducing the quantity of stuff that we got. And so Economist call this the deadweight loss of the tax and it rises not just as the tax Rises but it rises was a square of the tax write. This is a really big deal because it says we want to try to avoid high taxes and that creates a lot of space for tariff Engineers to come in and spend their time and get paid large.

Lots of money to try to get you from one high tax rate to a lower one. So why are governments doing this politics? I think they come to the political judgment some government some of the time come to the political judgment that tariffs are going to be popular. They got to be popular because when you rise tariffs on something you help a couple of very easy to identify Industries when we put tariffs on washing machines work is in the washing machine industry in the United States cheer. They don't have to compete as hard against China.

The rest of us going to pay another fifty bucks play washing machine many of us won't notice and even those of us we notice on exactly going to go out and protest in the streets will change the way we vote because we've had a little bit more for washing machine. So politician believe that I can buy votes by raising tariffs to protect particular politically important constituencies. I bet some of your listeners are going to say maybe that's the right thing to do so that those workers can be protected. But the reality is that we often end up with less overall is a society we can take something that's a bigger issue like steel tariffs we can think about the steelworkers, but now we have to think about all the workers who operate in factories and businesses that you steal as an input. So we've got one set of workers that are helped the steel workers in the United States. We have a whole bunch of other workers who are her.

Those are so workers who work in industries that you steal as an input, but this can often just be a game of who's organized enough to Lobby Congress to make sure that they're not hurt by tariffs and Beyond the confusion and the amount of money spent on lawyers. And and it's a lot of money spent on lawyers there is going back to rrr basics of economics if if I want to buy something and I think this price is correct and someone wants to sell it to me and they think the price is correct and then all of a sudden there was a tariff in the middle. It may suddenly make it so that I don't want to buy that item or someone doesn't want to sell this item if if they're taking the cost into effect and there's a transaction would have made both of us better. That is no longer happening. That's exactly how it works gains from trade disappear. And that makes me sad all those possibilities to create Joy.

That don't occur as a result of a tax or tariff huichol did weight loss and who is the lost that were talking about? Their the loss is people who can't afford a washing machine anymore because it's now it's fifty bucks more they could have afforded it feels no tariff. They be doing their laundry life would be good. But now they can before I let class out. I want to go for our vocabulary words. We had gains from trade we talked about that at the top and then we talked about the effects of tariffs as dead weight loss their transactions that would occur without a tax return if that would make both parties happy and those transactions do not happen because of taxes and tough but next time we're going to talk more about taxes in what is the best way for governments to raise money. Thank you so much Justin and Betsy. It's so much fun told Matt International Trade, isn't it? Always feels like temperature of noxious. Thank you. Both so much Justin wolfers and Betsy Stephenson only thing better than talking about.

Just talking about Santa Claus. So wait a minute. I think the class was thinking that they were going to get away with an assignment this week. And that is not how we roll in this class. Let's get an assignment for them to write in about as you go through your day. Think about how it would be different if you were doing everything for yourself from scratch with no ability to trade with others. Let us know what you came up with from our assignment this week. We're Planet Money NPR. Org hundreds of you have been playing along when we asked you to find inelastic good some of you mentioned vinyl records beer at a baseball game insulin ammunition interesting CrossFit and wedding dresses. Feel free to try man wear on a whole Congressional hearings worth of social media giant Facebook if

Graham Twitter and Tick Tock ya still there Tik Tok we're at Planet Money. Today's class was produced by Lauren Hodges with help from James Snead and Lexi Horowitz Ghazi sound design from Isaac Rodriguez. It was edited by Alex goldmark Betsey Stevenson and Justin wolfers are professors of Economics at the University of Michigan if need a new audio course with Himalaya called think like an economist would you can find wherever you get your podcast next week we go deep into American Tax history and we have a special guest lecture as a guy. I'm Robert Smith. This is NPR. Thanks for listening.

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