sugar quotas

The Hidden Costs of Tariffs

This news report from the Washington Post is a striking example of the absurd costs of complex tariff systems:

Brand-new Ford Transit Connect vans, made in Spain, are dropped off at U.S. ports several times a month. First, they pass through customs — and then workers hired by the automaker start to rip the vehicles apart. The rear seats are plucked out. The seat belts in back go, too. Sometimes, the rear side windows are covered with painted plates. Any holes left in the floor are patched over. 

Why? Because there’s a 25 percent tariff on imported pickup trucks and work vans, but only a 2.5 percent tariff on passenger vans. So even with all the extra effort of building a passenger-quality van, and then dismantling it, it’s still cheaper to do that than to pay a substantial tax on the import. 

The story is also a reminder of how bad policies can linger for decades. In the early 1960s Europeans increased their purchases of American chicken. European governments responded by imposing tariffs on chicken imported from the United States. In retaliation, President Lyndon B. Johnson imposed a 25 percent tariff – known as the “chicken tax” – on potato starch, dextrin, brandy, and light trucks. Tariffs on the other products were eventually lifted, but the high tax on light trucks remains. Thus the counterproductive construction and destruction. And by the way, this is no secret; the Wall Street Journal wrote about Ford’s practice in 2009.

The Post goes on to report:

Tariff engineering has a long history.

In the 1880s, the Supreme Court ruled it was acceptable for a sugar importer to intentionally darken refined sugar with molasses to lower the grade and secure a lower duty. Three decades later, the court took up the case of a company accused of trying to evade a 60 percent duty on strung pearls by instead shipping loose pearls with holes pre-drilled for stringing. Those faced only a 10 percent duty….

For example, some athletic shoes, such as Converse All-Stars, come with just enough fuzzy cloth on the rubber soles to qualify them as lower-duty slippers. In the early 1980s, the United States imposed a tariff on motorcycles with engines larger than 700 cubic centimeters in a bid to protect U.S.-based Harley-Davidson, so Japanese companies turned to making 699-cubic-centimeter motorcycles instead.

[See https://www.cato.org/publications/policy-analysis/taking-america-ride-politics-motorcycle-tariffs]

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