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Hello and welcome to Planet Money Summer School. The supply for your intellectual demand, this is class number five, 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 those parties. Joining us on the educational microphones today, our Planet Money resident economists. Yeah, yes.
It seems like Justin's a little bit further off the mic than Betsy. Oh, OK. I don't know.
Whatever Betsy is doing is perfect. Well, how are you how are you oriented toward the mike? She has told that Quada perfect.
We're not at all competitive. Justin Wolfers, Betsey Stevenson, welcome back. Great to be here today. Excited to talk about trade. Well, let's talk about trade, because so far we've talked about a lot of market phenomenon, but we haven't really talked about on the on the whole country level.
What should we think about trade as we listen to this episode?
Well, the easiest way to get to the whole country level is to go back and start at the simple level of two people. So let's take Bettini. We trade a lot in our family. She does the taxes. She's much better at that. And I do all the it. And so 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 the listeners to just think about one thing. What if suddenly someone drew an invisible line down the middle of my household? Betty's on one side of that invisible line and I'm on the other. The gains from trade 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 Betsey's it and she's doing my taxes.
Wait a minute, Justin Land and Betsi land. Yeah, that's right. When Justin Land is providing it support for Beattyville, that counts as an export from my country to hers. And then when Betty helps with my income taxes, that that's counted as an import from Betty Land to Justin land.
And since this imaginary world is a world of free trade, you both benefit and that invisible border in your home doesn't matter. But in the real world, borders do matter. I mean, once you have a border, different countries can make different rules. They can put guards at the border. And and one thing they love to do is charge a tax on everything that goes back and forth across the border. A tariff. 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 taxes. But we're going to learn is, you know, tariffs 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 its import and not even know it. Or maybe the U.S. government negotiated with another country so that that product has no tariff.
This is a huge subject of international law and negotiations, and there are 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. It 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. Here's us having fun with that. Robert Smith, what do you wear?
I am wearing red pants, a red overcoat, a black belt. I'm just a Santa. What am I wearing? You are also wearing a citizen, something I never thought I'd see Mr. Goldstein. Me neither.
But we are surrounded by a thousand people dressed as Santa. I'm trying to get my belt to walk.
You having belt trouble? Yes, dear. Help with this. Oh no, I'm OK. There's like a fourteen dollars doing Santa costume. This is red velvet pantsuit.
It's got a hood over it. Long sleeves, some embroidering here. Yeah. The embroidery is beautiful gold embroidery and look it this looks like a real belt that's actually holding in some girth. Oh yeah. This is Santa Con, New York City. Twenty fifteen. It's an annual tradition. You dress Bezerra, you get drunk. Yeah. Ho ho ho. You march in the city dance a little. Yeah. I'm not here to do that. No.
You're here, I'm sure for a nerdier economic reason. But I'm here for what I think is actually a more exciting reason.
There is this international dispute going on right now over this basic question. What is a fantasy?
Today on Planet Money Summer School, we consider a lawsuit over a Santa suit.
It gets to the heart of how international trade works and these strange Texas known.
Tariffs and stay tuned after the story, when our economists show us that there is a whole universe of hidden fights over tariffs that shape almost everything we buy, the standards are going into this bar right here. And I'm going to go China. I'm going to go back to the office and do the story. Have fun, man by. This message comes from Western Governors University, WANGU is a non-profit university committed to helping you reach your academic goals at an affordable price.
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The past is never past and every headline has a history. I'm from teen Arab Louis. I'm running Abdelfattah and we're the hosts of Through Line, NPR's History podcast.
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Subscribe and listen to Throughline from NPR. Ho, ho, ho, seems a little on the nose. What do you think is a suit a good fit, good looks for me?
I mean, Stacy Robert disappeared into Santa Con has not been seen from since.
You have graciously agreed to close the show with me.
What do you think?
You look very sharp. Thank you. So let me let me tell you about the suit.
OK, yes. Tell me about the suit. I got it at a place called Ruby's.
It's a costume shop out on Long Island. So you got some Santa costumes here. That's where we're going. This is Marc Beige. He runs rubies.
Are you got the Star Wars? I guess hard for me not to stop at the Star Wars.
Nice teka. Yeah. These are like really spectacular Star Wars costumes. Like there's this big old Darth Vader suit that looked like it was actually what the Darth Vader wore. Anyway, right around the corner from Darth Vader, where we stand now.
What are we looking at here? Of course, costumes, a lot of a lot of different different qualities, different price levels.
This fight over Santa suits plays out on this wall right in front of us on this wall of Santa suits, 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, he has to bring them through customs. And depending on what he's importing, sometimes he has to pay a tariff, he has to pay a tax.
And 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 harmonized tariff schedule.
It is ninety nine chapters long and it lists 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?
Marc Beige has an answer to that question. He says there is a section of the code section 95 05, to be precise, that is perfect for Santa suits. It's called Festive Articles. I printed out the page here. You can just read some of the stuff in there.
OK, Christmas ornaments of glass of wood, nativity scenes and figures there of artificial Christmas trees.
It's not just Christmas stuff. This section also includes stuff like party favors and confetti and streamers and all this stuff. Festive articles come into the country duty free. No tax mark imports costumes. 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.
It's made out of a flannel type of fabric to back closure with Velcro. This one is a festive article, but then Mark shows me a different suit right on the same display, a nicer suit.
Well, it has obviously the the pants tell me with these pants look like they feel nice. They're made out of a plush material. You have a jacket which has a zipper, has a white, four cuffs, white for collar. It's got this nice lining.
And Customs looks at this nicer Santa suit and says to Mark, this is not a festive article. You made this so nice. This is clothes and clothes going to a different part of the tariff code. To import this suit, Marc has to pay a 32 percent tax on the jacket and a twenty nine point two percent tax on the pants.
Yeah, there's a pair of gloves, you know, white Santa gloves. Those come in at 10 percent under the tariff code. And Marc thinks this whole thing is ridiculous. You know, he says it's a Santa suit. 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? I mean, it's it's nice.
I could put on this red fur jacket. It's a little bit chilly today. This is like the perfect wait for, you know, 50 degree weather. Right.
But what is the last time you were around dressed as the Santa Claus calling the Santa suit clothes, Marc says makes it a lot more expensive for him and for customers. It passes the cost onto us. Yeah, of course.
So if you were going to pay eighty dollars for a Santa suit, for instance, ten or fifteen dollars of that eighty dollars would be tax. And there is a lawsuit over this issue, a lawsuit over this question of what is a Santa suit. The person bringing the lawsuit is him.
It's Marc Beige. The suit is Rubies Costume Co. versus the United States. It's basically Marc saying to the government, come on, a Santa suit is a festive article. But when I ask Marc about the lawsuit, he doesn't really want to get into the details. He actually points to this guy in a suit and tie who's been following us around the store.
His lawyer, that's John Desiccating, the customs officials, our attorney for many, many years. So. All 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 mean this rhetorically. I actually called up an expert. I called up Douglas Irwin, an economic historian at Dartmouth, and asked, how do we get here?
And he says the story starts with the beginning of the U.S. government.
Actually, the second piece of legislation passed by Congress in 1789 was tariff legislation.
Second, second law Congress ever passed ever. Yes. Was a tariff on what? On everything, he was in his office when I called and as far as I could tell over the phone seemed like he had 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 I imagine that's because they just weren't that many different things in the world. You know, like you can list everything.
It's still not that much stuff he read to me from that first tariff floor. He said it's just three pages long.
Distilled spirits, molasses, malt, cast iron, all leather, tender Todd, all clothing ready made seven and a half percent. Oh, there it is. There it is.
Erwin says there's a 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, New York and Charleston.
And so the government looked at those ships and said, all right, you want to unload them here, give us some money.
That first tarrif 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 cuts, looking for when festive articles first appeared. Eventually, he got to 1922.
Oh, I think festooning is festive articles. OK, here's what it says. Doll heads, toy marbles, toy games, toy containers, toy favors, toy souvenirs, garlands 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 3600 and 81 pages. But in all those pages there is no line for costumes. So now you have these two categories that costumes might go in. If they're clothes, then you have to pay a tariff. If they're 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 clothes?
The answer is pretty, pretty fun. Pretty delightful back in the nineties. On the other side was Marc Beige was Rubies Costume Co. He has completely switched sides.
And you were on the other side then, right? Absolutely.
Well, you know, it's good to be flexible. Owning it right.
Is like he didn't seem ashamed of it at all.
He's clearly not like a philosopher of the tariff code. He's 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 importing costumes. He was making them here in the United States.
We were a domestic 100 percent domestic manufacturer. And of course, if you're a domestic manufacturer, if you're making costumes in this country, you want importers to have to pay a tariff, makes their costumes more expensive. So that is why Marc Beige was on the other side.
And the government has also flip flopped 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 no no.
Actually, those are clothes. 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 customs 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 and new people come in and they say, you know, that Santa suit that we used to call a festive article? I think it's actually close. And here's why.
This 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. It's thousands of pages long.
There are tons of complicated rules. And where there are complicated rules and money at stake, there are people for hire who will help you figure out how to play the game. It's called tariff engineering.
Tariff engineering. Yes, that's a real thing. Oh, it's a huge thing. You are a tariff engineer.
Sure, absolutely. This is Michael Cohen, tariff engineer and trade lawyer.
And he says tariff engineering is not just suing the government, arguing that something should be in one category or another.
It's 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 soul of it. You 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 a zipper or a button, it's less likely to be counted as clothing, more likely to be a festive article. Duty-Free, in fact, Kontum festive articles have been a big deal in his world. It's not just costumes. I mean, there have been cases for years over. You know, if you have a a mug or a placemat or tablecloth and you put a jack o' lantern or a Santa Claus on it, does it count as a mug or a placemat or a tablecloth or is it a festive article?
And there are other things that you don't even see. One client came to Michael Cohen and wanted to import this big industrial machine and couldn't figure it out.
If you split up the machine into two separate parts, basically take it apart. It's like hundreds of parts. It split it up into two steps. Shipments right on two separate ships configured up that 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 a tariff code that has tens of thousands of line items and different tariffs for each one.
Yeah, but obviously it doesn't feel good, right?
It's logical that if you step back, you know, and look at the work Cohn is doing here, it's not doing anything for our economy. Right.
I mean, we want a company spending time and money figuring out what is the best machine we can buy or would this costume actually be better with a zipper or with Velcro ping lawyers just to figure out how to minimize your tariff bill?
It doesn't make our products better. And, you know, I asked Cohen about this.
Would we be better off if your job went away? The very painful answer is yes, for real. You really think that?
Sure. Most economists 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 seven percent. 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, Rubies Costume Co. versus the United States is likely to go to trial next year.
You can picture in your mind a courtroom. And there's John Bezique, Ruby's customs lawyer, pointing out 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 clothes. The lawsuit is over a particular suit. It's over the premier plush nine piece Santa suit, which, of course, I tried to buy when I went out to meet market.
Rupee's, of course. Oh, it's this. It's this. I think this is the same look look at the names. Oh, you're right. They didn't have the nine percent stock, so I got the six piece. Basically the same thing doesn't have the beard or the wig or the plush red sanitary bag.
But, you know, the jacket, the hat, the pants. Come on, s.m.
Jacob Goldstein and Stacey Vanek Smith from an episode that we first released back in 2015. After the break, the 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 Betsey Stevenson, are you steaming mad? Are you are you upset at the inefficiency of the Santa suit and the tariff world?
It's a waste. I was about to say the same thing.
When I listen to this episode, I just think what a waste of time and resources and legal time and appeals and appeals 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. Have you ever seen one of those women's shirts that has a tiny little pointless pocket just around the waistline? You think, why would you have a pocket right there? It turns out that if you make your shirt with a pocket near the waistline, it attracts a lower tariff rate.
And as a result, it doesn't really attract the tariff. It gets assigned a lower tariff rate because the whole thing that companies are trying to do is operate within a set of really Byzantine rules around what kind of tariff you're going to face.
Right. And so they make these bizarre shirts because it's cheaper from a tariff perspective to make a business shirt with a tiny pocket than to make the sorts of shirts that people would want that maybe don't have tiny pockets near the waistline.
So the reason it's important to keep in mind the fact that a tariff is just a tax is 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 get. And so economists call this the dead weight loss of the tax, and it rises not just as the tax rises, but it rises with a square of the tax rate. 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 amounts of money to try to get you from one high tax rate to a lower one.
Yeah. So why are governments doing this politics?
I think they come to the political judgment.
Some governments some of the time come to the political judgment that tariffs are going to be popular and they're going to be popular, because when you raise tariffs on something, you help a couple of very easy to identify industries.
When we put tariffs on washing machines, workers in the washing machine industry in the United States cheer. They don't have to compete as hard against China. The rest of us are going to pay another 50 bucks per washing machine. Many of us won't notice, and even those of us who notice aren't exactly going to go out and protest in the streets or change the way we vote because we paid a little bit more for a washing machine.
And so a politician believes that they can buy votes by raising tariffs to protect particularly politically important constituencies.
Now, 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 as a society and we could take something that's a bigger issue like steel tariffs. We can think about the steel workers. But now we also have to think about all the workers who operate in factories and businesses that use steel 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 hurt. Those are the workers who work in industries that you steel as an input. But this can often just be a game of who's organized enough to lobby well enough Congress to make sure that they're not hurt by tariffs.
And beyond the confusion and the amount of money spent on lawyers and it's a lot of money spent on lawyers there is going back to our 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 is 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 they're taking the cost into effect.
And there's a transaction that 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 a tariff we call dead weight loss.
And who is the loss that we're talking about there?
The loss is people who can't afford a washing machine anymore because it's now it's 50 bucks more. They could have afforded it. If there was no tariff, they'd 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. There are transactions that would occur without a tax or a tariff that would make both parties happy. And those transactions do not happen because of taxes and tariffs. But next time we're going to talk more about taxes and what is the best way for governments to raise money.
Thank you so much, Justin and Betsy.
It's so much fun talking about international trade, isn't it? Always is. Like what? You're obnoxious.
Oh, thank you both so much. Justin Wolfers and Betsey Stevenson.
You know, the only thing better than talking about tariffs is 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.
Oh, good one. Let us know what you came up with from our assignment this week with Planet Money at UNPEG. Hundreds of you have been playing along. When we asked you to find inelastic goods. Some of you mentioned vinyl records, beer at a baseball game, insulin, ammunition. Interesting. Crosthwaite There is an addictive substance. Have I ever heard one? And wedding dresses. Feel free to chime in. We're on a whole congressional hearings worth of social media giants Facebook, Instagram, Twitter and talk.
Yeah, still that tick tock. We're at Planet Money. Today's class was produced by Lauren Hodges with help from James Snead and Alexi Horowitz, Gazy Sound Design from Isaac Rodriguez. It was edited by Alex Goldmark.
Betsey Stevenson and Justin Wolfers are professor of economics at the University of Michigan. Plus, they've made a new audio course with Himalayan called Think Like an Economist, which you can find wherever you get your podcasts. Next week, we go deep into American tax history and we have a special guest lecture as a guide. I'm Robert Smith. This is NPR. Thanks for listening.