Regulation

The Ghost of Christmas Presents

Uncle Sam's protectionist spirit slimes holiday shoppers.

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Walk through any mall in America right now and you will find a familiar tableau. The place is decorated in green and red. Kids sit on Santa's lap and ask him for the latest toys. Parents scour the stores trying to find those toys. The aroma of fresh-baked Christmas cookies fills the air.

But there are some things you won't see. Managers ripping their hair out because a shipment of winter sweaters or holiday wine is stuck in a customs warehouse. Lawyers arguing about what exactly constitutes a doll. Import managers scanning reams of paper—tariff schedules and quota reports—to figure out whether they can bring a shipment of slacks or blouses into the country.

You won't see these things, but they are there, as much a part of Christmas as fruitcake and mistletoe. American trade barriers touch virtually everything connected with Christmas, driving up the prices we pay for presents and giving businesspeople monumental headaches.

Probably no one knows more about those headaches than people in the toy industry, although they're often reluctant to talk about the matter. (One informed source speculates that the big manufacturers may not want to call attention to their many overseas operations.) But it is clear that trade barriers can have a major influence on the toy business, affecting every business decision, from where to locate production to how to classify the product.

As senior vice president for manufacturing at Ideal Toys, Charles Heilbrunner helped introduce Rubik's Cube to the United States. Manufacturers, he says, have to devote a lot of time to reviewing the latest changes in America's tariff schedules and quota limits. "We used to pore over the tariff schedules, trying to figure out how to minimize costs," he recalls.

One way to cut costs is to use toy factories in countries that get more favorable trade treatment—Hong Kong, for example, instead of China. And when the product is actually brought into the country, manufacturers try to convince the Customs Service to place it in a tariff category with a low duty. "We had people who specialized in import classification," recalls Heilbrunner. "Their job was to try to place the product in the category with the lowest tariff. For example, if we had a toy truck with working headlights,we might try to get it classified as a flashlight rather than a toy truck to get a lower tariff."

Last year, Hasbro spent months trying to convince the Customs Service that G.I. Joe is not a doll but a toy soldier. Dolls, it seems, are subject to a 12-percent tariff. Toy soldiers are not. Losing that argument, Hasbro took the case to court, getting as far as the D.C. Court of Appeals, which agreed with the Customs Service that G.I. Joe is "a representation of a human being used as a child's plaything"—in other words, a doll.

And once toy makers dole out the doll tax, there's the matter of dressing the little "representations." Doll clothing, you see, is covered by textile quotas, and quotas are even worse to deal with than taxes. A manufacturer can bring all the dolls it can sell into the country, provided it pays the tariff, but the supply of clothing is limited by law. "And," says Heilbrunner, "it's hard to sell a naked doll."

Dolls, of course, aren't the only ones getting clothes for Christmas-or suffering from apparel quotas. There are some 800–900 quotas and "voluntary restraint agreements" on textiles and apparel. "Anytime any country begins to export any textile good in some quantity, [the U.S. government] asks to negotiate a restraint agreement," says Cindy Herrera, a Washington, D.C.-based consultant to textile importers. "They call it a voluntary agreement, but if a country does not negotiate, the government will go ahead and impose a quota. It is a brutal program."

The quota system creates a number of problems for clothing importers. Prices can suddenly double as quota rights are bid up. Clothes that have been ordered and paid for can't be brought into the country because quotas have been unexpectedly filled.

As import manager for the catalogue retailer Spiegel, Larry Lifson deals with those problems every day. Besides coordinating shipments from dozens of different countries, Lifson must keep an eye on U.S. quotas and try to keep Spiegel from bringing in goods after a quota has been filled. If goods are brought into the country after a quota has been filled, Lifson must either ship them back overseas or allow customs to impound the goods until the next year's quota opens. Neither alternative pleases Lifson.

It sounds simple enough. Each month, the government issues updates that tell importers how close a quota is to being filled. "All the government is telling you, though, is what actually entered into customs," cautions Lifson. "The government could show you only 95-percent filled, but by the time you ship, the other 5 percent could come in and [the quota] is filled."

So no matter how careful an importer is, occasionally he brings in a shipment exceeding the quota limits. Talk to anyone in the apparel business, and he'll tell you about at least one shipment of sweaters or pants stuck in some customs warehouse. Despite Spiegel's close attention to customs reports and its watchful eye on other importers, Lifson says the company had an expensive shipment of women's slacks from Hong Kong impounded a couple of years ago. "Before I came on board," he notes.

Importers also complain about what the quotas do to the prices they pay for clothes. In many countries, most notoriously Hong Kong, the right to fill a U.S. quota is bought and sold on the open market. Bidding on these rights can cause unexpected jumps in the price importers must pay for clothing.

"Quota prices can skyrocket at times for hot categories. Right now, Chinese sweaters are very hot," says Lifson. "The price of the quota can be higher than the price of the item. If you want to buy that item in that country, you have to pay a substantial increase, and of course, you'll probably have to pay an import duty, too."

Even under normal circumstances, quota rights can account for a large percentage of the price of a good. "On a $20 sweater, the quota price can be $8," says Lifson.

Filled quotas and unexpected jumps in prices can obviously ruin the best-laid plans of any business. To ensure a steady flow of goods, Spiegel and the other larger retailers maintain an intricate system of backup sources. "We often double source," says Lifson. "We'll place an order in Hong Kong but have a backup source in another country or domestically. If something happens with the quotas, we aren't locked into one market."

But smaller retailers do not always have the luxury of numerous backup sources. For them, impounded shipments and sudden surges in quota prices are not just minor irritations; they can lead to unfilled orders and lost customers.

Lost shipments, bidding on quota rights, finding backup sources—they all add up to one thing: higher prices for consumers. Georgetown University economist Gary Hufbauer estimates that Americans paid an extra $25 billion to $30 billion last year for clothing because of protectionism. Think about that the next time you find—and can't afford—that perfect shirt for your husband or skirt for your mother.

And when you are out buying Christmas snacks, you might want to ponder U.S. sugar quotas. During the 1980s, the federal government steadily tightened limits on imported sugar, reducing the foreign share of the American market from about half to only 8 percent. At the same time, the domestic price of sugar has risen to about double the world price. Economists estimate that higher sugar prices cost consumers about $3 billion each year. Those high prices have also helped foreign candy makers swipe business from American companies.

One of the victims of U.S. sugar policy is Bob's Candy, a hard-candy maker specializing in candy canes. If you live in the South or along the eastern seaboard, chances are that the candy canes on your tree came from Bob's factory in Albany, Georgia. But that may change.

"Because of sugar quotas, the price we pay for raw materials is about double what our foreign competitors pay," explains Greg McCormick, president of Bob's Candy. Because of the price differential, foreign firms can undercut American candy makers. Until 1981, foreign share was declining. But McCormick claims there has been a 250-percent increase in imports of hard candy since the government started tightening sugar quotas. Bob's is facing growing competition from a Yugoslavian company.

Candy canes are about 60 percent sugar, so higher prices obviously hit Bob's hard. But sugar quotas have also raised prices in a less obvious way. As sugar prices skyrocketed, cola manufacturers and anyone else who could substitute cheaper com sweeteners made the switch. In response, the corn-sweetener people jacked up their price to just below that of sugar. The other 40 percent of candy canes is mostly com sweetener.

"Except for the ingredients, our costs are generally lower than foreign firms'," says McCormick. "If not for the sugar quotas, we could be exporting candy, not worrying about foreign competitors. But the quotas have pretty much made that impossible."

What do you give to the person who has everything—or the person you don't know all that well? To this seasonal dilemma, a bottle of wine or selection of cheeses often seems the perfect solution. Yet quotas reach even into the nation's gourmet food stores.

"The quota [on wine] is high enough that it is not likely to be reached," says Bob Berning, a wine buyer for Trader Joe's, a West Coast chain of gourmet food stores. "But since customs must record each shipment, it delays those containers for two or three days. The way I look at it, it's harassment."

Storing wine in government warehouses for two or three days, filling out paperwork, and guiding shipments through customs add to the cost of imported wine. "About 23 cents a bottle," says Berning.

Berning's colleague Leroy Watson started Trader Joe's cheese import program about 15 years ago. Soon after that, the government began to require all cheese importers to obtain a federal license. "The people in business at the time were granted a license to bring in the amount of cheese they were then importing," Watson explains. "The problem is that newcomers have no real opportunity to get a license."

And it's "almost impossible" for a retailer with a license to get an increase in the amount it imports unless it buys someone else's license, says Watson. "We were licensed for about 75,000 pounds, and that hasn't increased significantly. We could sell 100,000 pounds or more, if we could bring it in."

Further, federal licensing brings an assortment of seemingly inexplicable regulations. For example, Watson says that he must bring in two 10,000-pound shipments each year. One large shipment or several smaller shipments will not meet the requirement; the importer must bring in the number and size of shipments required by the government. The requirement seems to serve no purpose other than to bind an importer's hands with red tape.

By limiting the supply of imported cheese, licensing drives up the price. "In some cases, people pay up to 50 cents a pound extra," says Watson.

Totaling it all up, Georgetown's Hufbauer estimates that U.S. trade barriers cost American consumers about $80 billion each year. Talk about Christmas spirit! Ripping off consumers, forcing up prices, leaving baby dolls naked, running candy cane makers out of business—compared to Uncle Sam, Ebenezer Scrooge was a kind old man.

Charles Oliver is assistant editor of REASON.