Have you ever had the grand-standing debate of whether a hot dog is a sandwich?
Spoiler alert: it’s not.
Well let me ask you another question:
Is a Snuggie a blanket or a sweatshirt?
Now this may seem like a silly question, but you really should think twice about your answer.
See, that question has not only been debated but even answered in front of the court…
The court of international trade, that is
Why?
Well, how a product is classified can mean either big savings or big costs for the company
that sells it.
Which is why the question of whether this thing is
a sweatshirt or a blanket is actually really high stakes.
If you’ve ever rocked a pair of chuck taylors you may have noticed their soft, fuzzy
bottoms and sides.
"For Nike who bought Converse, the issue was, you know, is it a shoe or is it a slipper,
and they clearly want it to be considered a slipper....so Nike is adding felt, a soft
bottom or soft sides around the outer soul in order to say that this should fit in the
category of a slipper rather than a shoe."
An action figure is a toy...
An apple watch is a tele-communcations device…
And a snuggie is a….?
We’ll get to that one later.
The reason companies care so much about their products' classifications is because of tariffs.
Tariffs are the taxes countries place on imported goods..
But, all products aren’t assigned the same tariff amount.
See, tariffs change depending on where a product is made.
So a t-shirt made in, say, Mexico has a different tariff rate than if it were made in China.
Where it gets interesting is that small changes to an item's design, or material can actually
move the product to a different tax code with a lower tariff.
So manufacturers can tweak their product specifically for the purpose of lower tariffs.
It’s called tariff engineering and it’s been around for centuries.
Back in 1881, Sugar was a luxury product and its tariff was determined by type.
The Dutch Standard determined value solely by color - the darker, unrefined the sugar,
the lower the tariff, and vice versa.
Since color was the only standard to determine the tax, one clever importer decided to add
molasses to his highly refined sugar to see if it could pass as cheaper, darker sugar.
But, the Port of New York caught on to his antics.
So, they chemically tested his product, realized they were right, and charged the importers
with a higher tax.
This began a legal dispute that eventually made its way up to the Supreme Court.
Now, the Court ruled in favor of the importer -- why?
Well, they said that even though Port Authorities found a way to chemically test the sugar,
the only viable test at the time was color.
So that crafty sugar importer successfully engineered a lower tariff.
About 30 years later, another case was litigated-- but this time it was about a different luxury:
pearls.
In the 1900’s, imported jewelry -like necklaces for example had a crazy high duty rate of
60%
but if pearls were imported in their natural state, not set or strung, they were only taxed
at 10%...
So one man decided to test his luck “the story is that while in Europe.
A Person -- man -- saw a necklace he wanted to purchase for his wife and bring it to the
US.”
It’s said that he took off the pearls, and took the string out.
Then, he put the un-strung pearls with drilled holes in them into a bag and sent them into
the United States…
Customs automatically flagged it down and the two parties ended up in court.
And the ruling?
“They're either strung or they're not strung.
If they're not strung 10% duty.
That's it.”But this was just the start.
Tariff engineering remains a common practice even today.
You may be thinking, -- how?
Well, remember our question: is a Snuggie a blanket or sweatshirt?
That was only debated 4 years ago.
In 2017, the Court of International Trade argued that because you can wear a Snuggie,
it should be classified as a garment...which means a tax of almost 15%
But, Snuggies parent company Allstar Marketing Group argued against that classification,
defining the product as a blanket, hoping to keep its tariff at a mere 8.5%
Customs lost the case after the court ruled that despite the Snuggie’s sleeves and pockets,
it’s not apparel.
So, why do certain items have lower tariffs than others?
, it’s kind of complicated: “There is always a why.
And it is often lost in history.
Sometimes these things continue on forever.
And people have forgotten, but it's, it almost always originates with a domestic industry
that was perceived to be in need of protection.”
Over the last 50 years, textile manufacturing mostly moved outside of the U.S.
For the companies that stayed, tariffs continue to provide a bit of economic protection
Some tariffs relate back to historical events, like the US having a dispute with another
country and slapping on a tax that remains in place today -- .
So how do we access tariff rates?
Is there a glossary of some sort?
Great question.
And yes.
It’s called the harmonized system and used by customs worldwide.
In America, we use the Harmonized Tariff Schedule of the US.
This tariff schedule is basically an index that lists all goods numerically along with
which category it fits in.
The H-S- or harmonized system lists six-digit codes for the assigned good.
But countries can add longer codes for a more specific classification.
In the US, for example, goods are assigned 10 digits.
And the littlest detail -- like where it’s from or what it’s made out of --can change
the product’s code and thus the tax rate “men shirts, women shirts, men's shirts,
with collars, men shirts of cotton men shirts, polyester, it's incredibly detailed.”
And speaking of shirts -- one well known brand that spoke about how they practice tariff
engineering - is Columbia Sportswear Columbia executives discussed their strategy
in a podcast interview with Marketplace.org.
“I have a whole team of people that work with the designers and developers, merchandisers
and with customs actually to ensure while during the design process were considering
the impact of tariffs” Tariffs for women’s shirts that are made
out of man-made fiber and include a pocket below the waist are classified for a lower
cost than those without.
So, with that knowledge in mind, Columbia designers created a small pocket -- or what
they like to call a “Chapstick pocket” -- on their PFG shirt
That pocket makes a big impact, dropping the tariff rate of the from almost 27% to just
16%.
And those savings have a ripple effect: “they don't have to pass that higher cost
on to consumers, and so that they don't lose market share.
And so that they don't lose sales, and don't have to layoff workers.”
While tariff engineering is a legal practice, there’s a few things to remember of what
you can do and what you can't you can't lie about the product, right, nor
can make false statements to the federal government ...the merchandise has to actually be presented
to customers in a way where it's been inspected and seen so no artifice or disguise is the
legal term
where you are crossing the line into sort of illegal behavior to make a false declaration
about the product itself, or what it's what it is when it crosses the border.”
So, with companies able to engineer how should consumers feel?
Well, it depends on who you ask...
According to Mary Lovely, if a manufacturer has successfully engineered a product from
abroad, it means lower costs when it hits the shelves
“from an economic point of view, we want people to make choices based on prices that
actually reflect the true cost to society.
But also that gives them the most satisfaction”
“I just consider this to be, day to day good management of your supply chain, the
same way an accountant says, I don't know why you're paying taxes on that”
So where are we now?
You may remember that in 2018 the Trump Administration raised tariffs on China as well as specific
products like aluminum and steel.
The Biden administration has so far kept many of Trump’s tariffs in place.
Our experts say higher tariffs invites more engineering.
And, with the rise of technology in product development it also raises questions..
Like what might happen if you make a product out of a 3D printer that’s located in Silicon
Valley but uses software that was developed and downloaded elsewhere?