The Tariff Mismatch
Sunday, December 11, 2005
By all appearances, Sterlicia Rodney does not belong in a high tax bracket.
Juggling her toddler son in one arm while standing in line at a Payless ShoeSource in downtown Washington to buy $18 boots for her daughter, Rodney looks every bit the regular working mom that she is, with a $45,000-a-year job as the assistant to the vice president of a trade association.
But as a frequent purchaser of low-end footwear, Rodney pays hidden taxes that are among the steepest imposed on any product sold in the United States. Nearly all of the shoes sold in this country are made abroad, and the companies importing them must pay tariffs to the federal government that, to some extent at least, are passed through to the retail price. Tariffs are particularly high on athletic shoes; at discount stores, where sneakers typically cost $10 to $25 a pair, tariffs account for about $1.50 to $3 of the price -- or even a couple of dollars more, by some estimates.
"You wouldn't think it would be taxed so high because it's something you need to buy all the time," Rodney said. "Young kids grow out of them so fast."
Surprising as it may be to Americans who think of their country as a bastion of free trade, shoes are just one of many products subject to high tariffs. Although the average tariff on non-agricultural goods imported into the United States is less than 3 percent, tariffs on a number of everyday consumer products -- including clothing, luggage, dinnerware and handbags -- range well into double digits. The same goes for some food, such as butter and cheese. (These tariffs are separate from special duties imposed on certain foreign products that the government has found to be "dumped," or sold at unfairly low prices.)
The issue is coming to the fore as top officials from the World Trade Organization's 149 member countries gather this week in Hong Kong in hopes of advancing long-running negotiations to lower the barriers to commerce across international borders.
The governments involved in the talks face tough decisions. Although reducing obstacles to trade can help economies grow more rapidly and efficiently in the long run, exposing domestic industries to global competition can lead to factory shutdowns and job losses. Another thorny issue concerns how to make the international rules on trade in farm goods more beneficial to poor countries.
But for most Americans, the stakes are less cosmic. The talks' most tangible implications for the bulk of Americans -- heavy consumers of foreign goods -- concern the potential savings from a reduction in tariffs on commonly purchased products. That is particularly true for people at the middle and low segments of the income scale because the system has evolved in a way that produces a bizarre result: Some of the stiffest tariffs apply to the types of goods that people of modest means tend to buy, and lower duties are imposed on similar products that are more often purchased by upper-income individuals.
Sweaters offer a vivid example: If they're acrylic, the tariff is 32 percent. But if they're wool, the tariff is 17 percent. On cashmere sweaters, the tariff is lower still -- 4 percent -- and on silk ones, 0.9 percent. (Tariffs are levied on the "ad valorem" value of a product when it enters the United States -- the amount the importer pays, excluding insurance and freight. So for an acrylic sweater with an ad valorem value at the border of, say, $10, the 32 percent tariff would be $3.20.)
In the case of low-end sneakers, tariffs range between 48 and 67 percent, but tariffs on higher-end sneakers are only 20 percent, and for leather dress shoes, the tariff is 8.5 percent. Plastic handbags are hit with 16 percent tariffs but reptile-skin ones with only 5.3 percent tariffs. For drinking glasses, the tariff is 28.5 percent if the value at the border is 30 cents or less, but 5 percent if the value is $5 or more.
"Over the past 40 years, we've created a very skewed system, where many of the things that poor families buy are very heavily taxed, and things that only rich families buy are not," said Edward Gresser, a trade expert at the Progressive Policy Institute, a Washington think tank. "Of the five different kinds of taxes that the federal government imposes, tariffs are the smallest -- but they're by far the most regressive."
A former official at the U.S. Trade Representative's office during the Clinton administration, Gresser said he was taken aback by the perversities in the tariff system when he started scrutinizing it a couple of years ago. The task required poring over the official tariff schedule, a document filled with eye-glazing product categories. (One typical example: "Textile fabrics coated with gum or amylaceous substances, of a kind used for the outer covers of books or the like: tracing cloth; prepared painting canvas; buckram and similar stiffened textile fabrics of a kind used for hat foundations.")