June 17, 2019

The Honorable Robert E. Lighthizer
United States Trade Representative
600 17th Street, NW
Washington, DC 20508

Re: Docket ID USTR-2019-0004 Request for Public Comments Concerning Proposed Modification of Action Pursuant to Section 301

Dear Ambassador Lighthizer:

The Toy Association™, Inc. represents more than 1,100 businesses – toy manufacturers, importers and retailers, as well as toy inventors, designers, studios and licensors – all involved in bringing safe, fun and educational toys and games for children to market. With an annual positive U.S. economic impact of $109.2 billion, the U.S. toy industry supports 683,933 U.S. jobs and generates $14.8 billion in state and federal tax revenue each year. Approximately 3 billion toys are sold in the U.S. each year, totaling $27 billion at retail, and our members account for approximately 90% of this market. Importantly, over 95% of toy manufacturers, wholesalers, distributors in the United States are small businesses.

As submitted in previous comments, we continue to strongly oppose any tariffs levied on toys, games, toy components and other toy-related imports. In previous lists, tariffs on toy related products like art supplies, children’s furniture and toy components have already negatively impacted many U.S. toy companies. However, the proposed tariffs on toy imports from China will devastate the toy industry and assuredly lead to higher consumer prices.

We would greatly appreciate your office’s consideration of the harmful economic impact tariffs are having and would continue to have on U.S. toy and children’s product companies. We request that USTR not impose tariffs on Harmonized Tariff Schedule of the United States (HTSUS) subheading 9503.00.00, “Toys, including riding toys o/than bicycles, puzzles, reduced scale models,” the HTSUS classification under which all toys are imported. While most toys are imported under subheading 9503.00.00, other toy-related products would also be impacted by the proposed tariffs and we similarly request these products not be tariffed as well. We have included a list of related HTSUS classifications in Appendix A.

In general, the ongoing trade dispute with China has resulted in significant uncertainty for toy companies creating a challenging business environment related to decision making and planning heading into the all-important holiday season. Weather toys will be on future lists, how long the tariffs would be in place, and whether/how supply chains would be affected are all unknown factors. This is impacting decisions about future manufacturing, expected pricing adjustments, purchase orders, lead times and shipping costs, etc.

This uncertainty, and the looming tariff threat, is coming at a historically inopportune time for our industry given the recent bankruptcy of Toys ‘R’ Us. The liquidation of all 800 Toys ‘R’ Us stores and elimination of 30,000-plus U.S. jobs had a seriously disruptive impact on the toy industry in this country. Levying what is essentially an across-the-board 25% additional tax on U.S. toy companies at this time – which would go into effect just as peak shipping season for the 2019 holiday shopping season begins – would be crippling.

As detailed further below, including toys in the list of products subject to tariff retaliation against China would be particularly inappropriate for the following reasons:

• Toys and toy-related products (such as educational items) are far outside the scope of the Administration’s focus on the technologies and industries included in the “Made in China 2025” initiative that is central to the Section 301 investigation.
• With China supplying 85% of all toys sold in the U.S. and with no alternative manufacturing capacity readily available elsewhere, tariffs on toys will cause substantial harm to consumers due to higher prices and fewer choices.
• Toy tariffs would lead to projected losses of thousands of U.S. jobs at a time when the U.S. toy industry is already disrupted by the Toys ‘R’ Us bankruptcy and closure.

Impact on U.S. Consumers

With 85% of all toys sold in the United States imported from China, imposing a tariff on toys manufactured in China would have a major and immediate impact on the U.S. toy market generally and on U.S. consumers, by increasing toy prices by 14.3% and resulting in a reduced selection of toys.¹

While U.S. companies have maintained product design and other key functions in the United States, production by U.S. toy companies is well entrenched in China. The efficiencies of this manufacturing arrangement have allowed U.S. toy companies to be among the most competitive in the world, providing consumers with a broad array of safe toys at highly competitive prices.

Given this high degree of integration, U.S. toy companies could not switch to non-Chinese sources quickly or easily. One reason is that Chinese factories have adapted to the seasonal nature of the toy industry, by also producing other products.

Of even greater importance to U.S. consumers, the U.S. toy industry has invested in ensuring that Chinese suppliers produce toys that comply with the strict U.S. safety standards that protect America’s children and families while at play. Establishing a new manufacturing base elsewhere could thus force companies to move hastily (and at significant cost) to identify, invest and educate new manufacturers on these requirements and develop relationships with them to ensure that the toys are, in fact, compliant.

Last year, Congress passed, and President Trump signed, sweeping tax reform legislation that significantly cut taxes for American consumers and companies alike. These tariffs have the potential to undo the pro-economic growth benefits of tax reform legislation by raising prices for consumers and eliminating American jobs.

Impact on U.S. Toy Industry

Although low-level toy assembly typically occurs in China, the U.S. toy industry maintains essential corporate, design, marketing and distribution operations in the U.S. that would be significantly and negatively affected by tariffs on toys. About $27 billion of toys are purchased by consumers in the U.S. each year – nearly a third of total global toy sales. Over 80% of those retail dollars remain in the country because of U.S. domestic operations (e.g., production plus wholesale and retail). The most important aspects of creating a toy – research and development, design (including safety considerations), as well as some component manufacturing – occur domestically. On average, about 65% of the more than $14.7 billion that toy companies invest annually in production (e.g., salaries, benefits and material costs) remains in the U.S. These are high-paying jobs that fuel the consumer-driven U.S. economy – exactly the jobs we want to keep here.

As mentioned above, the U.S. toy industry supports over 680,000 American workers and accounts for approximately $110 billion in economic value. The viability of these American jobs would be significantly undermined by the imposition of tariffs. In fact, economic analysis has determined that a 25% tariff applied to toys and games would result in the loss of 68,014 U.S. jobs, a 10% reduction in the U.S. toy workforce, and $3.4 billion in lost wages. Overall, tariffs on the toy industry would reduce the economic impact of the toy industry on the U.S. economy by approximately 10%, or $10.8 billion².

Unfortunately, these tariffs will not result in a mass shift in toy manufacturing out of China and into the U.S. While a handful of companies do successfully manufacture less complex toys in the U.S. or are considering options outside of China, for the industry as a whole, quite simply, China is the only option. Our industry has unique manufacturing needs not shared by other industries; billions of toys are sold around the world every year, toys are seasonal, must be affordable and there must be a wide variety of toys to account for children’s range of (ever changing) interests. The technical capability, cost-efficiency, infrastructure, labor and overall capacity to accommodate the toy industry’s manufacturing needs do not exist in the U.S. or anywhere else around the world.

Finally, we note that tariffs could have the unintended consequence of favoring Chinese toy companies that benefit from the de minimis exemption and sell toys direct to consumers usually through ecommerce. Toys imported under the de minimis exemption would not be subject to tariffs and companies that sell to U.S. consumers would be able to price their products more affordably than a U.S. toy company that imports larger volumes and sells at local toy shops. Often, foreign companies benefiting from de minimis exemptions are selling inferior products that may be knockoffs and do not go through the same safety testing and assurances that established brands undergo. This puts our nation’s children at risk of exposure to unsafe toys.

Tariffs on Toys Will Not Advance Administration Goals

As a general matter, the imposition of tariffs on toy imports from China is unlikely to meet the Administration’s goal of inflicting maximum pain on China and minimal pain on U.S. consumers. Tariffs are hidden, regressive taxes that will be paid by both U.S. businesses and consumers in the form of higher prices.

The imposition of tariffs on toys specifically is especially unlikely to advance the Administration’s objectives, including the criteria set forth in USTR’s Federal Register notice, for the following reasons:

• Toys are not relevant to the Administration’s stated goal of targeting those products relevant to China’s “Made in China 2025” plan;
• Imposing tariffs on toys would provide little leverage in helping eliminate China’s offending practices (such as foreign investment restrictions, forced technology transfers and theft of intellectual property) because China does not regard toys as a high-priority or strategic industry and has placed little emphasis in promoting and developing its domestic toy industry, in large part due to the high foreign value (typically U.S.) incorporated in most Chinese toys;
• Tariffs on toys would cause disproportionate harm to U.S. consumers for the reasons detailed above;
• Tariffs on toys would cause disproportionate harm to U.S. toy companies, particularly small- or medium-size businesses; and
• China provides full tariff reciprocity on toys (China agreed to eliminate its duties on toys and games as part of its WTO accession negotiation, a crucial step for the U.S. toy industry in building on the earlier Uruguay Round zero-for-zero agreement on toys);

In lieu of higher tariffs, we encourage the Administration to employ a strategic policy to address China’s offending intellectual property practices in concert with other major trading partners who share U.S. concerns.

Foreign Trade Zones

For toy manufacturers using Foreign Trade Zones (FTZ), it is critical that USTR prioritizes how merchandise subject to Section 301 tariffs is admitted to an FTZ on or after the effective date of the increased tariff and provide privileged foreign (PF) status as defined in 19 C.F.R. 146.14. A “PF” status admission requirement has been included in previous trade remedies and is critical to ensure that US based importers are able to “lock in” the duties at the time the goods are brought into the FTZ. Additionally, previous language used in Presidential Proclamations 9704 and 9705, imposing tariffs on aluminum and steel pursuant to section 232 of the Trade Expansion Act of 1962 (“Section 232”), that would subject goods upon entry for consumption to any ad valorem rates of duty is unprecedented. These proclamations would impose additional duties upon the filing of customs entry on merchandise in an FTZ under a “PF” status prior to the time such duties were scheduled to come into effect. This provision penalizes FTZ users in the United States and contravenes provisions in the Foreign-Trade Zones Act of 1934 and customs regulations regarding the election of “PF” status on merchandise in FTZs.

Conclusion

The U.S. toy industry strongly opposes any additional tariffs on toy imports. As detailed above, imposing tariffs on imported toys and toy-related goods would have a significant negative impact on U.S. consumers, would be devastating to the U.S. toy industry, and would fail to advance the objectives set forth by the Administration. We greatly appreciate the opportunity to submit these views and would welcome any questions you or others in the Administration may have regarding U.S. toy industry concerns on this matter.

Sincerely,

Steve Pasierb
President & CEO
The Toy Association

¹ The Economic Impact of a Potential 25% Tariff on Imported Toys from China (data cited as of April 2018), produced by John Dunham & Associates for The Toy Association.

² The Economic Impact of the Toy Industry in the United States (data cited as of August 2017), and the Economic Impact of a Potential 25% Tariff on Imported Toys from China (data cited as of April 2018), produced by John Dunham & Associates for The Toy Association.

Appendix A

Additional HTSUS classification that would impact Toy Association members