How America’s Direct-from-China E-Commerce Model Will Kill Retail, & Manufacturing Labor

Somewhere in China is a small business operation working as a broker to bigger manufacturers, or stitching and sewing capri pants for sale on Amazon’s Marketplace. To say their livelihood depends on the U.S. consumer would be an understatement. They are the new neighborhood shop, only they’re based in Guangzhou. Thanks to e-commerce platforms, led by Amazon, they will help accelerate putting American retail out of business.

Most of the shelves of American retail stores – from Lowes to Old Navy – are full of items manufactured in China. But who needs them? All one has to do is buy online, sight unseen. Do you need these retail stores anymore?

Giant corporations like The Gap, owners of Old Navy, may be able to withstand declining in-store sales. Those who are not listed on the NYSE, or have private equity backing, will struggle against e-commerce’s direct-from-China trend. To survive into the future, they will have no choice but to create a website and have their buyers order direct from Asia. There won’t even be a need for warehousing.

All e-commerce sales priced under $800 come into the country duty-free under a tariff rule known as de minimis. Most of it is coming from China. Some of it is from those small Chinese players who sometimes do knock-off versions of American brands and underprice the originals.  Even Amazon admits to this.

Roughly 80% of counterfeits that enter the United States come out of China and Hong Kong, according to analysis of reports from U.S. Customs and Border Protection about fake products seized at the border. He points out that this makes sense because the region is a manufacturing hub, so people have access to both equipment and knowledge about how to make consumer goods. “Someone who works at a legitimate factory may start up their own business making fakes,” says Robert Handfield, a North Carolina State University professor who has studied Amazon’s counterfeiting problem. “They’ll copy it, sometimes using cheaper materials, and sell them on the same channels.” — Amazon’s Battle Against Fakes May be Too Little, Too Late by Elizabeth Segran, Fast Company, May 17, 2021.

The House Ways & Means Committee wants to ban non-market economies from benefiting from the de minimis rule.

Amazon and Walmart aren’t too keen on this idea and will lobby against it. Removing de minimis for non-market economies mostly impacts China. It also creates a compliance issue for U.S. e-commerce. Nobody wants to have to hire more lawyers to do more work.

That they would be against the rule change is no surprise. That it has opposition in Washington at a time of “Build Back Better” and worsening American electorate sentiment towards China is concerning. Why would anyone in Washington be against lowering the price threshold for duty-free entry into the U.S. when U.S. competitor nations have price thresholds much lower? Is the United States going to be the only free market in the world? If Congress is going to wage this ideological battle, they should be made aware that they wage it against their own constituents, not China, the world’s largest closed economy.

For Europe, the so-called de minimis price cap for duty-free entry is around $250. For China, it’s $7.90.

China knows how to protect its market. It wants to make it more costly for the locals to buy American-made baby food, or European branded luxury bags from Vietnam. The U.S., on the other hand, remains dedicated to opening the door to everyone.

At what cost?

Manufacturers will have a harder time competing against copy-cat items flown in from abroad. Retailers of all sizes will have a harder time making the case for physical stores.

Some of these closures will be absorbed by the big boys. They will stay as a going concern, of course, but their workers will have a smaller market to job hunt in.

Ravaged by a pandemic that shuttered stores for weeks in the spring—driving more spending online—retailers big and small closed 12,200 stores in the U.S. last year, according to commercial real estate firm CoStar Group. In all, that amounted to 159 million square feet of retail space. In 2019, the tally was 10,000 stores. Some of the retail names to have closed stores in big numbers include J.C. Penney, which filed for bankruptcy in the spring and emerged with a fraction of its store count of just a few years ago, GameStop, Gap, and Macy’s. Many of the closings came from retailers that shut down altogether last year, such as Pier 1 Imports and its 950 stores. – A Record 12,200 U.S. Stores Closed in 2020 as e-Commerce, Pandemic Changes Retail Forever by Phil Wahba, Fortune, January 7, 2021

The China-direct e-commerce model, facilitated by Amazon Marketplace, where some 40% of its sellers are based in China, makes it more attractive to turn China into a virtual, American shopping mall. For some time, it’s already been America’s manufacturing hub. De minimis shipments facilitate that trend and now adds retail to the mix.

CPA De Minimis Study: Billions Added to Deficit

CPA’s chief economist Jeff Ferry recently ran a first-of-its-kind study on de minimis shipments and its impact on another record-breaking goods deficit. He estimated that some $128 billion of duty-free products came into the country last year, sold online.

To put that into perspective, that is nearly half the GDP of the Hong Kong economy.

It’s one thing to have our goods deficit equal to the size of the entirety of the Mexican economy, roughly $1.1 trillion expected for 2021. But it’s another to have small packages coming into the country via e-commerce equal to half the size of Hong Kong’s economy, or that of South Africa’s, for that matter. We are importing 50% of entire national economies from our phones and laptops. None of this is being measured. De minimis entry is like a sidebar to the overall goods trade deficit.

“If we want to maintain a middle-class country, we need to produce as much as we consume, just as China does, just as Europe does. And that means shrinking de minimis to a sensible level, with say a $10 limit. But multinational corporations want to produce over there and sell over here,” said Ferry.

“Produce over there” is going to merge with “warehouse over there” and “retail over there” in the years ahead. Lowering the de minimis threshold stops some of the bloodletting.

Last year, the U.S. Customs and Border Protection (CBP) published data showing that in the U.S. fiscal year 2021, 771.5 million de minimis packages entered the U.S. That’s over two million packages a day.

Walmart now appears to be following in Amazon’s footsteps, recruiting thousands more international sellers to its site.  Walmart recently announced a change in chief executive for its online business, likely because it wants to see faster growth in online revenue. According to MarketplacePulse, Walmart has even accepted some of the Chinese sellers that Amazon removed for publishing thousands of fake reviews. Last year, a senior Walmart executive told a conference in Shenzhen: “Chinese sellers have very obvious advantages in the global cross-border e-commerce field.” That’s an understatement. Those advantages include the ability to sell counterfeit products, fabricate fake reviews, make spurious claims for their products, all while being for all practical purposes immune from any consequences under U.S. law or regulations. – “The Trade Deficit is Worse than We Thought: How De Minimis Hides $128 Billion In Trade” by Jeff Ferry, CPA, January 26, 2022.

The de minimis rule was established almost 100 years ago to save the federal government from assessing tariffs on small, inconsequential items purchased from abroad. The threshold was first set at $1 in the 1930s and gradually increased to $200 in the 1990s. In 2016, it was abruptly raised by Congress to $800.

This is a flawed system that must be fixed.

Some members of Congress have this on their radar and are doing something about it.

Oregon Democratic Congressman Earl Blumenauer recently introduced legislation to end the abuse of the de minimis loophole. House Democrats have included it in the new America COMPETES Act of 2022.

An alliance of unions, manufacturers, and trade associations, including CPA, sent a letter to House leadership urging them to use the COMPETES Act to end de minimis for non-market economies.

“As every day goes by and another two million shipments enter our country without scrutiny, or paying applicable taxes or tariffs, our economic and national security are further hollowed out,” the letter stated.

In its fiscal 2020 report, CBP said the total volume of shipments via air cargo and truck transport valued at $800 or less increased by 219% and 123%, respectively.

Free traders in Congress can argue that no one in the U.S. is making capri pants sold on Shein, a Chinese virtual mall that’s sprung up thanks to the direct-from-China e-commerce trend. That’s true. But are businesses in their districts thinking it would be better to source elsewhere but cannot, because the market has high-tailed it to China years ago? Is there no turning back?

Amazon and Walmart will survive de minimis reductions. DHL and FedEx will survive de minimis reductions. Retail, manufacturing, and its labor force, on the other hand, will not.

The Trade Deficit is Worse Than We Thought: De Minimis Hides $128 Billion of U.S. Imports