Here’s What the Senate’s E-Commerce Hearing Missed in its Fight Against Imported Counterfeits

A Senate Judiciary hearing on cleaning up e-commerce platforms focused primarily on the sale of counterfeit goods on Tuesday. But when the topic of enforcement and policing came up, one thing was missing from the debate – de minimis rules that now favor the growing model of Amazon-consumer-direct-from-China flood pouring into the U.S. That model doesn’t just soak the market with legitimate fall sweaters. It also floods the U.S. market with counterfeit goods – whether toy brand knock-offs or tainted and useless health supplements.

De minimis, in simple terms, is a law enforced by Customs and Border Protection that says anything that comes into the country under $800 in value is duty-free. In essence, Amazon and hundreds of lesser-known platforms, have created virtual malls for American consumers shopping directly in China.

“I think Customs does a good job as does the postal service, but they are very much challenged on the single parcels that come into the United States,” said hearing witness Aaron Muderick, Founder and President of Crazy Aaron’s, an American made toy manufacturer in Norristown, PA.

“It’s just a torrent of small envelopes coming through and it’s very hard for them to prevent that from reaching consumers’ hands. I don’t know what we might do about it,” he said. “It’s out of my scope of knowledge. But that’s where I see a major problem.”

That’s where de minimis comes in. Congress has to act on it. One way is to lower the de minimis threshold back to 1990s levels (around $10). Other ways are through executive branch rulemaking at the U.S. Trade Representative or Treasury. At best, China should be totally excluded from the $800 de minimis threshold. Companies like Shein have sprouted up because of it. Shein is basically a virtual Shanghai shopping mall for American teenage girls.

Section 321 of the Tariff Act of 1930 authorizes the Secretary of the Treasury to prescribe regulations to “admit articles free of duty and of any tax imposed on or by reason of importation” if they have a value of less than $800. These are known as “De Minimis” shipments. And this is how the bulk of the counterfeited goods come into this country.

“You’re not going to be able to arrest your way out of this problem,” said another witness, Ben Dugan of the Retail Crime and Corporate Investigations division at CVS Health in Woonsocket, RI. He was mainly addressing retail theft in the U.S. that is then put up for sale online. However, he told the Senate Judiciary Committee that “Preventative measures are the best way going forward.”

De minimis is one such measure.

Congress did not mention this at all in the hearing, suggesting they are not aware of the $800 limit, nor have they considered that lowering it would dramatically lessen importation of counterfeit goods, because Customs would actually inspect the parcels.

E-commerce sales are on the rise. It’s not just the big platforms like Amazon. Now entrepreneurs and startups are creating China direct to consumer manufacturing for everything from new brands like Xero Shoes, to supplements.

Amazon Becomes Infamous

At the hearing, titled “Cleaning up Online Marketplaces: Protecting Against Stolen and Counterfeit Goods”,  Amazon played a starring role. It wasn’t flattering. Though Chairman Dick Durbin (D-IL) said that the e-commerce behemoth was on board with his bipartisan INFORM Consumers Act, introduced in March.

It could be window dressing.

“I’ve been working on this issue since 2008,” Chairman Durbin said during his opening remarks about third-party sellers selling knock-offs of brand-name goods. He mentioned Home Depot saying that a brand name of power tools sold exclusively in their store was found online at Amazon. The tools were being stolen from the original manufacturer in China and resold online. That was back in the early days of e-commerce.

“I put out a bill to address this in 2009 and the e-commerce companies said they were taking care of it; we don’t need legislation. Here we are 13 years later and the problem hasn’t gone away. It’s gotten much much worse.”

In 2018, a government agency ran a test and bought 47 different consumer products from third-party sellers on various websites to see how many might be fake. Out of the 47, 20 were fake.

In January, USTR reported that the rapid growth of e-commerce sped up the growth of counterfeit, pirated goods. It’s now a half trillion-dollar business. They estimated that U.S. retail loses around $45 billion annually to fake goods people buy online instead, usually believing them to be the real thing.

“My staff asked Home Depot if they were still finding their tools sold online,” Durbin said. “They sent me 9 postings that they found in one week.”  One was a Ryobi 18-volt battery on sale at Amazon for 20% below Home Depot’s price.

The U.S. Consumer and Product Safety Commission filed a complaint against Amazon charging that some items like fire alarms and carbon monoxide detectors sold by third-party sellers don’t work.  Third-party sellers account for about half of what Amazon sells.

Amy Klobuchar (D-MN) said that Amazon’s own brand, known as Amazon Basics, often uses in-house data to determine what items are hot sellers. Then it makes them through a manufacturer and sticks the Amazon Basics label on them.

Klobuchar asked one witness, K. Dane Snowden, president of the Internet Association, which represents online retailers in Washington, about companies like Amazon who often make generic versions of branded products and then highlight them as recommended for consumers. Snowden said he had no position, Klobuchar chuckled, saying she figured he would not be able to speak out against internet retailers.

“At some point, this Congress has to take a side,” she said.

Muderick said that Amazon Basics sold a version of one of his products. “When I looked a little deeper at it, I noticed that not only was it a knock-off of our product, but it violated a number of our trademarks,” he said, citing poor due diligence at Amazon. Amazon eventually took that product down.

“Manufacturers are sick of seeing knock-off products hawked on sites like Amazon. Congress needs to do something. That’s what we were elected for,” said Durbin. One thing he recommended: “If a third party seller is going to sell a large amount of goods on a market place they should tell consumers who they are.”

Amazon Basics does not say where its products are manufactured.

Where’s it all Coming From?

Senator Marsha Blackburn (R-TN) said online retailers should publish where their products are coming from. Right now, at best, an online (or even a catalog) retailer will simply say “import” – if they say anything at all.

Blackburn: “I’ve heard from so many people who sell online and they think labeling where the product is made is a good thing. Even people who buy online say so because they don’t want to be buying stuff all the time from China; especially if they feel it might be counterfeit.”

Muderick: “It’s important for consumers. Sometimes products have where it’s made on it, sometimes they don’t. Sometimes it will be on an online listing, sometimes it won’t. And often it is in conflict with whatever the online listing says.”

Snowden said his group doesn’t like the idea of labeling online. “We don’t touch the product in some cases.”

Josh Hawley (R-MO) responded to Crazy Aaron’s founder: “When giant companies like Amazon help sell foreign counterfeits…they’re taking jobs away from people like you when you make similar items made in this country. It’s all a question of counterfeit goods…and offshoring.”

Consumers can decipher where much of Amazon’s goods are made or shipped from thanks to a new extension called WeCultivate. The extension runs on Google Chrome and Apple Safari to name the two big ones. Once logged in, WeCultivate automatically activates when surfing the Amazon website.

“We currently show U.S.-made alternatives while shopping on Etsy, Amazon, Target, and Home Depot and help you get to the right place to buy them,” said company CEO Harsh Khurana.

According to their proprietary data, some 52% of sellers on Amazon are based in China. “The number has increased since we started tracking the data on over 200,000 sellers,” Khurana said.

As far as counterfeit goods go, it’s not just Amazon. Individuals and organized entrepreneurs also sell their wares on Facebook and E-Bay.

“We are seeing it across the board, across product lines, on many platforms,” Klobuchar said.

One way to put up a detour is to lower the de minimis threshold for duty free entry of goods sold online so Customs officials will inspect what is in the box. Congress should begin to seriously consider this as an obstacle to what many in the Judiciary Committee, at least, believe to be a big problem in America’s booming e-commerce industry.