Editors note: The China/Amazon/FedEx strategy finally comes to light as a major story. The de minimis loophole must be closed. And can be partially closed by administration action. CBP chose to give priority to Sec 321 (the de minimis authority stupidly expanded by Congress) over the 301 duties but did not have to. And more comprehensive and systematic examination of those 301 de minimis shipments must be undertaken. It has been a big problem which is now becoming massive.
A tariff loophole lets companies ship small boxes across the border duty free. So the huge shipments are now heading to warehouses in Canadian and Mexican border towns, instead of the U.S.
[ Lydia DePillis | October 9, 2019 | ProPublica]
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A few months ago, Elliot Markillie started getting calls about small boxes.
He works for a logistics company near Vancouver, British Columbia, called a52 that handles distribution for big apparel and footwear brands. The brands source their goods from China and had just been hit with steep tariffs, on top of the duties already applied to clothes and shoes.
But, the brands had learned, there might be an out: According to U.S. customs rules, packages worth less than $800 — known as the de minimis threshold — don’t have to pay duties at all. They just have to ship items directly to consumers one at a time, rather than in bulk to stores or U.S.-based warehouses.
The result: Companies now have an incentive to use fulfillment centers in Canada and Mexico rather than the United States.
Here’s how it works. Instead of coming into the Port of Seattle, say, a shipping container or cargo plane full of Chinese goods comes into Vancouver, and pallets full of goods are transferred to a52’s warehouse. As goods are ordered from a52’s clients’ websites, they are individually packaged with a mailing label and sent via a courier service like UPS or FedEx across the border to their destination. There is no tariff code, because there is no tariff, and precious little other information about the contents of each package.
About 10 of Markillie’s clients have switched to this kind of shipping, he says, or are in the process of doing so.
“It’s a huge advantage,” Markillie said. “We already had clients that were doing this ahead of the tariffs. But that’s definitely surged the interest that we’re getting.”
As a result, warehousing jobs are now being created in border towns in Canada and Mexico that otherwise would be located in the U.S. The impact thus far is likely small, but it is poised to accelerate as companies adopt the workaround.
Experts and retail industry players also warn there’s an increased risk of counterfeits and illicit goods slipping through in a firehose of small shipments that customs officials can’t keep up with.
Take the toy business, which doesn’t even have tariffs, but does face a number of consumer safety regulations that are often enforced through the customs inspection process when retailers bring in whole pallets of Barbies or Legos. Items shipped one at a time in containers or air cargo holds filled with thousands of other individual boxes are much harder to police.
Rebecca Mond, who represents the Toy Association, says that gives an edge to manufacturers of toys that might be unsafe or fake. “If you were to throw a ball, you could pretty easily catch it,” Mond said. “But if I were to open up a jar and throw all the marbles, you’d have a hard time catching them all.”
Another side effect is more subtle: What happens to the United States’ leverage in trade negotiations when tariffs are so easy to avoid? Although the Trump administration’s steep duties have caused real pain for many industries, in general tariffs as a tool are supposed to give other countries an incentive to grant more access to their own markets.
That’s what worries Elizabeth Baltzan, a former trade policy counsel to House Democrats on the Ways and Means Committee who is now a consultant and senior fellow at the Open Markets Institute, an anti-monopoly think tank.
“De minimis loopholes are basically just another way of unilaterally disarming,” Baltzan said. “Other countries don’t do this to themselves.”
The Census Bureau, which tracks the approximate dollar value of packages too small to record precisely, shows a 12% increase in shipments from China for 2019 through July over the same period last year. The number of small packages coming into the U.S. jumped 46% in fiscal year 2018 after a steadier rise over the past decade, according to Customs and Border Protection. The agency is now processing 1.8 million such items per day.
President Donald Trump’s tariffs on Chinese imports, which hit a huge swath of consumer goods, are making those shipments a much more valuable channel than they used to be. It’s still less than 1% of total imports from the U.S., but it is growing quickly as companies configure their supply chains to take advantage of it.
“We’re talking about businesses and companies that are restructuring their business behaviors to take advantage of this loophole,” said Amy Magnus, director of compliance for customs broker Deringer. “This is an explosion of business. Everybody would like to be able to be a part of this.”
The “de minimis” threshold, as the $800 limit is known, is a longstanding part of the international trading system. Countries decide that they don’t want to bother their customs officials with trivially small imports or travelers bringing in gifts, so they wave through low-value items. The exemption’s use had already started to grow, as cross-border e-commerce gained steam — and as a result of a little-noticed change in the law.
In 2015, an omnibus customs bill skated through Congress. But it included a large shift in how small shipments are handled: The de minimis threshold quadrupled from $200 to $800, vastly expanding the number of items that could come into the country duty-free and with little paperwork.
Industries that have long battled counterfeit goods noticed a competitive uptick from imported knockoffs. According to CBP, 90% of the intellectual property-based seizures it made in 2018 came through international mail or express shipments, the majority of which fell under the de minimis threshold. International mail has also been the main conduit for illicit pharmaceuticals and dangerous drugs like fentanyl.
The exemption is also probably larger than it looks, because it’s difficult to tell whether a shipment is actually worth less than $800 or not.
“There’s a lot of fudging of invoices now, just to get under that $800 number,” said Dave Bryant, a Vancouver-based importer who also trains people to set up e-commerce businesses. “International sellers more or less have impunity. You get caught, and how are you going to go after someone in China vs. someone in Buffalo?”
Customs officials are aware of that problem, and they have announced a pilot program to see what information they could reasonably ask shippers and online marketplaces to provide about small packages that would help inspectors track down infringing content. But it’s voluntary, and the Express Association of America — which represents UPS, FedEx and DHL — said its members haven’t decided whether to participate. Amazon and eBay declined to comment.
And then, starting in early 2018, Trump’s new tariffs on Chinese imports tilted the scale even further.
Some companies have already set up foreign trade zones to manage tariff payments, but imported goods sold in the U.S. still have to pay them. Columbia Sportswear has foreign trade zones in Oregon and Kentucky, and it is considering what to do if tariffs of up to 52% on goods like waterproof footwear aren’t removed soon.
“Moving these things is not something we want to do,” said Peter Bragdon, the company’s chief administrative officer. “But once more parties have invested outside the U.S., there are going to be people invested in keeping things the way they are. Fast forward five years, you could just say, let’s have the e-commerce done elsewhere.’”
Columbia Sportswear is part of a coalition that’s lobbying to allow goods routed through foreign trade zones to also benefit from de minimis treatment, arguing that they’re better able to monitor for any counterfeit goods or illicit drugs. That would at least weaken the incentive to move distribution across the border and help protect warehouse employment — like the 6,700 jobs in Columbus, Ohio’s foreign trade zone, which is occupied mostly by consumer goods companies like Burton and the Gap.
“In my estimation, this flat out encourages offshoring,” said the zone’s manager, Angie Atwood. “You can serve from just a few hours north the same customers in the same amount of time.”
But allowing foreign trade zones to fulfill e-commerce orders duty-free would expand the exemption, not narrow it, which doesn’t help domestic companies that benefit from tariffs because they produce goods in the U.S. instead of importing them.
The bigger problem for those being affected by the offshoring of fulfillment: Powerful industry associations remain in favor of it, from the National Retail Federation to the National Association of Manufacturers.
U.S. brands and retailers are now in a situation where direct-to-consumer imports can avoid extra inspections and paperwork as well as the cost of astronomically high tariffs. In order to capitalize, larger companies are setting up e-commerce operations in Canada and Mexico with the help of specialized logistics providers.
“ELIMINATE DUTIES?” one brochure from San Diego-based XB Fulfillment reads. “A guide for e-commerce companies to use new customs regulation 321 to do just that!” The brochure then names 29 companies that it says are now delivering orders to the U.S. from a Mexican fulfillment operation, including Dell, Crocs, Sony and Honeywell. All of those either did not respond or declined to comment to ProPublica.
E-commerce platforms also love the de minimis exemption, but not for the obvious reasons.
Amazon, for example, prioritizes delivery speeds too much to easily take advantage of cross-border de minimis shipments. The surest way to get something to a Prime member fast is to stock the item at a distribution center nearby, and a warehouse in Canada or Mexico might be too far away to fulfill the promise of one-day shipping.
For that reason, Amazon says it’s not changing its vast delivery network in order to import goods duty-free itself. However, a small-scale seller might source inventory from abroad — say, coffee cups from Mexico — in shipments worth less than $800 each, and then send them into Amazon’s fulfillment system, so the tariffs are avoided anyway. “That seller is 100% benefiting from de minimis,” said Amazon spokeswoman Jill Kerr.
EBay doesn’t have any distribution operations of its own, but its members almost exclusively use de minimis shipments both for deliveries and returns; it’s encouraging its sellers to write their members of Congress asking them to support keeping the threshold where it is.
And they’re having to play defense these days, because the White House may want to change it.
In congressional hearings, U.S. Trade Representative Robert Lighthizer has sympathized with the critics of the de minimis exemption and voiced concern about potential abuse. And in the updated North American Free Trade Agreement, the chapter on trade facilitation includes a footnote that says parties could lower their de minimis thresholds to match those of other parties. Despite concerned letters from representatives, Lighthizer has not said he wouldn’t seek the authority to do so in the bill Congress will have to pass to implement the agreement.
In that way, Lighthizer seems to agree more with the Canadians, who have fought hard to keep their de minimis threshold low — just 20 Canadian dollars, and $150 in the new NAFTA.
Since Canada also imposes a national sales tax at the border, allowing de minimis goods to come in tax-free under a higher threshold would mean losing government revenue. Domestic retailers have also been slower to adopt e-commerce than their American counterparts, and so most of their goods would be at a huge price disadvantage to anything arriving under a raised de minimis threshold.
According to Karl Littler, senior vice president for public affairs at the Retail Council of Canada, a pair of shoes that cost $50 when imported under de minimis would have to retail for $68 if sold in a store.
“From a domestic merchant perspective, we have to bear the cost of duties on imports, and we have to collect and remit sales taxes, and we’re the ones who invest and hire here,” Littler said. “So why the hell are you letting a warehouse in Schenectady get an $18 advantage on a $50 pair of shoes?”
Read the original article here.