On June 1, 2023, the United States and Taiwan signed “the first agreement under the U.S.-Taiwan Initiative on 21st Century Trade.”
“Initiative”? “21st Century Trade”? Sleepy terms that convey a classic “nothing-burger”. But that’s never been the case with trade agreements.
This agreement, ostensibly for Taiwan, sets out expectations for how the U.S. and Taiwan will run their customs authorities vis-à-vis the whole planet.
The agreement’s provisions relating to express shippers, specifically those in Art. 2.14(3), risks the U.S. Treasury taking the opportunity to use their existing authority to explode the already unmanageable volume of small parcel e-commerce shipments – currently at well over two million per day.
Any expansion of small volume shipments would be a disaster. Earlier this month, U.S. Customs and Border Protection (CBP) reiterated prior warnings, stating:
- “The overwhelming volume of small packages and lack of actionable data limit CBP’s ability to identify and interdict high-risk shipments that may contain narcotics, merchandise that poses a risk to public safety, counterfeits, or other contraband.
- In FY 2022, CBP cleared over 685 million de minimis shipments with insufficient data to properly determine risk.”
Read those bullets again. CBP staff uses muted language, but digesting what the agency is saying should convey extreme alarm. Also left unsaid here is that the large majority of those 685 million shipments consist of imports from China.
Ideally, such a big change would be debated in Congress, but over the last fifty years, powerful interests have perfected the art of re-writing domestic law via trade agreements without the involvement of rank and file Members.
Part I of this article outlines the evolution of “trade agreements”, and how they commandeered domestic policy formulation.
Part II lays out how the new Taiwan agreement risks the U.S. Treasury re-writing U.S. customs law to expand the volume of small shipments from all over the planet.
Part I – How “Trade Agreements” Took Over Domestic Policy
The term “trade agreement” is broadly understood to mean two or more countries agreeing to cut tariffs for each other.
But it’s been about more than tariffs for over half a century, rewriting U.S. law for the whole world.
And most recently, as further tariff cuts became too politically difficult, the powerful interests behind trade agreements pivoted. They decided there was no point attacking what trivial tariffs the U.S. had left when all the other unpopular policies they wanted could still advance through “trade agreements.”
In this vein, the “the U.S.-Taiwan Initiative on 21st Century Trade” doesn’t cut tariffs, but continues addressing many other policy areas that will inhibit future Congresses from making changes to domestic laws and tempt executive branch agencies to engage in rulemaking adventurism that Congress did not intend.
Background on “What is a Trade Agreement”?
There’s no formal definition of what is a trade agreement. It’s not any kind of recognized U.S. legal instrument stemming from any of our branches of government.
Early trade agreements were “Treaties”, as defined by the U.S. Constitution. Under our Constitution, a “Treaty” is a specific form of legislation that differs from a regular bill-turned-statute.
Per the U.S. Constitution, treaties are negotiated by Presidents with foreign powers, but then must be submitted to the U.S. Senate for advice and consent, and receive two-thirds support. Like federal legislation, a Treaty may preempt contradictory state-law and supplant earlier-in-time federal legislation. U.S. courts can adjudicate claims that a treaty has been violated, just like with regular federal statute or regulation.
From the first days of the Republic, the U.S. entered into many Treaties stylized first as “Amity & Commerce Treaties” and later as “Friendship, Commerce, and Navigation” (FCN). These Treaties typically gave citizens/subjects of each country assurances of fair dealing for a variety of commercial activities.
For example, the U.S. entered into an FCN Treaty with the Empire of Japan in 1911. Its terms were put to the test in 1921, when Seattle passed an ordinance saying only U.S. citizens could get a pawn broker license, and licenses held by non-citizens were revoked. A Japanese pawn broker in Seattle who did not have U.S. citizenship brought suit to challenge the ordinance, invoking the FCN Treaty, and won at the U.S. Supreme Court who found that it was a protected “trade” under the FCN Treaty with Japan.
The FCN Treaties were the “trade agreements” of their time, but they did not offer preferential tariffs to the other countries. The Constitution grants Congress the right to lay tariffs, with bills originating in the U.S. House, and this function was taken seriously. Tariffs were the most important revenue source for Congress, in addition to being popular for driving economic growth.
Two preferential tariff agreements that actually were Treaties
Only two Treaties in the 19th century cut tariffs for another country: first the Elgin–Marcy Treaty with Britain cut tariffs for Canada in 1854, although it was unpopular and repealed in 1866. Then in 1875, the Senate gave its consent to the Reciprocity Treaty of 1875, a preferential tariff agreement with Hawaii.
This was not without controversy, and there was debate as to whether it was constitutional. Senator Morrill of Maine observed that the Treaty was a “put up job, in the interest of the sugar-planters of the Sandwich Islands, and at the expense of the Government of the Unite States.”
Senator Morrill made the point that Art. I, Sec. 7 of the Constitution requires that “all bills for raising revenue shall originate in the House of Representatives”, and thus any tariff bill should originate there, and thus a Treaty (involving the President and the Senate) could not adjust tariffs without an accompanying bill passed by the House. His opponents said that Treaties weren’t ‘bills’ and so this was an exception.
Other preferential tariff agreement treaties were introduced in the nineteenth century, but never passed, having failed to enjoy the support of two-thirds of the U.S. Senate. And it is worth noting that the only two that did, Canada and Hawaii, were both ratified amid open talk and presumed annexation of the other country.
1934 to 1974: Congress gives the President authority to Proclaim tariff cuts following “Trade Agreements” that are mere executive agreements.
In 1932, Democrats swept Congress and the Presidency. FDR didn’t care much about trade policy. As a concession to the anti-tariff Southern Democrat wing of his party, FDR appointed U.S. Senator Cordell Hull of Tennessee as Secretary of State, a life-long anti-tariff zealot.
In 1934, Democrats successfully passed the dishonestly named “Reciprocal Trade Agreement Act of 1934” (RTAA). This was historic, as the RTAA delegated to the President Congress’ constitutional authority over tariff policy. With the RTAA, the Executive could slash tariffs via Presidential Proclamation up to fifty percent following the Administration’s signing of an international executive agreement. The President needed no subsequent action from Congress to pursue tariff cuts.
A quick word about “executive agreements”: they are not defined in the Constitution. But, over the years, the Supreme Court has recognized that Presidents have inherent constitutional authority to sign certain types of agreements with foreign countries based on powers enumerated to their office under the Constitution, like the Commander and Chief clause. You can read more here, but it’s pretty academic. Despite unfounded concerns by Congress that will be addressed further below, there is no debate about whether the President has any inherent constitutional authority over tariff policy or anything else that’s not a narrow POTUS power. He doesn’t. The President only has authority that Congress has bestowed, and Congress can take it back anytime.
Getting back to the RTAA: in what was poorly understood in Congress and what proved to be the devastating final end to over a century of successful protective tariffs, the RTAA prescribed that the President’s Proclaimed tariff cuts “shall apply to articles the growth, produce, or manufacture of all foreign countries, whether imported directly, or indirectly”. Reciprocity was never the aim, nor was it the result.
The RTAA originally authorized these Presidential Proclamations for a period of three years, but it was renewed in 1937, 1940, and 1943. And so Secretary of State Hull, throughout his eleven-year term, entered into thirty-two executive trade agreements using RTAA authority, wiping out most U.S. tariffs to trivial levels.
Following World War II, again under RTAA authority, William Clayon, U.S. Under-Secretary of State for Economic Affairs, collapsed Hull’s thirty trade agreements into one mega non-reciprocal tariff agreement in 1947 known as the General Agreement on Tariffs and Trade (GATT), which persists to this day.
A key thing to understand about these executive trade agreements, including the GATT, is that they have no force of law domestically. Without Congress delegating authority for recognized domestic legal instruments (like Proclamations and Regulations), executive trade-agreements do nothing. You can think of it as merely a pinky-swear by a President to the foreign country. Nothing happens domestically at the signing-ceremony of an executive trade agreement; a subsequent domestic legal instrument needs to be deployed to carry forth the substance of the executive agreement.
And for these tariff-cutting executive agreements, that domestic legal instrument for the tariff cuts was the President’s Proclamation, which was enabled only with the tariff-cutting power Congress gave the President via statute before the international executive agreement had even been written up.
Import lobby insiders have been using this to their advantage for all of living memory. The GATT’s preferential tariffs were meant to be only one part of a larger International Trade Organization (ITO) that would also require countries to observe certain labor rights and antitrust standards among other things. This was critical for support from progressives in Congress, and for selling the GATT tariff cuts.
However, the ILO’s creation and other substantive reforms needed new Congressional action (whether Treaty or statute) beyond the RTAA’s tariff proclamation authority.
Well, you can guess what happened. The import lobby had already won the advance tariff-cutting proclamation authority in the RTAA renewal. So that got done. Needless to say this lobby did not want the labor rights and competition rules that were supposed to accompany the tariff cuts. So they leveraged Congressional animosity to the GATT to kill the rest of the package once they got their tariff cuts. The full ITO package was quietly dropped in 1950. We were left only with the asymmetrical GATT tariff cuts, now into its 75th year as an executive agreement.
By 1950, the average rate of duty on goods imported into the United States was down to 5.8%, and sixty percent of all goods were imported free of duty.
For what it’s worth, many in Congress assailed the GATT as illegal, and there was hostility to it throughout the 1950s. (See Jackson, The General Agreement on Tariffs and Trade in U.S. Domestic Law, 66 Mich. L. Rev. 265-69 (1967).
However having given the President authority to Proclaim-away tariffs in advance, subsequent arguments that those executive agreements were illegal after the fact got nowhere.
Perhaps getting wise to the notion that “reciprocity” was never going to be in the cards for America, yet not wanting to end their war on the remaining American tariffs, the import lobby began coming up with other names besides the RTAA for their RTAA-like delegation of tariff cutting authority to the President.
In 1951, Congress passed the “Trade Agreements Extension Act” to delegate tariff policy to the President, just like in the RTAA. This law enabled the first GATT “negotiating rounds” of the 1950s. There have been eight concluded GATT Rounds since 1947, not including the failed Doha Round of the 2000s-2010s, which was the ninth Round.
The three rounds of the 1950s focused mainly on further tariff cuts, but later rounds would expand the scope of coverage of the GATT agreements.
The Trade Expansion Act of 1962 births the modern GATT insider’s policy club
In 1962, the “Trade Expansion Act” was passed. In Title I, “Purposes”, the word reciprocity was gone, and instead we got talk of wanting “to strengthen economic relations with foreign countries” and the need “to prevent Communist economic penetration.”
For “any of these purposes”, the President was authorized to cut tariffs by way of Proclamation. (Sec. 201(a)).
The driving force behind the 1962 Trade Expansion Act was the start of the GATT Kennedy Round (1962 – 1967) of negotiations. It was enacted in October, 1962, at the height of the Cuban Missile Crisis.
Congress formally stepped up its involvement with this law, kind of. It created a “Special Trade Representative” office within the White House – precursor to today’s USTR – to lead the talks, but it required the President to bring along both a Republican and Democrat Congressman from the Ways & Means Committee chosen by the Speaker, and likewise two Senators from Senate Finance chosen by the Senate President.
Limiting Congressional involvement to a group of insiders has been the hallmark ever since.
One key point of doing things this way was to eliminate U.S. tariffs while minimizing individual responsibility for any politically vulnerable legislator. Congressional leaders knew (or should have known) what they were doing, in concert with Presidents who enjoyed having tariff cuts as another carrot in their foreign policy toolkit. (It should be noted that from domestic producers’ perspective, having a special Trade Representative was a good thing, as it at least took tariff policy away from the State Department.)
This secret collaboration, where Administration insiders, along with key Ways & Means and Senate Finance staff, work behind closed doors with industry insiders, persists today.
The GATT insider club learns it needs to avoid Congressional debate at all costs
The Kennedy Round insiders had also negotiated a package they called the “International Antidumping Code” to restrict the use of anti-dumping remedies. Changing U.S. law to align with this new Kennedy Round executive agreement needed legislation, however.
This led to a debate about what, if any, affect these executive agreements had on U.S. law. In the summer of 1968 the Johnson Administration tried to persuade Congress into believing that no legal changes were required for consistency with the International Anti-Dumping Code, but that didn’t fly. The Administration also argued that the President had inherent Constitutional authority to negotiate these executive agreements. Senate Finance staff disagreed, correctly, saying enabling legislation was needed.
The 1968 Congress did float an arguably valid concern (yet trivial compared to the tariff cuts). The concern was that domestic agencies adjudicating anti-dumping petitions may err on the side of interpreting ambiguity in U.S. anti-dumping law in accordance with the executive agreement. Fair enough. So appropriately, given the concern, Congress passed legislation (Title II, Pub. L. 90-634) explicitly telling the agencies “don’t do that!”
This was a setback for the GATT insiders. For the next GATT Round, they’d be sure to get their allies in Congressional leadership and the Administration to do an end-run around regular old Congressional debate.
The GATT Tokyo Round (1974 – 1979) deploys the modern day ‘one-two punch‘ to American democracy, consisting of:
- an up-front Congressional delegation of authority to POTUS to proclaim tariff cuts; followed by
- “fast track” implementing legislation to accommodate the wholesale law and policy changes commanded by the executive-agreement trade deal.
The Trade Act of 1974 facilitated the GATT Tokyo Round, which lasted five years, concluding in 1979. The Tokyo Round’s ambition went far beyond cutting tariffs and associated trade remedies. The Tokyo Round saw several new “Codes” annexed to the GATT that would – if given force of law domestically – limit countries policy sovereignty. These included: a Subsidies Code, the Anti-Dumping Code (that failed in the Kennedy Round), a Government Procurement Code, a Standards Code for how we handle food and drug safety, and other standards, a Customs Valuation Code, a Licensing Code, and more industry specific codes on dairy, civil aircraft, and beef.
— Henry Gao (@henrysgao) June 18, 2023
These codes required re-writing a lot of the U.S. statute for them to take effect. For example, a reading of the Tokyo Round Customs Valuation Code makes plain that customs authorities would no longer be able to do their job in protecting government revenue. In particular, it went to great lengths to restrict fair valuations for transnational-enterprises’ imports, where both the foreign and domestic entity were related (same business concern).
And very importantly: most of these Tokyo Round Codes did not limit the re-writing of statutes for the exclusive benefit of other GATT countries; the legal revisions were for the whole world. This pattern persists today. Trade Agreement codes that govern standards and similar forms of public law tend to be implemented in non-preferential ways (i.e., for the whole world). Other Trade Agreements that pertain to what’s called “market access” (typically, tariffs and access to government procurement) are the preferential agreements. E.g. the Tokyo Round Customs Code re-wrote our customs law for the whole planet; the Tokyo Round Procurement Code only for the benefit of those who signed-on.
But getting back to the run-up to the 1974 Trade Act, GATT insiders knew if they had to pass a law the old fashioned way, it would be an uphill battle. The Kennedy Round anti-dumping defeat was fresh in their memory.
The GATT insider’s club developed a scheme to deal with their ‘problem’ of Congressional deliberation, and they wrote it into the 1974 Trade Act. They took their success with advance tariff-cutting proclamation authority, and extended that to law-making. Pre-charge the mechanism before firing the harmful shot square in the jaw of the public.
The 93rd Congress was a good time, too. Democrats controlled the House and Senate. Ways & Means Committee Chairman Rep. Al Ullman (D-OR) introduced the bill on October 3, 1973. Watergate investigations were underway and political chaos would mask trade policy subterfuge. President Nixon resigned on August 9, 1974, and President Ford signed the bill into law a few months after taking office, on January 3, 1975, the last day of the 93rd Congress. He would go on to preside over the worst economy since the Great Depression.
This is how their new mechanism would work in parallel to the President’s proclamations on tariff cuts: Sections 102 and 151 of the Trade Act of 1974 said that once the GATT Insider’s Club had finished their unpopular policy package behind closed doors, they would send a bill in normal form to Congress for approval, but with three important procedural modifications:
- a procedure requiring automatic “discharge” from committee consideration, so that the bill would necessarily have to be considered by the full House and Senate within little time;
- a prohibition on any amendments; and
- little-to-no debate on the floor.
This became known as “Fast Track” authority and it worked like a charm. Just two months after the GATT insiders finished the Tokyo Round codes, Congress passed the “Trade Agreements Act of 1979” wiping out our critical elements of customs law, Buy American provisions, sovereignty on standards setting, and much more.
A few other notes about how ridiculous everything is at this point:
- A fake rationale for Fast Track that persists to this day: William Pearce, U.S. Deputy Special Representative for Trade Negotiations, claimed other countries were demanding the U.S. do it. In 1973 he said in testimony before a Ways & Means hearing that “our trading partners are reluctant to negotiate with us until they have some assurance that agreements can be implemented, and implemented rather promptly.” Uh-huh. The simple truth is that the political drivers of these trade pacts are not foreign countries, it was and is transnational enterprises gathered in the GATT insider’s club. They get Congress to do this, not foreign countries. Also, keep this in mind if you’re ever unfortunate enough to witness a Member of Congress plead for Fast Track authority – they’re saying they don’t trust themselves or their colleagues to do their job. It is pure hypocrisy for a Member of Congress to advocate for fast track while talking about the importance of their constitutional role in trade policy.
- A mockery of transparency and public participation: Section 135 of the 1974 Act formally established the GATT insider’s club as it authorized the President to invite 45 bigshots as part of an “Advisory Committee” to the secret policy planning sessions happening behind closed doors. But perhaps as a taunt, the 45 included a “representative of the general public”. Were they laughing when they wrote this? Everyone had to sign non-disclosure documents, so we’ll likely never know. This happened exactly fifty years after Justice Brandeis made his famous statement that “sunlight is said to be the best of disinfectants.” The Insiders knew they were being shameless.
- Reciprocity for GATT insiders’ victims only: Section 126 of this Act brought back the notion that reciprocity might be in order, but it was only required vis-à-vis Canada, Europe, and Japan. This remains U.S. law. Even when China joined the GATT in 2001, the insiders never demanded reciprocity! Perhaps the 1974 drafters included the Canada, Europe and Japan reciprocity provision as a concession after the 1974 Act exacerbated existing tariff asymmetry by offering unilateral tariff cuts to over a hundred developing countries through the bill’s “Generalized System of Preferences”.
Fast Track authority given out in 1988 would lead to wholesale rewriting of U.S. law during the autumns of 1993 and 1994.
Seven years after the Tokyo Round’s conclusion, the GATT insiders’ club was back at the trough.
The Democrat-controlled Congress duly passed the Omnibus Trade and Competitiveness Act of 1988, giving the President the authority to proclaim tariff cuts at the end of the Uruguay Round (1987 to 1994).
This 1988 fast track was 468 pages. Interestingly, the Congressional Findings section of “Title I – Trade, Customs and Tariff Laws” conveys that Congress knew past trade policy had been a complete failure. The confidence of past trade acts was gone. At the outset, the law notes “the United States is confronted with a fundamental disequilibrium in its trade and current account balances and a rapid increase in its net external debt” and that “inadequate growth in the productivity and competitiveness of the United States firms and industries relative to their overseas competition.”
Problem number one though was that messaging is no substitute for policy.
Problem number two was the messaging about “United States industries” was long outdated. The GATT Insiders were trans-national, global concentrations of capital, and they weren’t going to be deterred in the slightest from their agenda by Congress’ findings.
In fact, the 1988 Act would culminate to the most wild ‘fast track’ re-writing of U.S. law in the autumns of 1993 and 1994. Every policy area would be affected. Two mega laws were passed with the 1988 fast track authority:
- The NAFTA Implementation Act, introduced in the House on November 4, 1993, and signed into law on December 8, 1993.
- The Uruguay Round Agreements Act, introduced in the House on September 27, 1994; and signed into law December 8, 1994.
Each law deserves its own essay, and had negative effects on a broad range of industries, but here’s something to know for each:
NAFTA Implementation Act rewrites Customs service for whole world
NAFTA was about much more than tariffs. A big animating factor for the United States was dissuading Canada and Mexico from nationalist energy policies and getting specific commitments in this sector to make them more attractive for investment by U.S. energy companies. We also gave up many of our agricultural import quotas that safeguarded sustainable domestic production.
But the key thing for our purposes in this article is to know that Title VI of the NAFTA Implementation Act, often referred to as the “Mod Act” (short for Customs Modernization) completely reimagined our customs service for the entire world (not just Canada and Mexico).
The U.S. Customs Service itself noted that the ‘Mod Act’, which spent a mere total of 4 weeks flying through Congress alongside NAFTA, was regarded as “the most sweeping regulatory reform legislation since the U.S. Customs Service was organized in 1789.” It was essentially the end of Customs being a focused revenue collector, transitioning the agency to hall monitor for the ports. Through the creation of concepts like “informed compliance” and “shared responsibility”, the inmates took control of the asylum.
Whomever in the Clinton Administration wrote up the “NAFTA Statement of Administrative Action” must have been sensitive to the extent of the sweeping changes going through fast track, as the document makes clear that those changes were not necessary to comply with NAFTA. This is an important historical lesson: Administrations will use trade agreements as a pretext for going even further than what is contemplated in a text.
More on this in Part II.
Uruguay Round Agreements Act
The GATT insiders club this time got their biggest Uruguay Round (1987 to 1994) win in the intellectual property policy space. They massively enriched holders of intellectual property (themselves) by marrying the GATT to a new “TRIPS” agreement. TRIPS forced all countries to extend patent and copyright terms and more if they wanted to access the low U.S. and European tariff rates the GATT offered.
Note though: this wasn’t just an imposition on foreign countries as a penance for enjoying an asymmetrical tariff relationship with the United States. In fact, as is typically the case, “developing” countries got decades to comply. They’re still kicking the can down the road! Instead, the real target of the GATT insiders was developed markets (the middle class, who still had a bit of money). The United States was forced to extend the patent term from seventeen years (from date of issue) to twenty years from the filing date.
You’d think a major revision to our I.P. law would be something Congress would want to chew on, but instead it all happened in one fell swoop via fast-track implementing legislation, this time the Uruguay Round Agreements Act. There’s much more, but we can’t cover it here.
And of course, the tariff cuts were still icing on the insiders’ policy cake. On December 23, 1994, President Clinton issued Proclamation 6763 pursuant, our latest ultra-low tariff schedule we offer to every other GATT/WTO country. It’s 697 pages. In the Congressional tariff setting era, new tariff schedules were massive public exercises that involved many Congressional committees, countless hours of public debates, filling out entire Congressional sessions. But since 1934, it just gets proclaimed all at once after being negotiated by insiders behind closed doors. Merry Christmas!
Trade Promotion Authority (TPA)
Fast track would continue to be used well into the twenty-first century to accommodate the flurry of new bilateral trade agreements. These tariff-cutting delegation statutes were now known as “Trade Promotion Authority” (TPA). These bills were essentially pages upon pages of corporate-boilerplate akin to “reach for the stars!” along with the necessary language for the President to proclaim more tariff cuts, and fast track legislation to implement necessary changes to the U.S. code.
And increasingly significant – and damaging – were the provisions authorizing the President to rapid-fire proclaim new regulations to implement the insider’s language, immediately. For example, Section 103(a) of the 2015 TPA (matching earlier ones) authorized the President to “to proclaim actions implementing the provisions of the Agreement, as of the date the Agreement enters into force.” I.e., rapid-fire regulatory policy changes.
The last fast track was passed in 2015, and is codified at Title 19, Chapter 27. The tariff cutting proclamation authority expired July, 2021.
Part II – the Taiwan Deal’s Revision of U.S. Customs Law for the Whole World
We’re almost ready to discuss the text of the Taiwan agreement – but it won’t make sense without first discussing where the GATT insiders’ heads are at, and provide a crash course on the fundamental principle of customs law.
GATT Insiders agree to drop tariffs from trade agreements to pursue their other unpopular policies
The failure of the Trans Pacific Partnership and the election of President Trump helped change the calculus of the insiders. The majority of Americans weren’t buying the line about more jobs through increased global economic integration. President Biden read the room, and declined to even request TPA from Congress, a nice first. But also, there was skepticism in much of the world as well. Countries like Brazil, India, and Indonesia have no appetite for a tariff cutting agreement with the United States, as they already enjoy one-way free trade with us.
The insiders who control trade policy clearly read the room, too. Why should the unpopularity of tariff cuts – here or abroad – hold them back from using trade agreements to pass their other unpopular policies? (It should be noted that this sentiment was not universally shared; many in Congress bizarrely attacked the Administration for not asking Congress for the traditional advance tariff proclamation authority.)
Big Tech had also joined the GATT insiders in the early 2010s and were feeling left out. They have tons of unpopular policy they’d like to push via trade agreements! (Kudos to Senator Warren and other Members of Congress who see exactly what Big Tech is up to via these new “trade agreements”.)
IPEF and the Taiwan Agreement
This is where two new “trade” executive agreements come in:
- The Indo-Pacific Economic Framework for Prosperity (IPEF), with Australia, Brunei, Fiji, India, Indonesia, Japan, Korea, Malaysia, New Zealand, Philippines, Singapore, Thailand, the United States, and Vietnam as signatories; and
- The “U.S.-Taiwan Initiative on 21st Century Trade.”
With broad consensus on the Hill about the threats posed by the Chinese Communist Party, and the corresponding desire for lots of engagement with the rest of Asia to counter CCP influence, executive agreements with these countries were the logical avenue to advance unpopular policy.
The above agreements will have most of the chapters found in prior trade agreements, but not the upfront “Market Access” chapter, nor any Presidential proclamations on tariff cuts. We know this for certain from the “Negotiating Objectives” document released in August 2022 that lists all the chapters they intend to put forward.
The customs chapter for the Taiwan agreement was rushed through as Congress began getting serious about the ‘de minimis’ loophole.
As mentioned at the outset, on June 1, 2023, the United States and Taiwan signed “the first agreement under the U.S.-Taiwan Initiative on 21st Century Trade.”
This “first agreement” with Taiwan is merely the latest iteration of the standard “Customs & Trade Facilitation” free trade agreement (FTA) chapter found in FTAs going back to NAFTA. Compare it to USMCA’s Customs Chapter.
The historical framing and inside-Beltway discourse around FTA Customs chapters has been as follows:
“Hey, look – this [prospective FTA country] is a disorganized backwater, their customs authority is a nightmare. They’re very “offline” focused, wanting to see things first hand, and take their time. They’re not sophisticated like us, where everything is PDFs and no one steps away from a screen. Let’s use this to help them better themselves by being more like us.”
Super condescending stuff. But that’s the framing: not “preferential benefits” for the other country, but rather “here’s some baseline standards for these lesser countries to approximate us” when in truth the “standards” are basically “waive everything through right away for insiders”. Although they don’t say “insiders”, they use “Authorized Economic Operators” instead.
Very Odd that the Taiwan Customs Chapter was signed ahead of rest of agreement – increased attention to customs law likely why
The current USTR is pivoting away from comprehensive trade agreements with good reason. However, signing just a chapter of a trade agreement ahead of the rest of the agreement is not the norm. Normally, negotiations are holistic, with concessions and deal-making crossing chapters. For example, labor and environmental commitments, which are found in separate chapters, may be traded off against each other.
The signing ceremony of the customs chapter of the Taiwan deal when the rest is still being negotiated is concerning.
Customs chapters have historically been used to drive unpopular changes to U.S. customs law for the whole world, as discussed in Part I. But right now, one customs issue – de minimis – is red hot in Congress, and it makes sense that the trade policy insiders benefiting from de minimis at everyone else’s expense would be keen to take advantage of the text to gain regulatory changes before the issue of small volume shipments gains further traction on the Hill.
What is de minimis? An insane backdoor through our ports, and likely the reason why the Customs Chapter was just rammed through
A once obscure provision of customs law, ‘de minimis’ has gained notoriety on the Hill over the last couple years as Chinese e-commerce platforms (that don’t even retail in their own country) became massive multi-billion dollar enterprises, fueled by de minimis.
The original de minimis, 1938 – 1993, before the GATT insiders flipped it into a backdoor around our ports.
Prior to 1938, customs officers were required to do assessments and entries on all imported merchandise. Practically speaking, when travelers return from a trip abroad, carrying out the letter of the law could make for a very time consuming experience when arriving at the port. So rather than rely on individual officers’ discretion as to what to waive through, Congress set three dollar limits in 19 U.S.C. §1321, and anything below that could be waived through with no formal entry, and no taxes or duties owed. (Almost anything, not booze or tobacco.) The three limits were as follows:
- (a)(2)(A): “bona fide gifts” – $5
- (a)(2)(B): “personal articles accompanying travelers” – $5; and
- (a)(2)(C): “any other case” – $1.
The “any other case” $1 limit was the only one applicable to commercial imports, and if you think about it, that’s strict. It’s not uncommon that customs officers find smaller, additional items not indicated on the shipping manifest or commercial invoice. For example, a bicycle helmet included in a box containing a bicycle but not declared on the manifest or invoice. Failing to declare the helmet is an error. The $1 “any other case” was solely for the most trivial items discovered in commercial imports. A pen left in a cup holder of an imported car? Yeah, that can be waived through without entry.
Incidentally, in 1952, GATT insiders tried to blow this up from $1 to $10, but American retailer leaders (before they went global) organized successfully to stop that, citing the blatant unfairness of letting overseas mail-order retailers sell and ship to Americans tax-free while domestic retailers paid tariffs, corporate income taxes, payroll taxes, etc. etc. etc.
The 1952 Congress was sufficiently moved by the warnings of de minimis as an avenue for foreign vendors to ship duty free and undercut domestic retailers that they amended the law to clarify that it didn’t apply to “any case in which merchandise covered by a single order or contract is forwarded in separate lots to secure the benefits” of being waived through. And they kept it at $1. Also, Congress also gave the Treasury Secretary basically unlimited authority to curtail de minimis to protect government revenue or prevent unlawful importations.
In 1978, the thresholds were adjusted for inflation, and the “any other case” went from $1 to $5.
The 1994 Customs Mod Act increased all three de minimis thresholds to $200 – a bad policy that the U.S. Treasury made worse with regulation.
Section 651 of the Customs Mod Act made all three de minimis thresholds $200, and made the thresholds minimums, not maximums. There was no discussion as to why. But this is the whole point of fast track legislation.
That the “in any other case” de minimis slipped through shouldn’t be too surprising, as recall from above that the Mod Act went from introduced-in-the-House to law-of-the-land in 4 weeks, and reinvented the entire customs function of the United States, as a backdrop to NAFTA!
Also important for this latest development, Section 662 of the Mod Act, titled “Entry Under Regulations”, essentially conveyed blanket authority to the Treasury Secretary on deciding how to handle any shipment valued at less than $2,500, known as “Informal Entry”. Trouble ahead!
The 1994 Customs Mod Act had a hidden bomb apparently unbeknownst to anyone but a few insiders: “consignee entry“
When the U.S. Customs Service issued their Mod Act implementing regulations for de minimis on June 13, 1994, they sent shockwaves through the customs world by declaring that any “consignee” was now able to import merchandise without a customs broker if the foreign vendor declared it to be worth less than $800, in their country. NAFTA did not address consignee entry and neither did the Mod Act, but the Customs Service used the opportunity to dramatically change pre-existing rules.
Why was this shocking? It smashed the fundamental control we have of all importers:
- that they be subject to our laws, and
- that they be knowledgeable about the merchandise they’re importing.
Hopefully, it’s obvious why we need importers to be subject to our jurisdiction. As for the knowledge requirement, that’s because customs officers are responsible for enforcing a myriad of laws. They need to be able to ask follow up questions; they cannot do their job properly if they cannot ask questions about merchandise.
For this reason, 19 U.S.C. § 1484 limited the right to “make entry” (aka, do an import) – whether formal or informal – to only an owner, purchaser, or licensed customs broker.
Welp, remember Sec. 662, “Entry Under Regulations”, mentioned above? Yeah, the Treasury Secretary is the captain now, not Congress.
So using this authority, the Customs Service modified their regulations (19 CFR 143.26) to say that “consignees” were free to import merchandise if someone, somewhere alleged that the value was less than $800 in their country.
19 CFR Part 111, the Customs Brokers regulations, were modified to let them know their services would no longer be needed for these transactions.
New Customs Reg Says Don’t Even Worry About What’s Inside These Packages
It gets worse even. The standard documentation requirements were tossed. For every shipment that’s not de minimis, an “Entry Summary” (CBP Form 7501) is required, and this form gives customs critical information about the merchandise being imported, who supplied it, and who the buyer and seller are. Now, with the new regulation, merchandise “under $800” (as alleged by some overseas dealer) could be entered with only “summary manifest information”, supplied by that same dealer.
#AllInADaysWork Recently, @CBP officers assigned to @JFKAirport's International Mail Facility discovered designer pills in a package manifested as "buttons." After further testing, these deadly pills were discovered to be 20x stronger than Fentanyl! pic.twitter.com/M1182fYAoM
— Director of Field Operations, Francis J. Russo (@DFONewYork) May 9, 2023
A shipping manifest doesn’t tell you about the transaction driving the merchandise, it only tells you where the merchandise is being shipped from and shipped to, and a plain short text description of what the merchandise is. Spelling and full words optional. (This is also important now, in summer 2023, as certain shipping companies benefiting from the de minimis loophole try to confuse policy makers into thinking manifests, not entry summaries, are the important document.)
As Brenda Smith, former Executive Assistant Commissioner for Trade says, these manifests are lousy. She gives the example of an item listed as a “bag” on a manifest, but then finding out it’s an air bag for a car following physical inspection. Instead, CBP relies on “Harmonized Tariff System” (HTS) numbers, a universal system used by every country in the world that assigns a unique number to anything that can physically show up in a port.
The National Customs Brokers and Forwarders Association of America (NCBFAA), founded in 1897 was stunned by the new regulation. They sued the U.S. Customs Service in federal court to stop the madness, winning a temporary restraining order the following month, on July 25, 1994.
NCBFAA told the Court that Customs was “abrogating its responsibility to enforce certain laws”. They predicted all the problems we have today.
FedEx, UPS, and other couriers intervened in the case (rare public linkage of an insider and their policy machinations!).
Unfortunately, the NCBFAA case was ten years following the Supreme Court’s adoption of the infamous Chevron deference doctrine. Citing to Administrative Procedures Act protections, and the regulation’s inconsistencies with other areas of customs law, got the NCBFAA nowhere. The court sided with the Customs service and the express shippers.
“Consignee Entry” is the real de minimis
The court understood the momentous aspect of its ruling. It its decision, while referencing the express shippers, the court noted that the question of consignee entry “will define their frontier in this industry.”
This – “consignee entry” – was the birth of “de minimis” becoming an avenue of commerce.
The Taiwan Agreement Risks U.S. Treasury Greatly Expanding Consignee Entry
Article 2.14 of this new Taiwan Agreement is for Express Shippers. This article says that the customs authorities of each country shall do the following (and again, this language is not limited to only doing so for the other country, it’s intended to be for the whole world):
2. For express shipments valued at less than US$2500, each Party, through its Designated Representative, shall adopt or maintain procedures that apply fewer customs formalities than are required for formal entry procedures, provided that the shipments do not form part of a series of importations that may be reasonably considered to have been undertaken or arranged for the purpose of avoiding compliance by an importer with the laws, regulations, or procedures of the territory represented by the Party into which the shipments are to enter.
3. The procedures provided for in paragraph 2 shall:
(a) allow for individual shipments, identified by a bill of lading, to be consolidated into one customs entry by either the plane-load or truck-load;
(b) allow the release and clearance of shipments without requiring an importer to obtain a customs bond; and
(c) allow either:
(i) a qualified consignee to request the periodic billing and remittance of customs duties, taxes, fees, and charges assessed for all its imports over a designated time period; or
(ii) the levy of a flat percentage rate assessment on all goods, the payment of which will fulfill the requirement to pay any customs duties, tax, fee, or charge owing for the shipment.
Paragraph 2 interfaces neatly with U.S. law, as $2,500 is the maximum amount for which the Treasury Secretary can re-write policy with her “Entry Under Regulations” authority Congress bestowed.
Paragraph 2 by itself would simply be a statement of current U.S. law, and in fact the same language is contained in USMCA’s section for express shippers, Article 7.8(2). (But note a restatement is not harmless either, as Congress should absolutely lower the informal entry below $2,500, but now express shippers will be able to say “you can’t! It’d violate our trade agreements!” As if other countries wants this; they don’t.)
The risk that Treasury will expand consignee entry is in Paragraph 3, which was not in USMCA. Paragraph 3 gives the United States and Taiwan two separate and very distinct methods of ‘complying’ with Paragraph 2.
The section option, sub-paragraph (c)(ii), appears to be something that would need Congressional legislation, and would be quite foreign to our existing law. Perhaps, then, this was what Taiwan was willing to do for express shippers.
The first option, sub-paragraph (c)(i), which discusses “qualified consignees” (express shippers) remitting duty to Treasury on shipments up to $2,500, would be a policy change Treasury/Customs to do via regulation. Essentially a repeat of what they did in 1994, but now amending 19 C.F.R. §143.26(a) (right of entry for $800 – $2,500) to allow consignee entry without a customs broker, as it is in (b) (right of entry below $800). Or perhaps they’ll amend 19 C.F.R. §128.24, which sets special informal entry procedures for “express consignments”.
Why would Treasury undertake regulatory changes based on the Taiwan text? Well, right now, an express shipper wanting to import something (as consignee) over $800 must use a customs broker. The customs broker is in charge of preparing the entry summary, and remitting applicable duties.
But the text of the Taiwan deal says “For express shipments valued at less than US$2500 … [CBP] shall allow a qualified consignee to request the periodic billing and remittance of customs duties, taxes, fees, and charges assessed for all its imports.”
Right now, consignees aren’t remitting any duties in the USA. There are no duties for de minimis shipments, and for shipments between $800 and $2,500 brought in by express couriers, the customs broker is remitting the duties.
Treasury is certainly not helpless. They could read the text, and decide that no changes are necessary. And indeed, at CPA we’ve covered Treasury’s refusal to follow plain instructions from Congress in detail. But if Treasury is predisposed to expand consignee entry, as they were in 1994, then the text in Article 2.14 is a very convenient pretext.
Fast Track All Over Again
On June 9, just over a week after the text had become public, the Democratic and Republican leaders of Ways and Means and Senate Finance announced legislation, H.R. 4004, to “approve” the agreement.
This legislation was not needed, and it “approves” nothing. It’s not implementing legislation like prior implementing acts, because in this case, Congress already delegated all the authority the Administration needs to expand consignee entry back with the NAFTA Implementing Act.
Rather, what the legislation does do – counter to all the messaging about Congress “asserting” its role – is insulate Treasury from Congressional criticism if and when they decide to make policy changes to conform to the Taiwan agreement.
No amendments were allowed in Committee. And H.R. 4004 is scheduled to be voted on “under suspension of the rules“. No floor amendments either. Funny how this always happens with “trade agreements” that re-write every aspect of our law. No debate. No deliberation.