The Section 301 tariffs are good and the de minimis trade provision is a China free trade deal, according to senior members of the House Ways & Means Committee and the expert witnesses that testified before Congress. It’s the latest hearing set by Chairman Jason Smith (R-MO) that puts China and trade issues front and center. In CPA’s view, the Smith-led agenda marks a much-needed and noteworthy change of direction for the House Committee that is responsible for all tax and trade policy.
In one of the Committee’s first-ever outdoor hearings on Tuesday, held at Global Container Terminals in Staten Island, NY, Committee Chairman Smith was joined by Rep. Earl Blumenauer (D-OR) in calling for reform of the customs provision known as ‘de minimis’ which allows any vendor in the world to ship directly to American consumers, escaping any meaningful change of customs inspection. In this hearing, de minimis had no defenders.
On De Minimis…
“There is one area that I think this Committee ought to get their arms around,” Rep. Blumenauer said about de minimis. He said the system is facilitating all manner of law breaking. Indeed at least two Chinese e-commerce players, Shein and Temu, have entered the U.S. market full steam ahead thanks to de minimis. “We have two million, largely uninspected packages coming into the U.S. every day because of this loophole. Here we are in New York City, the home of exploding e-bike batteries, and you can buy those bikes duty-free online. We have to look at this in this Committee,” Congressman Blumenauer said during the hearing titled, “Securing Supply Chains and Protecting the American Worker.”
Thomas O’Shei, President, United Steel Workers Local 135 in Buffalo, NY, represents workers manufacturing steel-belted radial tires. “You can send tires in the mail through de minimis. You can get a set of four shipped here for less than $800 and put them on the road,” he told Blumenauer. “It’s another way of skirting our trade laws and of course these tires can be untested and dangerous.”
O’Shei spent much of his time talking about all the trade cases his union won against foreign tire imports.
Nury Turkel, Chairman of the United States Commission on International Religious Freedom, has become somewhat of a regular at hearings on China. Turkel called de minimis “a serious problem” because it was also easier to ship products that have come under scrutiny by Customs, namely clothing made from cotton sourced from Xinjiang. All textiles derived from Xinjiang cotton face a Withhold Release Order by Customs.
Turkel highlighted Shein in this case. Last year, Bloomberg contracted a German firm to run tests on random articles of clothing purchased from Shein’s website and the German firm said that some of the articles had cotton that matched the DNA of cotton grown in Xinjiang.
Last week, Chairman @RepGallagher and Ranking Member @CongressmanRaja sent letters to @SHEIN_Official and Temu questioning their potential abuse of US de minimis exemptions that allows shipments under $800 to enter the US without inspection.
— The Select Committee on the CCP (@committeeonccp) May 9, 2023
Shein’s fast-fashion is so cheap that even if the de minimis threshold fell to $25 it would not lead to a tax on imports. Even rival Temu sells sneakers for under $10 for those who are not wedded to certain brands. Furthermore, under the de minimis law, the value is not the value used in the United States, but rather the country of shipment. This makes policing the value limit impossible. Ultimately, to stop the chaos, lowering the limit must be paired with ending the ability of any vendor to ship here without use of a customs broker.
“One quarter of all packages are not even inspected,” Turkel said, reading from a document he was leafing through while speaking. “Another quarter of those two million packages at JFK had some type of violation,” he said.
Blumenauer said that China should be excluded from the provision. “This loophole is swallowing trade restrictions. It is detrimental to American business and can be a safety issue for U.S. consumers,” he said.
“This is a free trade agreement with China. That is what de minimis looks like to me.” – Chairman Jason Smith (R-MO), Chairman of the House Ways & Means Committee, May 9, 2023.
On Section 301 Tariffs…
Section 301 tariffs were lauded by both O’Shei and another witness, John Romano, CEO of Tronox, a multinational mining company. Chairman Smith asked Romano to talk about how the tariffs, imposed in 2018, had impacted his business.
“I have been at this company for 35 years. I have had plants close in 2004 and 2007 in Savannah, Georgia because of China imports,” Romano said, seated across from the Committee members in foldable chairs outside. “There was no capacity until the 301s. Since then, we expanded in Mississippi and got a $55 million payroll increase. Tariffs not only helped us maintain production, but it also helped us maintain jobs. Many of our employees have been with us for generations,” he said, a common sentiment among manufacturing businesses far from the mostly transient, large urban hubs. “Our Hamilton, Mississippi facility is our crown jewel and we are looking at how we can expand that,” he said, focusing on rare earth minerals processing. A lot of the rock will be shipped in from Africa, however, and processed at home. “Historically, the materials would get exported to China and processed there. We want to do that here,” he said.
Romano cited environmental hurdles that made it hard to compete with China and other countries in Asia. Additionally, he said that for processing and mining to be successful, companies like Tronox needed long term contracts to source materials from both the private sector and government. He named the Defense Department as one example.
See “Embracing Mining”, an op-ed by CPA’s chief executive, Michael Stumo.
Rep. Carol Miller (R-WV) expressed concern over China’s dominance in the critical minerals market after Romano gave an example of how companies that wanted to invest in cobalt, a key mineral used in EV batteries and a market overwhelmingly dominated by the Chinese, had to exit because China would create a glut and tank the price of the metal, making investments risky.
“We have the capabilities to promote our own domestic mining industries,” she said. “We have to be able to change this situation so we are developing our own mineral processing plants in the U.S.”
Trade Enforcement & Capital Market Sanctions
On the tariff front, O’Shei said his union workers are benefitting primarily from years of anti-dumping and countervailing duties victories won by the union, and filed by the union with the Commerce Department. He said the main issue they face is AD/CVD enforcement.
“Once we had a proper enforcement of trade laws, we had no more tire plants shutting down. We had them being built instead. Those tariffs were a big impact on us. They cost us millions of dollars and thousands of hours to fight this because we believe in fair trade. We should not drop tariffs because companies then invest in a preferential country [he named Serbia] under our Generalized System of Preferences program and can then ship tires here duty free from there. We have to recognize that global companies shift from one country to another very fast. Congress should pass Level the Playing Field Act by Terry Sewell (D-AL) and Bill Johnson (R-OH) introduced last year. We need better enforcement.” — Thomas O’Shei, President, United Steel Workers Local 135, House Ways & Means Committee hearing, May 9, 2023.
Rep. Bill Pascrell (D-NJ) asked about how he brought cases to the International Trade Commission, and if the process could be easier. O’Shei said they had brought 12 cases in total since 2012, meaning they have been playing whack-a-mole almost annually on different types and sizes of tires.
“You brought these trade cases on yourself?” he asked.
“Yes. And we are going against China lawyers with deep pockets,” O’Shei responded. “It would be better if you didn’t have to show three years of injury before you can bring a case because by then you could be so damaged you may never be able to recover. It would be better if the government could bring a case and advocate for companies, especially for smaller companies. We had big tire companies testifying against us in our cases because they made tires overseas, too.”
Rep. Ron Estes (R-KS) asked about human rights abuses and how Congress should use that in countering China.
Turkel recommended adding human rights abuses to the 1977 law, the Foreign Corrupt Practices Act.
“If you look at the new Uyghur Forced Labor Prevention Law’s list of banned companies there are only around 20 designated on that list and we have many more that can be on there. You don’t need all of Xinjiang’s companies there, but there are clearly many more under the umbrella of XPCC (state-owned conglomerate Xinjiang Production and Construction Corps) which is already sanctioned under the Global Magnitsky Act,” Turkel said. “You have to name and shame companies involved. And we have to stop investing in our own self destruction. You have 64 Chinese entities sanctioned and only 11 are banned from accessing capital from Wall Street. We fund that.”
One example not mentioned by the Witnesses or the Committee is Hoshine Silicon Industries. The company is on the Uyghur Forced Labor list due to forced labor. The company is part of China’s solar panel supply chain. But, as of the end of April, both Vanguard and Blackrock own shares of Hoshine in two separate emerging market mutual funds and exchange-traded funds.
Agriculture was represented by both a witness and Congressional leaders from farm districts. Once again, some Committee members called for the opening of new markets in order to make U.S. farmers less captive to the China market.
Rep. Randy Feenstra (R-IA) said that one out of every five jobs in Iowa depends on agricultural exports. “All of those are centered on Mexico, Canada, Europe, South Korea, and China—and China is the biggest. We need more free trade agreements to open new markets for American farmers and reduce this intense dependency on China,” he said, a call often heard in trade-related meetings on Capitol Hill.
Dale Hemminger, owner of Hemdale Farms Dairy and Greenhouses in New York said that one in six bushels of soybeans produced in the world is used in China. “It is critical to the future of American agriculture,” he said.
The Trump Administration spent well over $20 billion in a trade aid package to help farmers hurt by China’s retaliatory tariffs. That included $12 billion in relief in 2018 and $16 billion in 2019. While no one brought this up at the hearing, the USDA’s Market Facilitation Program in 2019, for example, gave up to $14.5 billion in direct payments to producers of affected commodities (compared with up to $10 billion in 2018). The Food Purchase and Distribution Program administered through USDA’s Agricultural Marketing Service gave out $1.4 billion (compared with $1.2 billion in 2018) to purchase surplus commodities affected by trade retaliation such as fruits, vegetables, some processed foods, beef, pork, lamb, poultry, and milk for distribution by USDA’s Food and Nutrition Service to partner entities like food banks and school lunch programs. The Agricultural Trade Promotion Program, administered by USDA’s Foreign Agriculture Service, had $100 million ($200 million in 2018) to assist in developing new export markets on behalf of U.S. agricultural producers.
Hemminger said that the bigger problem for farmers was European-style environmental regulations, including one in upstate New York that would make it restrictive to hook up to new natural gas lines. Existing ones would be allowed, but farmers who need additional gas lines would be banned, he said.
Rep. Claudia Tenney (R-NY) said some farmers in her district are no longer growing crops, and have turned their farmland into solar projects. She called solar New York’s new “specialty crop”.
“Are these policies in New York sustainable for you?” Tenney asked about the ban on new gas lines.
“We are concerned. We had land ready to expand greenhouses, but because of that budget we are not expanding them,” he said, adding that much of his greenhouse vegetable staff comes from Mexico and has been working with them for over 10 years. He said he will likely have to let some of them go, and no one in upstate New York farming will be there to hire them.
“We are stacking the deck against American farmers, particularly those who have more intense labor needs, like fruits, vegetables, and dairy,” Hemminger said. “In New York state, where you have more traditional family farms, these latest environmental regulations will put them out of business.”