Tariffs targeting Chinese e-commerce could dampen demand

“E-commerce importers may need to reassess their logistics, pricing strategies, and compliance measures to avoid delays and extra costs,” said DSV, a top five global logistics provider, in a customer notice on Wednesday. 

The Biden administration said it intends to issue a notice of proposed rulemaking that would primarily exclude all shipments containing products covered by tariffs imposed on China during the Trump administration under Section 301 of the Trade Act from the current de minimis exemption. The 301 tariffs, which can be as high as 25% of the product’s value, currently apply to about 40% of U.S. imports, including 70% of textile and apparel imports, from China. The rule will also strengthen information collection requirements so border authorities better understand what packages contain, analyze their risk and identify patterns of concern. 

Meanwhile, the Consumer Product Safety Commission plans to propose a rule requiring importers of consumer products to electronically file certificates of compliance at the time of entry, including for de minimis shipments. The goal is to identify and block unsafe products from entering U.S. commerce and prevent foreign companies from using the low-value exemption to skirt testing and certification requirements. 

Rulemakings from CBP likely won’t be finalized until well into 2025, after comments from the public are collected and reviewed. CPSC has already issued its proposal and could set the final terms in the coming months. 

The administration also urged Congress to pass legislation to reform the exemption for small-dollar shipments. Making the changes a permanent part of the law would protect U.S. taxpayers and consumers more thoroughly than a rulemaking process, it said.

How we got here

Congress in 2015 raised the minimum value at which individual shipments are exempt from paying duties from $200 to $800. The de minimis exemption (Trade Act, Section 321) simplifies customs clearance because shippers aren’t required to provide as much information as on a formal entry. It’s also an acknowledgment that duties on low-dollar imports are so small it isn’t worth U.S. Customs and Border Protection’s time and resources to collect them. The value change was intended to help small businesses, like those that sell on Etsy and other platforms, import goods from overseas and spur the retail economy as online shopping gained popularity. 

But large online retailers, led by Shein and Temu in China, took advantage of the provision to legally skip import taxes by shipping direct to consumers instead of in bulk to U.S. importers who de-consolidate containers in a warehouse and send individual packages to customers’ doorsteps. 

The vast majority of those parcels enter the country through air cargo, express consignment and international mail facilities. Packages are physically shipped together but are listed separately on the manifest filed by the carrier with CBP, which is then cleared without going through a formal customs process. Manifest clearances don’t require 10-digit classification numbers and product descriptions are vague, making it difficult for CBP to really understand what types of products are coming through the de minimis program. 

Most de minimis shipments moved by air are filed using a so-called Type 86 entry because it is much more efficient than manifest clearance, which is a very manual and paper-based process. Entry Type 86 is a voluntary program created in 2019 as a way for customs brokers working on behalf of shippers to electronically file entries that also require clearance from other agencies with import jurisdiction, and get an electronic release from CBP for low-value parcels. 

As de minimis air volumes ballooned, sellers quickly shifted to Type 86 entries because automated CBP clearance can be completed in minutes rather than days. In exchange for speed, companies provide more data, including full product descriptions and harmonized tariff codes.

The program quickly became so popular that CBP was overwhelmed by the volumes, according to trade compliance experts..

If implemented, Friday’s proposed rule change would likely force Chinese and other e-commerce retailers to raise prices to cover any import taxes, which could dampen buyer spending.

Over the last ten years, the number of shipments entering the U.S. claiming the de minimis exemption has exploded from about 140 million to more than 1 billion a year, according to CBP figures. And the U.S. is on track to import nearly 1.5 billion parcels in the current fiscal year – 4 million per day – that ends Sept. 30. The overwhelming volume of parcel shipments has made it difficult for U.S. Customs and other agencies to enforce trade laws, health and safety requirements, intellectual property rights, consumer protection rules, and to block illicit synthetic drugs such as fentanyl and clothing made from forced labor from entering the country, officials say.

More than three quarters of the way through the 2024 fiscal year, 89% of all seizures in the cargo environment originated as de minimis shipments, including 97% of narcotics seizures and 72% of health and safety seizures of prohibited items, according to a Department of Homeland Security news release Friday.

“The majority of shipments entering the United States claiming the de minimis exemption originate from several China-founded e-commerce platforms, putting American consumers at risk, undercutting American workers and businesses, and resulting in the importation of huge volumes of low-value products such as textiles and apparel into the U.S. market duty-free,” the White House said in a fact sheet. 

New enforcement regime

Plans for tighter enforcement include requirements for additional data, such as the 10-digit tariff classification number and the person claiming the de minimis exemption, which will enable CBP to better target shipments for inspection. 

CBP needs to clarify who qualifies as the ship-to party because some retailers ship direct to a storefront for the customer to pick up there. Enforcement is currently inconsistent, with officers at some ports of entry accepting the store as the consignee and other ports requiring the name of the individual, said Marcus Eeman, senior global customs manager at freight intermediary Flexport, during a company webinar Wednesday. 

The proposed regulatory changes will also clarify who is eligible for the Type 86 administrative exemption and require filers to identify the person on whose behalf the exemption is being claimed.

The proposed rules extend the Type 86 data requirements to all de minimis shipments. 

The Retail Industry Leaders Association, which represents large store brands, applauded the administration’s action. “Improving compliance obligations with these new rules will ensure that foreign businesses cannot exploit the de minimis privilege, protecting American consumers and disadvantaged American companies,” it said in a statement. The group opposes Section 301 tariffs on Chinese goods, but said as long as they remain in place they should be applied evenly across the board. 

The administration is trying to take action while Congress negotiates which bills modifying de minimis will advance. Rep. Earl Blumenauer, D-Oregon, would bar de minimis shipments from China and Russia. The House Ways and Means Committee instead passed a bill that mirrors the Biden plan to end de minimis privilege for any good subject to the Section 301 tariff. It also prohibits use of de minimis for all goods facing trade remedies, including national security tariffs, and imposes a new $5,000 civil penalty for anyone who violates the de minimis law. Similar plans are circulating in the Senate. 

Industry pushback

The House bill never made it to the floor for a vote after being stalled by intense lobbying from freight companies and retailers that make money from cheaper Chinese goods, according to the New York Times. 

The Biden administration also encouraged Congress to pass de minimis reforms in counter-fentanyl legislation previously proposed by the administration and lawmakers. The “Detect and Defeat” bill would give border officials more tools to take action against drug traffickers and  track, target and seize drugs, raw materials and machinery used to make counterfeit pills. 

The legislation would also add a user fee for de minimis packages to help pay for the staff and equipment needed to target fentanyl shipments, as well as stronger penalties designed to deter trafficking in the de minimis environment and incentivize the private sector to self-police their supply chains for narcotics risk.  

The White House said a legislative fix should exclude quota-level products, such as textile and apparel products, from de minimis treatment because American textile and apparel manufacturers face “unfair competition from several China-founded e-commerce giants.”

De minimis supporters challenge its characterization as a loophole, saying that CBP receives manifest data (sender, recipient, value and description of the goods) before they arrive at ports and that low-value shipments are screened through CBP’s risk-assessment system like other goods entering the U.S. 

The U.S. Chamber of Commerce, express carriers FedEx and UPS, the National Association of Manufacturers and other trade organizations oppose de minimis changes circulating in Congress. They argue eliminating de minimis is equivalent to a tax hike that will disproportionately impact small businesses and low-income consumers.

The National Foreign Trade Council, a pro-trade group, said in August that eliminating de minimis would create unintended consequences. For starters, it would require a massive increase in CBP inspectors and other staff at a time when the agency has a shortfall of 4,800 officers, raising costs significantly more than collected revenue. Weakening de minimis would create backlogs at already-congested ports of entry, increase inflationary pressures felt by American families, and create complexity for shippers, it added.

A report commissioned by the NFTC and published this month by advisory firm Oxford Economics estimates CBP would need to spend $1.6 billion per year to carry out the Ways & Means bill (based on a $5 processing cost per package), which would only raise $1 billion in revenue. The legislation would result in a 55% price increase for end users, which would affect 330 million packages in 2025, it said. 

The NFTC calculates that without de minimis the average $50 package would require about $31 in paperwork, a brokerage fee of $20, plus tariffs and taxes, which would more than double the delivery cost.

The The American Action Forum, a think tank led by former director of the Congressional Budget Office Douglas Holtz-Eakin, also released a study showing that eliminating de minimis would result in $8 billion to $30 billion in additional annual costs that would eventually be passed on to consumers and would harm small businesses. A recent study by Yale Economics Professor Amit Khandelwal and UCLA Economic Professor Pablo Fajgelbaum detailed how degrading de minimis would hurt the poorest households that are struggling most with inflation. 

“In order to assess if a shipment is eligible for de minimis, CBP would need to separately determine whether the shipment contained products that are subject to Section 301, 232, 201, or anti-dumping/countervailing duty tariffs. While CBP currently has the resources to make those determinations on high-value formal entries, making such determinations on a significant portion of over one billion low-value shipments would be impossible with CBP’s current staffing levels…. Every minute CBP spends focusing on classifying low-value shipments to collect minimal duty is a minute that they are not inspecting packages that may pose a high risk” the NFTC said in a briefing paper.

Another drawback, according to the NFTC, is that small importers without an in-house customs expert are likely to make costly mistakes under a new regulatory regime. When a product enters under de minimis but is found ineligible by CBP, the import will need to be converted to an informal or formal entry. Businesses will then need to identify a person as an importer, hire a customs broker, and pay the duty before the shipment is released. If the shipment is abandoned CBP would have to dispose of the product, which is costly.

And, the trade association argued, modifying de minimis rules will shift many parcels into the postal environment, which is more difficult for CPB to monitor, resulting in bad actors smuggling fentanyl through that pathway to evade detection. To the extent CBP is able to identify shipments at international mail facilities that are ineligible for de minimis treatment, CBP officers and the U.S. Postal Service will have to manually convert them to dutiable mail, identify the recipient, and get the customer to pick up their package and pay duties in person. It’s not clear, however, whether e-commerce companies that rely on timely delivery will revert to more inefficient postal systems, especially in the origin country. 

In a March letter to the White House, a half dozen trade groups warned that degrading de minimis in the U.S. would likely trigger a response in other countries with de minimis policies, resulting in American exporters paying more to sell their products overseas. They also said de minimis shouldn’t be blamed for the fentanyl crisis, noting that the vast majority of the drug enters the U.S. in large shipments at the southern land border. Only 3% of fentanyl doses projected to be seized by CBP in fiscal year 2024 will come via air cargo, they said, citing CBP statistics. 

The NFTC and its allies say Congress and CBP should require higher quality data and upgrade screening software to separate illegal shipments from compliant ones. Funding should also be increased to buy non-intrusive imaging systems and advanced label readers that utilize machine learning to identify suspicious packages. Also of interest for many in the trade industry is a CBP pilot program in which a small group of volunteer importers electronically send extra data before shipments arrive to help CBP identify any that might need physical inspection.

Higher scrutiny

CBP earlier this year began cracking down on de minimis compliance violations, notably by temporarily suspending several intermediaries from the Entry Type 86 program for failing to properly describe and value goods, and for late filing of required data. The agency declined to identify those companies, but Seko Logistics was exposed in a media report and subsequently sued CBP for punishing it for allegedly lacking any evidence of wrongdoing. Seko Logistics recently dropped its suit, according to a filing in the U.S. Court of International Trade that was first reported by Supply Chain Dive.

Rejections of cross-border e-commerce shipments also increased after CBP’s automated trade processing system was recalibrated to prevent Type 86 transactions from being filed after products arrived at a port of entry.

In April, CBP leader Troy Miller urged the trade community to do a better job providing advanced data for low-value shipments and stop listing vague or inaccurate descriptions of the contents on the carrier’s manifest. Instead of describing a shipment as apparel, for example, CBP expects documents to provide more specifics about the item and what it’s made of (100% men’s cotton T-shirt, woman’s polyblend skirt or machine parts) and the type of inside packaging.

“CBP employs a multilayered enforcement strategy, but the fact remains we are operating under the constraints of outdated laws passed more than 30 years ago, with significant resource and enforcement limitations in a heightened threat environment,” Miller said in the DHS news release. “These executive actions are a critical first step in modernizing our enforcement mechanisms in the small package environment so we can better protect the health and safety of Americans. However, we still need to modernize and enhance our trade laws so that CBP can implement a more strenuous enforcement architecture to further crack down on the individuals and networks attempting to abuse the de minimis environment.”

Impact on international e-commerce

The pending de minimis restrictions also apply to Chinese produced goods that move through Canada and Mexico, where they are stored in logistics providers’ warehouses and then shipped to the United States. Any goods covered by the 301 tariffs would require a formal entry and payment of the China duty, customs experts said.

Izzy Rosenzweig, the founder and CEO of Portless, an international direct-to-consumer fulfillment provider, endorsed stronger data-sharing requirements to help inspectors identify suspicious packages and purge bad actors.

Entering a harmonized tariff system code, a description of the product and raw materials, and the shipment value should be prerequisite for advance digital clearance, he said. Portless provides its customs brokers with product details and hasn’t experienced slower clearances despite heightened CBP scrutiny this year.

Eliminating de minimis on Chinese products and making CBP collect duty on every small item will burden businesses and the agency, but won’t hurt the direct logistics model because it offers a much shorter order-to-cash cycle – days instead of months – and eliminates excess inventory since production matches demand, argued Rosenzweig. The biggest losers will be consumers, who will pay more for imported goods. The primary risk is the higher prices could eventually dampen demand for overseas products.

“If the de minimis gets removed it’s the American brands that will get affected. They talk about Shein and Temu, but there are hundreds, if not thousands, of American brands also using this model and they will have to raise the price to the consumer,” he said. 

Derek Lossing, a former Amazon logistics executive who advises clients on how to navigate e-commerce supply chains, said many U.S. companies are moving fulfillment to China because of the better cash conversion cycle and the ability to reduce product obsolescence. By being closer to the factory, fashion and apparel companies can react better to shifting style trends. 

Tightening de minimis isn’t going to stop the big Chinese e-tailers because insatiable consumer demand in the U.S. for low-cost fashion, apparel and household goods means the Chinese companies can absorb some higher costs or pass them onto the customer. They will comply with the new rules, logistics professionals said. 

“You might have a dress that used to cost 10 bucks. Now it costs 12 or 13 bucks. So, the prices will go up. It’s not going to stop the model,” said Rosenzweig.

Shein and Temu most likely will revert to more traditional logistics arrangements, said Tom Gould, a Seattle-based customs consultant who serves on two CBP trade advisory committees. Instead of sending 1,000 normal entries under de minimis treatment, for example, it makes sense to file one entry for a single shipment with 1,000 parcels so they only pay the broker for filing one entry. On top of that, the companies will save paying the merchandise processing fee, which is a percentage of the shipment’s value but has a cap.

“You don’t want to file 1,000 entries because then you’ll have to pay the merchandise processing fee on every single package. If you put them all in one entry, then you only pay it at the cap, so you end up paying less,” Gould said. 

Online retailers will continue to pick and pack orders in China, label each box with the customer’s address, bring them to the United States on a consolidated entry, open the container and drop the ready-to-go boxes at UPS, FedEx or other couriers to make the final-mile delivery to peoples’ homes, he and other logistics professionals explained. 

And from CBP’s perspective, it’s much easier to analyze data for a shipping container with hundreds of dresses on a single entry, even if they are individually packaged, than screening hundreds of entries, Gould added. The agency is set up to run containers run through non-intrusive X-ray machines when concerns crop up, but doesn’t have the systems and capacity to inspect hundreds of parcels.

Another option for Chinese e-commerce players is to set up warehouse infrastructure in the United States to store inventory from Chinese sellers and ship directly to households, something they already do for a limited portion of their inventory. But the warehouse scenario raises costs and introduces the risk of holding too much, or too little, inventory, something the e-commerce players aren’t fond of. 

“I don’t think from the physical movement of the goods side, there’s going to be much difference. Shein and Temu are going to still [fulfill orders] the way they do. The only real difference is the way the documentation is filed with Customs and the way Customs handles the inspections,” said Gould. “If the duty saving goes away that doesn’t mean that the business model completely goes away” because companies base sourcing decisions on many factors, including labor, transportation, manufacturing quality and geopolitics.

Requirements for more information on goods that still qualify for de minimis treatment could add friction to the shopping process in ways that discourage consumer purchases, Lossing said. Trade specialists dismissed the idea that CBP would ask buyers for their social security number as a way to better identify the consignee, but how would customers react if, for example, at checkout they had to go to a new screen and certify they hadn’t made any other purchases from China on the same day, Losing posited. 

Data from freight market analytics firm Xeneta shows e-commerce volumes out of China via air cargo increased more than 30% so far this year from 2023, as well as 37 million downloads of the Temu app alone in a single month this summer. 

“Companies like Shein and Temu have known for a long time that changes to U.S. import regulations are inevitable. I don’t think they will be overly concerned by the latest announcement,” said Niall van de Wouw, Xeneta’s chief airfreight officer, in a news release. Even if prices rise slightly on the digital marketplaces, goods will still be so much cheaper than in the U.S. that American retailers and manufacturers won’t be able to compete, he added. 

Click here for more FreightWaves/American Shipper stories by Eric Kulisch.

Twitter: @ericreports / LinkedIn: Eric Kulisch / ekulisch@freightwaves.com

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