This week I want to talk about what seems like a footnote in the trade landscape but in fact is an important issue. It is the so-called de minimis level, which is the value below which imports can enter without duty and with minimal government review, the theory being that for low-value items it is simply too much trouble to put them through normal Customs and Border Protection (CBP) procedures.
The question of what that level should be has been debated for a long time. It used to be $200, but Congress raised it to $800 starting in 2016. That change was in response to pressure from the business community arguing that significantly increased volumes of trade would lead to slowdowns at entry if CBP had to review everything, and that $200 was an outdated number that did not take into account inflation over past decades.
Subsequently, however, complaints have come in from CBP and elsewhere that $800 is too high. It appears, among other things, that foreign exporters have realized that breaking their shipments down into smaller packages, each valued at under $800, allows them to evade duties that would be assessed if there were a single shipment. That did not make as much sense when the level was only $200—it would have made for too many packages. Second, there has been an enormous increase in the number of packages entering below the de minimis level, and that is no doubt growing even more in the era of Covid-19, when so many people have shifted to online shopping. That means a lot of imports are entering the country without paying duties and without even minimal customs scrutiny. That lack of scrutiny is also an issue, since it makes it easier to import illegal items or items made with forced labor that CBP should have an opportunity to catch.
Of course, the explosion in online shopping did not happen because of the raised de minimis level, and one can make a good argument that some of these problems would have happened even if there had been no change in the level. But it does seem clear that this has not turned out how Congress expected six years ago when it made the change. The question now is what to do about it.
As with many trade issues, there is no shortage of arguments on both sides and, also as usual, not all of them are relevant. Businesses complain that a lower level would mean more payment of duties (obviously true) as well as processing and broker fees (probably true). Big companies, for which the fees would be a minor inconvenience, usually make this argument on behalf of small companies. It would have more credibility if the small companies spoke for themselves.
On the other side, those who want to either lower the level or impose other restrictions are often from sectors of the U.S. economy that are under pressure from imports and want more protection. Making imports more expensive doesn’t bother them.
From my perspective, the cost arguments are not the most important. I am more worried about items entering the country that should not—contraband of various kinds or items made with forced labor and the like. There appear to be three general approaches to addressing this problem.
The first is to simply lower the level back to $200, but that is an untargeted approach that would inconvenience a great deal of legitimate trade and increase the burden on CBP. The second would be to require CBP to collect more data on incoming shipments—a good idea but also untargeted and an increased burden on CBP.
The third option is one apparently being considered by House Ways and Means Trade Subcommittee chairman Earl Blumenauer (D-OR). It would remove the de minimis option for imports from non-market economies and from imports that are subject to “enforcement actions,” meaning tariffs imposed pursuant to Sections 232 or 301 (items paying antidumping or countervailing duties are already excepted from de minimis). This is a narrower, more targeted approach, but that creates its own set of issues. While obviously aimed at China, it is not the only non-market economy in the world. Others on the Commerce Department’s list are Armenia, Azerbaijan, Belarus, Georgia, Kyrgyzstan, Moldova, Tajikistan, Turkmenistan, Uzbekistan, and Vietnam. A number of those are strategically important for the United States—in particular, Georgia and Moldova vis-à-vis Russia and Vietnam vis-à-vis China. If we want to continue to work with those countries and also move them in a market-oriented direction, making it harder for their imports to enter the United States may not be the best move.
Moreover, differential treatment between countries both raises World Trade Organization (WTO) rules issues and creates transshipment incentives. Treating WTO members differently—and a number of the countries on the Commerce Department list, including China, belong to the WTO—is inconsistent with the national treatment principle. Treating countries differently also encourages those being treated more harshly to redirect their shipments through a third country that has not been penalized, which creates a significant new enforcement challenge for CBP.
So, while the narrower approach solves some problems, it creates others. It would be wise for the committee to consult with stakeholders from both the business and enforcement communities before deciding what course to take.
William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C.
To read the commentary by CSIS, please click here.