Several bills challenging China passed the House of Representatives last week, in a blitz orchestrated by the Republican leadership. But they left on the table a high-impact, bipartisan proposal that deals with a clear danger from Chinese mercantilism: a bill to close the “de minimis” loophole that has allowed billions of packages to enter the country from China, avoiding tariffs or inspections.
The loophole, where packages worth less than $800 can pass through customs duty-free, was initially intended to save tourists from paperwork hassles when bringing home souvenirs. But now it is blamed for facilitating the illegal drug trade and destroying the domestic textile industry. This makes consumer product safety compliance, any kind of trade enforcement, and even an accurate estimate of the trade deficit impossible.
Shein and Temu, two Chinese discount e-commerce companies, directly ship hundreds of millions of low-cost fast-fashion items each year, accounting for most de minimis shipments. Their recent surge has prompted the closure of 18 yarn-spinning and garment factories in the US, to say nothing of the impact on local retailers. Credible concerns that Shein and Temu use forced labor to produce their products may also mean that de minimis precludes enforcement of the Uyghur Forced Labor Prevention Act. Third-party Amazon sellers from China have also taken advantage of the loophole, and countries around the world are responding to e-commerce exploitation de minimis. South Africa has completely abolished de minimis, while the European Commission has proposed the same.
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In the US, a bipartisan coalition has formed urging immediate steps to close the loophole, with broad support in Congress. In 2022, legislation that would ban all de minimis shipments from non-market economies like China passed the House; that bill was reintroduced. Bipartisan Senate legislation would bar certain categories of goods, including those deemed “import sensitive,” from claiming de minimis status, along with requirements for more data on shipments and additional fee to fund customs operations. (There is a House companion bill that is somewhat similar.)
Last week, this coalition to close the loophole scored an initial victory. The Biden administration has announced executive actions that would exempt any products from de minimis exemptions that would otherwise be subject to tariffs under Sections 201 or 301 of the Trade Act of 1974, or Section 232 of the Trade Expansion Act of 1962.
Section 301 tariffs are the big category here, covering 40 percent of all US imports and 70 percent of textile imports from China, according to a White House fact sheet. Section 232 tariffs are on things like steel and aluminum; that doesn’t come in $800 bundles. But the fast trend from Shein and Temu is, and the Section 301 tariff exemption should cover that.
The proposed regulation includes specific actions that shippers must take to qualify for the exemption. Instead of dropping directly at doors, these packages have to arrive at ports, with information on their contents. Separately, the Consumer Product Safety Commission will require importers to file certificates of compliance for all shipments, including those that claim the de minimis exemption. It will force importers to lie if they try to claim de minimis on a good that fails to undergo proper safety testing, and it will also interact with tariff exclusions.
The stock price of PDD Holdings, Temu’s parent company, fell on the announcement.
The recent surge of Chinese e-commerce companies Shein and Temu has prompted the closure of 18 yarn-spinning and garment factories in the US, to say nothing of the impact on local retailers.
But the administration has only announced notices of proposed rulemaking, which must go through a lengthy public comment period. This is not something that will have an immediate effect. The White House recognizes this, and is seeking congressional action before the end of the year to comprehensively reform the loophole.
Aspects of the congressional action highlighted by the White House reflect bipartisan Senate legislation that would ban import-sensitive products as well as implement the proposed tariff exclusion. Under the law, that exemption would move forward more quickly, with more legal backing, and with funding to deal with any increased inspection burden. The White House also requested reforms that would prevent fentanyl products and precursors used to make illegal drugs from de minimis use to hide illicit activities.
The White House announcement came just two days after 126 House Democrats, the majority of the caucus, sent a letter to the president calling for executive action. The letter noted that the Tariff Act of 1930 gives presidents broad discretion to determine what qualifies for de minimis treatment. Rep. Earl Blumenauer (D-OR) and Rosa DeLauro (D-CT), who spearheaded the letter, called the White House action “just a first step,” which “does not negate the need for Congress to act on a comprehensive solution .”
Other stakeholders applauded the White House’s action. “This is an important, common-sense reform,” Kim Glas, president and CEO of the National Council of Textile Organizations, said in a statement. Glas called for an expedited rulemaking to implement the administration’s plan. “We call on Congress and the administration to work together to immediately close this harmful loophole once and for all.” He noted that the existing enforcement of the ban on textile imports made with forced labor has increased over the past few months. About $22 billion in imports have been subject to trade audits, according to the Department of Homeland Security, and inspections of small package shipments and special joint trade operations have increased.
Meanwhile, the industry is pushing back. The National Foreign Trade Council, a trade group that includes international shipping companies, has defended the loophole and is now highlighting a study from Oxford Economics that says the House bill would ban the nonmarket economy from the use of de minimis will cost $3.2 billion in 2025 for 39,000 customs officials, while generating $627 million in higher tariffs. A bill closer to the Senate’s bipartisan version, the study found, would cost $1.6 billion in 2025, and would increase tariffs by $1 billion.
“Reinstating the de minimis provision would greatly increase costs for consumers and small businesses, while costing the government more than the revenue expected to raise,” the study concluded.
But according to Lori Wallach of Rethink Trade, a division of the American Economic Liberties Project, the numbers are very misleading. “To get that crazy topline projection for greater consumer spending and [almost] 40,000 more customs inspectors are needed, they assume that the same number of small-value packages will arrive as if they were de minimis in effect!” Wallach said. “Obviously, the business model behind many of these low-value packages that are profitable relies on de minimis … So, if certain products no longer qualify for de minimis, until the business survives of Shein and Temu US, they will need to ship containerized. and make fulfillment from the storehouses here.”
A container ship full of T-shirts will be checked once, in other words, not 83,000 separate times with separate fees for each package. If additional inspection is required due to suspected forced labor or tariff evasion, it is highly likely that such goods will not actually enter if the violations cannot be concealed in de minimis packages. However the Oxford study only expected the same amount of goods with the same number of packages, a premise that is highly suspect, according to Wallach.
“Somewhere in the ivy towers of Oxford, an economics dean is crying at the sight of the university’s name associated with the work of this private company consulting firm,” Wallach said.
It is probably true that there will be some additional costs if de minimis is blocked for many items, and imports have to go through the normal customs process. But the $2 fee per de minimis shipment in the bipartisan Senate bill, along with increases in tariff revenue, is designed to cover relatively minimal costs, relative to the entire US budget.
It is also likely true that closing the de minimis loophole will make some consumer goods imported from Chinese e-commerce companies more expensive. I’m sure the Emancipation Proclamation made cotton more expensive too, but that wasn’t reason enough to allow slavery to continue. Lawmakers and advocates make the simple point that violating trade laws, forced labor, or consumer safety laws is an unacceptable downside for cheap clothing.
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