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The Problems Posed by E-Commerce without Borders

May 28, 2019

By Greg Owens

Express entry means smaller import shipments face no customs duty

Products under $800 are now flowing freely into the United States without paying duty, but the issue does not stop there.  “Express shipments” are overwhelming U.S. Custom’s ability to monitor, regulate and verify ecommerce packages entering the United States. The floodgates are literally wide open. 

Imagine a world where packages could cross the border into the United States by land, sea and air without paying duty in such numbers that Customs could not begin to screen them to determine what is in them or vet who is shipping them.  Welcome to 2019 and the evolution of the Section 321 “De Minimis” express entry rules that has gone rouge.  What is De Mimimis?  Well, there are two sides to this rule:

The first is the one that most of us are familiar with. It covers travelers who are allowed to bring back a De Minimis amount, meaning a trivial amount, of merchandise without making a formal customs entry or paying any duty. This rule has been in effect for decades and, although amounts vary, is common practice worldwide.

The second side is the “express shipment” rule, which similarly allows articles valued at $800 or less to be imported by one person on one day free of duty and with an “informal” entry. (Congress increased the previous limit of $200 to $800 in 2016.) These rules and many of the interpretations of them by U.S. Government agencies were put in place long before e-commerce was a reality. As we shall see, they are now being exploited by Chinese merchants, Amazon, and others to gain a competitive advantage by circumventing duty on e-commerce shipments into the United States. China’s De-Minimis level is a mere $7.00 and all E.U. countries have set levels far below the United States.

To make matters worse the way this is being carried out is so underhanded you may find it hard to believe. Amazon and other 3PL (third party logistics) companies have set up warehouses on the Mexican side of the U.S. border. They import container loads of product from China and other places into these bonded warehouses, paying no duty when entering Mexico. When the e-commerce orders are received, they are picked, packed and placed on a truck with a manifest listing them all as separate imports. That truck is then driven across the border, clears customs using the express shipment entry process paying no duty, and is then dumped off at the shipping company, likely the U.S. Post office, where the packages are forwarded on to the person that ordered them online. This creates a huge duty advantage for those taking advantage of the De Minimis rules while leaving other importers, those selling through brick and mortar locations or over the web, who don’t use this duty circumvention tactic, at a distinct disadvantage.

This issue is not totally unknown. United States Trade Representative Robert Lighthizer is not only aware of the transshipment issue created by De Minimis, he was also reportedly not happy that Mexico and Canada have set their permitted De Minimis levels far below the U.S. The newly negotiated U.S. Mexico Canada Agreement (USMCA) stipulates that Mexico and Canada must raise their threshold to USD$117 and $150 respectively and allows the U.S. to lower its threshold to match that of the other country reciprocally. Most importantly the USMCA prohibits the use of the express entry rules to circumvent payment of duty on goods coming from non-USMCA countries. Sounds like a win, but not so fast…..

A lobbying group known as the 321 Coalition is proposing legislation that would change the existing Free Trade Zone (FTZ) rules to allow the express shipment mechanism to be used in FTZ’s located within the U.S., something that is prohibited under current interpretation of the law. The proposed bill is known as the “De Minimis Entry for U.S. Foreign-Trade Zones Act”. If this legislation is enacted it will allow Amazon and others to import every product they sell for $800 or less, directly in bulk and then re-ship to e-commerce customers out of those warehouses duty free and without formal entry. It in essence creates “e-commerce without borders.” So why is this important? The abuse of the express shipment rules is causing issues in many areas and should be of concern to almost everyone.

- Loss of Revenue to the U.S Treasury via duties is hard to calculate but estimates range from as low as $500million to as much as 3.6 Billion dollars during 2018.

- Why such disparity in estimates? It is impossible to calculate the exact loss of duty revenue because the informal entry process does not provide Customs with Harmonized codes, duty amounts or even shipment value. Values for the goods coming in using an informal entry process are often understated and goods are often misclassified.

- Use of the express shipment rules to import items one-by-one has vastly multiplied the number of foreign companies selling into the United States and even more so the number of importers on a daily basis. This explosion in the sheer number of packages, or “tsunami of small packages” as it has been described by customs officials, has made policing of imports nearly impossible. Think about trying to check a shipment of three containers of toasters versus trying to check 10,000 individual toaster shipments with limited seller information and 10,000 different buyers. The task for U.S. Customs and Border Protection is daunting at best.

- The widespread use of the De Minimis rules has effectively eliminated the Executive Branch and Congress’ ability to use tariffs as a negotiating tool against countries that are unfairly dumping consumer products in the U.S. market. This hurts U.S. manufacturers as well as U.S. based companies that are importing in bulk and distributing products in the standard formal commercial way.

- De Minimis shipments are making it nearly impossible for Customs to investigate or companies to defend themselves against counterfeit merchandise. Sellers on platforms like Amazon and Facebook can pop up overnight selling knock off goods. When and if they are ever caught, they simply go away and pop up later under a different name. Who knows how many millions or billions in revenue is being lost by legitimate brands that are losing sales to counterfeit merchandise sales, made easy and almost impossible to track by the overwhelming numbers created by De Minimis express entry.

- The list of American business and consumer interests that are being threatened by this new practice is growing. Here are a few parties that are or should be alarmed by this escalating practice:

  1. Domestic manufacturers of consumer goods that retail for under $800
  2. Large, medium and small brick and mortar retailers who buy direct or through wholesalers that bring in merchandise in large quantities valued at over $800 that are subject to duty.
  3. Suppliers of components and raw materials to American manufacturing who will be hurt by the De Minimis shipments as it creates unfair competition for their customers.
  4. Internet retailers who buy product from China in bulk through distribution or in values over $800 which are subject to duty and then resell on the web. They will face stiff competition from Amazon, direct shipments from China, and those taking advantage of the distribution centers in Mexico.
  5. Trade organizations that represent brick and mortar retailers, brands and wholesale organizations that import consumer goods that sell for under $800.
  6. Established brands that are selling to mainstream retailers in bulk quantiles above $800 that are subject to duty.
  7. Customs officials concerned with the “tsunami” of small packages and the overwhelming workload that makes it nearly impossible to do an effective job of screening for contraband in the form of illegal drugs or counterfeit products.
  8. Brands that recognize this as a clear avenue for counterfeit merchandise to enter the marketplace in violation of their intellectual property rights.
  9. Consumer protection agencies and advocates that recognize the threat to consumer safety and susceptibility to fraud in the form of false performance claims and identity theft.
  10. Government agencies concerned that the lack of information gathering and/or accuracy of information relating to the contents of these express shipments is hampering their ability to generate accurate import statistics.
  11. Officials within the Trump Administration and Members of Congress who recognize this as a practice that hampers the effectiveness of tariffs as a trade rebalancing remedy.

So what can we do about the situation before it spirals completely out of control?

  1. We must make sure that the current language in the USMCA agreement remains intact and is further strengthened to ensure that the transshipment practices on the Mexican/American border cease.
  2. We should pass legislation to strengthen law enforcement’s ability to detect and fine parties that are illegally circumventing duties by making false claims relating to the value or country of origin of imported merchandise.
  3. We must make sure that the legislation being proposed by the 321 Coalition that would allow U.S.-based Foreign Trade Zones to use the De Minimis express shipments to avoid paying duties and or making formal entries does not become law.
  4. We should immediately adjust the United States level for De Minimis shipments down from the $800 to an amount that is truly “De Minimis” and is more in line with the De Minimis amounts set by other countries.