How Chinese goods dodge American tariffs
Summary
- Policymakers are unsure what to do about a tricky loophole
Queues of idle trucks trying to enter America are standard fare at Mexico’s border. Recently, however, vehicles at the Otay Mesa crossing, which separates California and the city of Tijuana, have been lining up to get into Mexico. The trucks do not travel far—they offload their shipping containers in newly built warehouses just 15km south of the border. The goods are then separated into thousands of small packages and driven back to America. Although such imports are made in China and purchased in America, no tariffs are paid. Call it the Tijuana two-step.
The two-step is a way in which some retailers make use of a loophole in American trade rules known as the “de minimis" exemption, which means “too small to be trifled with" and allows packages worth less than $800 to enter America without facing duties. More than 1.4bn packages, worth at least $66bn, are expected to arrive under the exemption this year, up from 500m in 2019 (see chart 1). The rule exposes flaws in Uncle Sam’s tariff strategy: bricks-and-mortar retailers that import from China must pay duties, while their offshore rivals bypass them altogether. Some legislators now want to close the loophole, a move that would hit poor Americans.
Bordering on madness
Congress created the exemption in the 1930s to reduce hassle for, among others, tourists bringing home souvenirs. But Trump-era policies and the rise of e-commerce have made it more important. In 2016 legislators lifted the threshold on packages from $200 to $800 to save on enforcement. In 2018-19 they raised tariffs on Chinese products, increasing incentives to find a dodge. During the covid-19 pandemic, American imports of cheap goods such as clothes and homeware, which often come in under the threshold, shot up.
Trade through the exemption—mostly the regular import of small packages rather than any trickery—is now so large it distorts national data. Seven in ten de minimis parcels arrive from China. Shein and Temu, two large online retailers with Chinese supply chains, alone account for three in ten. Our calculations, based on China’s share of de minimis imports, suggest that America’s trade deficit in goods is 13% larger with China, and 5% larger with the world, than official numbers indicate. This may help explain a growing puzzle in Sino-American trade statistics. China says that it exports about $73bn more than America thinks it receives, and some economists believe the true gap may be more than $150bn. Figures from America’s Customs and Border Protection (CBP), a law-enforcement agency, suggest that at least $37bn of the gap comes from goods which fall under the $800 threshold.
The real de minimis tally may be bigger still. CBP relies on values entered by foreign shippers, who lack both training and a reason to declare goods accurately. An improbably high 16% of parcels claim to be valued at $1 or less, according to data from private carriers. A Senate investigation in 2018 found that foreign-shipment data was often a “long line of illogical letters and characters" in place of information about the origin and value of parcels.
Some sellers exploit the threshold in ways other than simply posting parcels worth less than $800. One option is to falsely declare a good’s value. Amit Khandelwal of Yale University and Pablo Fajgelbaum of the University of California, Los Angeles find that America receives 79% fewer shipments from China with reported values just above $800 than just below, compared with 24% fewer shipments from all other countries, which face lower duties (see chart 2). Although some of this may reflect consumers opting for cheaper items to avoid tariffs, it seems unlikely the whole difference does. American authorities recently found that almost a tenth of parcels violated import rules, typically by falsely listing the content or value of imports.
A different approach is what CBP calls “structuring". Senders split a high-value order from a single customer into multiple parcels that qualify as duty-free. Many e-commerce platforms advise shoppers to split orders when a cart exceeds the $800 threshold, which is allowed so long as the orders are placed 24 hours apart. The Tijuana two-step is another crafty but not illegal workaround, in which containers land in America, before travelling in “bonded" lorries to Mexico, meaning the goods are treated as if they have not entered the country. Once they arrive at a Mexican distribution hub, they are split into smaller packages and sent back to America, arriving under the $800 threshold. The manoeuvre saves sellers in the region of 6-12% a package, according to Divey Gulati of ShipBob, a logistics firm.
There are big winners from this tariff avoidance. They include Chinese producers. However, the avoidance also generates a windfall for American consumers. Messrs Khandelwal and Fajgelbaum calculate that, absent the exemption, consumers would have paid $7.8bn more in tariffs in 2021. Include fees and the fact that producers often cut prices just below the threshold to avoid tariffs, and consumers save $22bn a year, or $69 each. Poor households benefit most as they are the biggest consumers of cheap Chinese goods. Indeed, one in every two de minimis parcels from China lands in the poorest postcodes, compared with one in five for the richest. Without the exemption, tariffs on China would be even more regressive.
Border towns, and those seeking employment within them, are another winner. Although the number of commercial lanes at the Otay Mesa crossing has doubled over the past year, waiting times for trucks entering Mexico have risen, such is the level of demand. Firms are building warehouses fast. DHL, a freight company, has constructed 15 in Mexico since 2016. Industrial floorspace on the American side of Otay Mesa, where packages are received before distribution, has grown by 45% since 2019. Amazon, an online retailer, built 340,000 square metres of warehouses across Otay Mesa and Tijuana in 2021-22.
But there are also losers. The wave of de minimis parcels, mostly filled with cheap clothing, is hitting America’s heavily protected textiles sector. Industry representatives say 18 cotton mills have shut since last summer. Retailers with physical stores receive bulk shipments and thus cannot avoid border levies. For example, retailers importing t-shirts from China must pay a 16.5% duty, 7.5% in China-specific tariffs, as well as brokerage and customs fees. That, in part, explains how Shein is able to list women’s fashion items at 39-60% cheaper on average than H&M, a rival clothes retailer. H&M paid $205m in import duties in 2022; Gap, a rival, paid $700m. By contrast, Shein and Temu paid no import duties, according to a recent congressional report.
Sheiny new things
Some firms, including Shein, say they want rules enforcing more transparency for de minimis shipments, but the exemption to remain. For its part, China shows no signs of relenting. In May the country’s cabinet passed a resolution announcing its desire to “expand exports via cross-border e-commerce and advance the development of overseas warehousing". The de minimis exemption is crucial to this strategy. Without it, average tariffs on Chinese parcels worth less than $800 would jump from zero to 15%, as well as a fixed charge.
All this is causing anxiety in America. In May CBP suspended several brokers from a programme designed to speed up shipments. Foreign shippers are now made to declare contents before packages reach American shores. A broker notes that some shipments which disclose scant data on their prices are now being delayed by a few days as CBP steps up inspections. In future, shippers may be required to provide a product webpage so that the American authorities are able to verify the prices of the goods in question. Congress is working on one bill to close the loophole by removing tariffed goods from de minimis eligibility. Another bill would have America simply match its trading partners’ de minimis thresholds (China’s is set at 50 yuan, or $7). Any move would probably come after November’s presidential election.
Neither option is particularly attractive. Getting rid of the de minimis exemption would punish America’s poorest consumers and raise prices at a time when policymakers are doing their best to cool them. Yet leaving the loophole in place gives China something akin to a free-trade deal on low-value goods, while taxing American retailers—an approach that is almost comically at odds with the rest of Uncle Sam’s trade policy. The Tijuana two-step has America in a muddle.
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