Why Trump is terminating China’s trade exemption
Reasons behind Trump’s decision to terminate a trade exemption for China. This week, President Trump issued an order that not only imposed further tariffs on China but also suspended the widely utilized de minimis provision. This provision had allowed discount platforms like Shein and Temu to bypass import duties and regulatory hurdles on low-value shipments from China. The directive led to considerable disarray, resulting in the U.S. Postal Service halting the acceptance of parcels from China and Hong Kong temporarily, before resuming operations thereafter. An examination of the beneficiaries of de minimis provisions reveals potential implications for companies and consumers should these regulations be revoked for imports from China.
What is the mechanism behind de minimis provisions?
According to U.S. tax legislation, the de minimis exemption permits firms to bypass import duties and customs scrutiny for international shipments valued at under $800. The threshold was elevated by Congress from $200 in 2016. The regulation originates from 1930 and was initially designed to assist American travelers in transporting souvenirs from overseas. The utilization of these platforms has surged in recent years, driven by the influx of products from China-based discount retailers such as Shein and Temu.
In fiscal year 2024, approximately 1.36 billion shipments utilizing the de minimis provision were recorded entering the United States, a significant increase from 637 million just four years prior, as reported by U.S. Customs and Border Protection. Baird Equity Research posits that Chinese imports account for 75% of de minimis products available online.
What criticisms exist regarding de minimis?
The provision has encountered a significant wave of bipartisan pressure in recent years, as lawmakers have voiced concerns regarding the increasing volume of shipments. Officials from U.S. Customs assert that this situation facilitates the entry of hazardous products, including narcotics, into the nation, while American businesses contend that it enables China-affiliated platforms to undermine their offerings through competitive pricing.
Robert Brammer stated that his Traverse City, Mich., enterprise, Stromberg Carlson Products, which manufactures items for recreational vehicles, has incurred a 25% tariff on products sourced from China. This situation complicates competition with Chinese vendors who are able to export goods to the U.S. without duties under de minimis provisions. Legislators have expressed concerns that the reduced oversight associated with the provision may facilitate the illicit entry of goods from China’s Xinjiang region, where allegations of forced labor have been levied against the Chinese government by the United States.
Is it within Trump’s legal authority to suspend de minimis regulations concerning China?
The de minimis exemption constitutes a facet of U.S. trade law, stipulating that exceptions may be warranted when necessary, particularly to avert “unlawful importations.” Legislators from both sides of the aisle have put forth proposals aimed at reforming de minimis regulations. Last year, the Biden administration employed the president’s executive authority to impose restrictions on its application. In the lead-up to Trump’s inauguration, U.S. Customs and Border Protection put forth new regulations aimed at curbing de minimis thresholds.
The executive order issued by Trump regarding China may introduce complexities into the process, with certain trade experts suggesting it could encounter legal obstacles. Legal experts in trade suggest that it seems permissible for Trump to implement specific alterations to de minimis via executive order. Nonetheless, the comprehensive elimination of the provision necessitates legislative intervention, noted Greg Husisian, a partner at the law firm Foley & Lardner.
Who stands to gain from de minimis provisions?
Companies dependent on manufacturing in China are poised to gain from de minimis regulations, with fashion powerhouse Shein and discount platform Temu emerging as the principal beneficiaries. A report from a House committee on China in 2023 indicated that the two entities represented over 30% of all packages shipped to the U.S. each day under the de minimis provision.
Shein, headquartered in Singapore and predominantly sourcing its supply chain from China, heavily depends on the de minimis provision to export its affordable apparel to the United States. Temu, a marketplace predominantly dependent on third-party sellers for a wide array of products, has systematically diminished its reliance on de minimis over the past year, responding to mounting scrutiny of the provision. Shein and Temu assert that de minimis is not central to their achievements.
Advocates for the continuation of the exemption frequently contend that it serves the interests of American small enterprises that import goods and U.S. consumers who enjoy reduced prices.
What implications could Trump’s directive have for Shein and Temu?
Some analysts suggest that Shein is poised to experience greater repercussions than Temu from the elimination of de minimis thresholds. Over one-third of Temu’s orders in the United States are now being fulfilled by domestic sellers who maintain inventory within the country, rather than relying on de minimis provisions, as reported by sources knowledgeable about the situation. Recent tariffs imposed by the Trump administration, alongside the de minimis provision, could see imports from China facing duties reaching as high as 60%, as reported by Momentum Works, a venture firm based in Singapore.
The alterations are expected to have minimal impact on the pricing of Shein’s ultralow-cost apparel, given that tariffs and import duties are determined by the value of the goods involved. The additional documentation and compliance requirements present a significant concern. The capacity of U.S. Customs and Border Protection to efficiently screen each small-value package is limited. This indicates that packages may now encounter an extended processing duration. Shipping containers at the Port of Long Beach, California.
Is a large American corporation like Amazon impacted?
Given its considerable reliance on Chinese imports, Amazon.com remains vulnerable to external pressures. The firm, which has remained silent regarding Trump’s directive, introduced “Amazon Haul” in November, a service reminiscent of Temu that emphasizes the direct shipment of affordable fashion, household items, and various products from Chinese warehouses to consumers. Baird Equity Research analysts indicated in a recent note to clients that the prospects for Amazon Haul remain uncertain. Amazon boasts an extensive network of sellers who import goods from China, facilitating direct sales to the company or its clientele. A number of these vendors invest significantly in advertising on Amazon, suggesting that the company’s advertising revenue may face a decline.
The robust performance of the company’s U.S. operations may provide a buffer, especially if it capitalizes on the constraints faced by Temu and Shein to expand its market presence. Foreign competitors may need to reduce their operations or increase their prices in the U.S., suggesting that the removal of the tax exemption on two significant rivals could ultimately benefit Amazon, according to Truist Securities analyst Youssef Squali in a recent communication to clients.
How are Shein, Temu, and similar entities addressing the repercussions?
In recent months, representatives from Temu have informed certain merchants in China of the potential advantages of participating in a program that facilitates the direct delivery of orders to American consumers from U.S. warehouses. Shein is actively broadening its supply chain beyond China, leveraging third-party logistics providers and warehouses throughout the U.S., while also engaging manufacturing partners in Brazil, Turkey, and India. The company has been actively enlisting local vendors in the markets where it conducts its business. However, its primary supply chain remains situated in China.
A significant number of American enterprises utilizing the de minimis exemption for products manufactured in China are considering relocating inventory to the U.S. instead of dispatching individual packages to consumers from overseas. Nonetheless, the removal of de minimis for imports from China is unlikely to fundamentally address the loophole. The trade exemption applies to goods sourced globally.
