How A U.S. Trade Loophole Called ‘De Minimis’ Is China’s ‘Free Trade Deal’

No one will consider you a dummy if you’ve never heard of the ‘de minimis’ trade provision at Customs and Border Protection (CBP). But China retailers SHEIN and Temu surely have. They wouldn’t exist here without it.

De minimis is a provision of custom’s law that allows for duty-free shipments up to $800 into the U.S. It has led to the growing trend of direct-from-China e-commerce, and super low-cost clothing retailers SHEIN and Temu can use it to their advantage. It is a wonder stores like Old Navy, or the baby clothing aisle at WalmartWMT
and TargetTGT
, still exist. SHEIN and Temu will replace them soon enough.

Temu’s parent company in China, logistics beast Pinduoduo (PDD) ran ads during the Superbowl. The company’s share price is up 14.5% this year, beating MSCI China and CSI-300, the leading China A-shares index, which are up no more than 8% as of Feb. 19.

China’s foray into e-commerce happened a long time ago. But it was mainly for the locals back home. De minimis helps them sell directly to the U.S. consumer. There’s no need for costly storefronts. There’s no need to pay real estate taxes. And there are no port duties for packages under $800. Small family stitch and sew factories in China can make a prom dress for $50 and ship it direct to American teens, tax-free, from their tiny home in X’ian, out to New York via the Shanghai International Airport.

In other cases, importers will order container loads from manufacturers and store them in Mexico. AmazonAMZN
will often do this but will store in U.S. fulfillment centers. Such bulk orders are not de minimis, as container loads will cost over $800.

CBP’s John Leonard, Deputy Executive Assistant Commissioner at U.S. Customs and Border Protection, reportedly referred to de minimis as the country’s ‘free trade agreement with China.’ The Wall Street Journal called it a ‘tariff dodge’ in a headline last April, saying that in some cases, de minimis allows for companies to breach U.S. trade policies.

E-Commerce: The New Direct-from-China Model

Greg Owens is the CEO of Sherrill Manufacturing. They make flatware under the brand Liberty Tabletop at their factory in upstate New York. Amazon accounts for around 20%-25% of their sales. And online sales account for around 60% of their total sales flow, up three-fold since the pandemic.

“Because of de minimis, China manufacturers can now sell you flatware duty-free, which is interesting for them because they actually have a 25% tariff since the Trump years,” Owens says. “De minimis means they don’t have to pay it. As it is now, around 80% of flatware sold in the U.S. is all made in China, with the rest in Vietnam and Indonesia.”

CBP says they got as many as three million uninspected shipments daily in 2022 that could claim de minimis treatment, a rate more than doubled from 2018. At some ports of entry, de minimis shipments arrive via the mail and express courier without electronic data, making them impossible to police.

The American shopping mall has suffered the collateral damage of online shopping.

In 2021, UBS retail analysts predicted some 50,000 store closures by 2026. Global REIT Westfield said they would exit the mall business in the U.S.

Some 1.15 million Americans work in retail, either as clerks or managers of clothing and clothing accessory stores, according to the Bureau of Labor Statistics as of January 2023. This is a dying business. Coronavirus lockdowns hurt the job numbers. Some are coming back. But two years after the 2021 pandemic was in high gear, job totals are nowhere near where they once were. Online shopping hurts them. China’s entry into the de minimis game will hurt this segment even more.

“De minimis makes it much more difficult to compete because it creates an unlevel playing field that alters the real cost of a product,” says Don Buckner, CEO of MadeinUSA.com in Florida. “You are already competing with countries that have very low wages, no environmental regulations, little to no taxes and freight subsidized by the U.S. taxpayer. Consumers have to get smart about their purchases and think where their dollars are going and who is benefiting,” he says.

Temu will benefit. It is a new brand for Americans. SHEIN’s been selling directly to U.S. consumers for a few years.

SHEIN caught the attention of a bipartisan trio of Senators recently. Bill Cassidy (R-LA), Elizabeth Warrant (D-MA) and Sheldon Whitehouse (D-RI) sent a letter to SHEIN CEO Chris Xu on Feb. 9. They inquired about two things – de minimis and use of banned cotton in making clothes for sale on SHEIN’s website.

While SHEIN CEO Xu is unlikely to answer questions about the supply chain of all of his company’s sellers, certainly the bulk of shipments to the U.S. use de minimis.

The de minimis rule was never meant to be a tool of commerce. It was meant to ensure customs agents weren’t wasting their time doing tariff assessments on the most trivial items. But now, allowing every fly-by-night oversees judgment-proof vendor to ship sales directly into American households is Customs anarchy.

Every societal expectation, from those reflecting laws against forced or child labor to consumer safety standards and truth in advertising laws, all go out the window under existing rules.

De minimis used to be set at $200 but was increased in 2015 to $800.

At a Senate Finance Committee hearing on ‘leveling the playing field’ for trade, held on Feb. 16, FedExFDX
Vice President for Regulatory Affairs and Compliance, Cindy Allen, told the Committee that the de minimis trade provision was important to businesses.

“It helped facilitate trade for hundreds of small to mid-sized businesses who can import easily, without paying a tariff,” Allen said. “That tariff is a tax on them.”

On March 24, 2022, a small business advocacy and research organization called the Small Business Majority, sent a letter to House and Senate leaders saying the de minimis threshold should be lowered to $10.