The End of De Minimis: What does it mean for E-Commerce?

Machine Operated Script:

Annik  

A Hello everyone. Welcome to the simply trade podcast. My name is Anik. I will be your host today, and really every news roundup, an intelligent guest in the industry. I would say, I think you’re perfect for this one. Her name is Marion Rowden. She is, and I’m sorry if I mispronounced that she is the CEO and director of the Eat merchants Trade Council, a global trade association dedicated to simplifying trade, tax and transportation policies for E commerce entrepreneurs. I you know what? I love that and I just think about, well, first of all, thank you. Thank you so much for coming.

Marianne Rowden 

So de minimis has been around for a while, right? 1930 I think it was in the chair effect of 1930 is when they implemented it, or 1934 around there. Yeah. And just for you know, regular I would hope that regular people are watching this that are not in the trade industry. We’re definitely getting into more of the nitty gritty things where trade professionals will gain some insights. But just to understand what the minimus means, do you want to give like a simple explanation? Sure. So literally diminish means in Latin it’s almost too trivial to bother with, but the concept originally was that it would cost the government more time to process the entry of that shipment than the customs duties collected. So originally, when diminish was introduced in the 1930s the threshold is $1 Okay, so that meant it would cost the custom service at least $1 to process that shipment. And then it was raised to $5 for many years. Then in 1986 omnibus Reconciliation Act, which was the big Reagan tax cut, they raised it to $200 and then 2016 in the trade facilitation and Trade Enforcement Act, it was raised to 800 now, what I don’t think they’ve done, and one of the things emtc asked Congress in our comments was, Has anybody done a study about how much it cost CBP to process an entry Okay, to see if there’s that cost benefit analysis still.

Annik  

Wow. And you know what? So now we’ve been operating with de minimis, especially China has been operating with de minimis. I mean, there’s, you know, they have very low costs that they ship over here, or low cost shipments that come over here, and they use de minimis primarily, right, like she and Timo, all those big name, I would say businesses or corporations, where Americans buy from, and they get to send it under the minimus, but that is going to be gone right as of May 2.

Marianne Rowden 

Yes, now there are two tracks to keep in mind, and this is what everybody forgets. On one track, you have the President’s. Executive Order, okay, or multiple orders, I should say. And those fall in a couple of buckets. So there’s the executive orders dealing with PRC, Hong Kong and Macau. So those go away as of May 2. Then you have, uh, Canada and Mexico. And those are important, because many of the logistics and fulfillment centers were pushed to Canada and Mexico for a variety of reasons, so they are sort of the feeder countries if a shipment is not coming direct through postal, okay, but then the second track is CB P’s notice of proposed rulemaking on entry of low value shipments, and it’s got a companion rule on trade and national security action on entry of low value shipments. So those were released in, I think, the last week of the Biden administration. So in January, we just filed all our comments on that. So that would have been March 17, and I think the 24th and there were over 100 comments submitted on those notice of proposed rule makings. And our expectation is CBP will probably issue an interim final rule, probably in June or July, after reviewing the comments. And what that means is they’re coming out with their final rule, but it’s on an interim basis, and it’s it means that they’re pretty solidified in their positions, and they’re not going to make major modifications. And I think it’s doubly true, because CBP conducted a 321, and a type 86 pilot for many years, so they have a lot of data backing up that proposed rulemaking.

Annik  

I see And and, you know, I know that well, I researched this, but it CBP now process about 4 million, the minimal shipments daily, and, and it says that it’s up from 1 million in 2018 which means that, I think that just shows the perspective of E commerce being, you know, grown into this massive thing you know, that we take advantage of every single day and businesses. So I think we take advantage of it because of the prices. And businesses take advantage of it because they get to price their things lower, correct. Well, if

Marianne Rowden 

you take a step back, one of the reasons that I gravitated towards e commerce is because I finally realized that E commerce represented the democratization of global trade. It allowed small and medium sized companies to sell their products around the world. What was unique, though, was that it flipped everything on its head. Instead of sellers having to find buyers, buyers could just go to the marketplace and find a producer or a seller, but the import and export was handled behind the scenes after the sale, okay, and that’s what made it unique, but also it got rid of, or at least removed from the seller and the consumer, the intricacies of cross border shipments, you know, the trade and logistics side of it, and now we’re dealing with those consequences, yeah,

Annik  

and what are these consequences? That’s what I’m understanding. They want to take it away, right? Or they are taking it away for, at least for China, right now, you know why? Why are they doing this Exactly? Or what is their thought process?

Marianne Rowden 

I think there’s a couple of reasons. Now, my view is that the biggest trade barrier is complexity. Importing and Exporting is complex, because there are a base layer of customs regimes, right? So that’s tariff, classification, value, origin, IPR issues. But then you know, there are, you know, just being fastidious, and the trade related costs of paying for a customs broker, you know, the logistics, which is a little bit more expensive. I think the reason de minimis took off over the last couple years was probably in reaction to President Trump’s first term, section 301, duties and the rise of direct to consumer shipments that you did internationally. And the other big factor, of course, is that a lot of these shipments go through postal, okay, which is handled as a separate supply chain. It’s different government agency, and, in fact, it’s operating under a different, uh. International treaty, the Europe, the Universal Postal Union, okay, which is a whole separate regime, if you will, from the traditional customs, cross border transactions.

Annik  

So, okay, so now that, let’s say the de minimis will be gone may 2. Big companies like she and Timo have been operating, have been using de minimis because of, you know, they’re, they’re, they have such little costs, and they get to do that, even though I heard that some of them might, those shipments might not be correct, like they’re kind of putting things. I’m not, I’m not very sure about this, but they have, like, big packages, and they put every because they don’t really know what’s in the packages, right? There’s a certain Do you know what I mean? It’s right?

Marianne Rowden 

Every package so right now, every package has to have its own manifest. So in a de minimis environment, you’re not actually making an informal or formal customs entry. It’s a transportation manifest which I think only has about eight to 10 data elements, and it’s not as strict or stringent as an informal and formal entry. So you put all of those together, some containers could literally have 80,000 manifests, 80,000 small packages in one container. Okay, so the way that’s handled logistically is the Express air couriers. Let’s say they’re integrated transportation and customs brokerage operations. They can handle the cross border movement, postal service, it’s a little bit more difficult, and that’s why the President’s had to keep delaying the executive orders implementation, because it says in the executive orders that the Secretary of Commerce has to notify the President when they have a system in place to be able to collect those duties and transfer that data to customs, so the big Chinese based marketplaces, you know, we’re watching what’s going to happen logistically, because It may mean that instead of using the Postal Service or even express air couriers, what they will do is they will take control over the logistics from China direct to the United States in bulk. You know. Now the question is, how they going to deal with those increased costs? Now, you know, as we both know, there’s been some articles indicating that they’re communicating to people that their costs will their prices will rise. But the question then is, do they have economies of scale such that on the logistics side and the customs brokerage side that they can get that price down so it’s not going to have such a great impact in terms of the level of prices that they will have to to raise.

Annik  

Yeah, and there’s also been some speculation, which I’ve also also heard some rumors, that, you know, those companies, they want to move the operations over here, so that way they will, you know, not have to pay those tariffs. And then obviously have the de minimis situation now kind of, you know, put away, and they’ve kind of advised against that, which obviously it would increase their cost even more, right? And I don’t really understand know if that’s true or not, but do you think that would work for them?

Marianne Rowden 

You know, I think it depends on the scale and whether they’re really able to use, you know, you got to be careful with bonded warehouses and Foreign Trade Zones, which are all great devices that you can use, but it may only delay when you pay the duties. Okay, it’s not going to eliminate the customs duties. So on the logistics side, in particular, it’s all about economies of scale. And if they can have in house brokerage that will then, instead of paying a brokerage firm, let’s say, $20 to file an entry, if they can do it in house, for the salary of the brokers that they have in house, they may be able to get that price point down enough to justify with the scale that they have, that the cost per package will be reduced. We just don’t know yet, and that’s got to be very proprietary data, where we may see it pop up. Is she in? Is supposed to be doing a an initial public offering on the London Stock Exchange this year? I got to believe they’re going to have to disclose a little bit more data about their business model. But the current market. Market volatility, may the delay or change the valuation of that IPO, we just don’t know.

Annik  

Yeah, and I think chin is very interesting, because it’s gone through a lot of allegations in the past, such as forced labor and whatnot. So I think theirs will be a little bit difficult. I guess they Yeah, they’re going to have to give a lot of data on making sure that you know, it’s all justified, but one thing also I read is that DHL will stop shipping packages over $800 to US customers due to new customs rules. So what is how is that affecting?

Marianne Rowden 

So, so the reason they’re doing that is because they talked about any shipments between value between 820 $500 so then you’re in an informal entry process which is more documentation and data than the de minimis, okay, because you’re actually filing a specific type of entry, the in house customs brokers, they’re having to provide more information and documentation, and it’s slowing them down. They can’t do it as quickly as you do with a manifest, and that’s why they’re doing it. So we’re starting to see those real, you know, operational challenges, even when you have Express air couriers, who are very integrated in both the logistics side and the custom side, that they’re having those internal challenges.

Annik  

Yeah, the supply chain it, you can really see it. You know, how it’s from business they’re going to struggle with, what are we going to do? You know? We’re going to, first of all tariffs, then sending it over here. It’s like de minimis. We’ve been using it. We can’t, probably won’t be able to do that anymore, you know? And what Carrie carrier are we using? If, if, like, DHL, are letting them know we’re not shipping that kind of stuff anymore. Now we can ship it down. As

Marianne Rowden 

I always say, transportation and trade are like water. It’s always going to try to find the most efficient route. And for many years, de minimis was that very efficient route. And now that that’s, you know, closing that volume of packages has to find another way to get through. But you know, as I’m sure we’ll talk about more, the economics model is changing. The cost structure is changing, and whether this is a sustainable business model for both the online sellers, but also the service providers that transport and clear these goods

Annik  

See, that’s my other question. How are they going to make sure everyone’s compliant? Like we’ve talked about the CBP issue. You know, there’s CBP has a lot on their hands, especially in the United States, we have immigration going on, and I always think that CBP is sort of split. And how are they dividing? You know, their their abilities to go to immigration, whatever they need to do there, or whatever they have been ordered to do there and then now, you know, they’ve been ordered to do all or correct all these changes. How is that possible? How are they going to be compliant? Will this come back to other businesses in years later? Or, you know, are they enforcing it now, like coming May 2? How? How are they prepared? Or,

Marianne Rowden 

well, remember, you know, CBP is a an amalgam of the former US Customs Service and the Border Patrol, and then now the agricultural inspectors that were at USDA, and that happened in 2005 or six with the creation of the Department of Homeland Security. Okay, border patrol handles the immigration, you know, and they still wear their green uniforms. Everybody else is in their blue uniform, and they have 65,000 people. CBP is a very data dependent agency trying to, you know, get away from labor intensive. The problem with the minimus environment is because of the volume of packages. It has become very labor intensive for them to do the inspections. Now I, I hate to use this, but I told you so, you know, and back in 2015 when we started, you know, as the private sector co chair at the WCO for the E commerce work group, I said to CBP the delegation, the most important thing you need to do is to come up with a different risk model that handles the scale of E commerce. Because you have millions of E sellers, you have millions of customers. You have a fair number. Of marketplaces and but you don’t have that traditional input of record who is legally responsible, like in a traditional transaction and filing the or responsible for all the information and compliance on that entry. So now we’re 1.3 5 billion shipments late, right? And now they’re having to really deal with that tsunami, and it’s taken them a long time. So the default that they’re doing is obviously, to a certain degree, they’re regulating the marketplaces to get that information, and that’s sort of what the NPRM really does. It really moves those shipments away from de minimis environment into an enhanced basic entry system, you know, process where you have to file more data, and you know, the party that’s in the best position files the data almost like what we call a progressive filing. And then the party can be designated by the seller to file an entry, okay, that’s what they’re progressing to. But when you’re when you’re going from 1.353 4 billion manifest into a basic, enhanced entry environment. It’s more data flowing through that ace system. Now it should give them more visibility into that supply chain so they can use predictive analytics to know what to inspect. So that should cut down their work a lot, but it may be a lot of data that could overwhelm the system as well the ACE system, we just don’t know. Okay, they’ve done the pilots, but we don’t know what’s going to happen. But

Annik  

even as of packages, what exactly is coming over? Do you think they’ll have better track of that? Or definitely,

Marianne Rowden 

the more data they have, the more information. So right now, off de minimis, you just have to have a product description, okay? And it could be stuff, you know, it could be parts now, in anticipation of this proposed rulemaking, the marketplaces were asking the sellers to provide a more precise description, and we confer with some sellers groups and people are getting mad at the marketplaces. It’s not the marketplaces fault. Fault. They were just anticipating what was going to be in this proposed rule because they participated in the pilots, but it’s to get them a more prescriptive, precise description, so that they could generate the 10 digit Harmonized Tariff Schedule number for the product. Okay? And once CBP has that data, it’s so precise, they’re going to know if it’s a t shirt from China, you know, cotton t shirt, men’s versus women. You know, they’re just going to have more granularity, and they’re going to be able to see is this a product that normally comes from, you know, Hong Kong versus China, versus Vietnam versus Malaysia? Okay, they’re really going to have a better sense of what’s coming in from where, and they can, they’ve got so much historical data that they compare what’s coming into their historical data. Oh, okay,

Annik  

yeah, that’ll be interesting to see. But let’s last I just want to get into some of the economic challenges that are upcoming because of this change. So obviously Americans, you know, small businesses, which I love to talk about, because I believe that those will be affected most, or, you know, just they have it harder because they have less money. And it just, you know, small businesses, like I care for them, and I think every, every little city has them, and, you know, they get stuff from China. And now that the minimus is happening and tariffs have been happening. They’ve been struggling. So what can they do with E commerce? Because obviously we don’t want them to fail, right? But what can they do now that this is happening? Well,

Marianne Rowden 

one of the reasons that I set up with colleagues e merchants Trade Council is to represent the small e sellers, because when I would go to the WCO, the World Trade Organization UNCTAD, the marketplaces were there, the Express area, couriers were there, but nobody was representing the E sellers. Now those entities do a pretty good job of representing their interest. To a point, and now we’re starting to see the divergence for E sellers. The message that we’ve had is, you know, this is going to totally change your cost structure. It’s not just the tariffs, which you have to figure in in calculating your costs. So if you have a $5 t shirt, you’ve got to calculate, okay, what is the applicable duty rates, but it’s the trade related cost that they didn’t have to have. So in the past, they just had, they have the logistics cost right now they have to figure on, they have to pay a merchandise processing fee. So that is a minimum of $32.71 and let’s say, a brokerage fee. So we use, you know, just $20 as you know, just the bare minimum cost. Now there’s some logistics providers, if they have in house brokers or something, may be able to get that cost down. But figure $20 so those trade related costs, in addition to the duties, is going to be much more than the duties. So you could look at doubling your cost for a product just to bring it in. Now, many e sellers are working on very low profit margins, and there’s intense competition in many consumer products spaces, so their ability to sell profitably online, I think, is going to be a big challenge, depending on what your product is, and the fees going up on the marketplaces to deal with This regulatory compliance and other issues is going up as well. So the E sellers are in a very challenging environment, and I think they’re very worried, and they should be, because right now they may not know exactly what their costs are, and they’re in an environment that they really have to work closely with their logistics provider to really map out what all those costs are to see if they can make a profit.

Annik  

Yeah. I mean, I can’t imagine that that’s so challenging if you have to double your costs, and you know, you have loyal consumers, and they’ll buy from you, but it costs double of what the product was. I don’t see anyone buying the product. And

Marianne Rowden 

I think it depends on how how established your brand is, and how powerful your brand is, and whether you have any pricing power at all. Yeah,

Annik  

no, you’re right. And, you know, because if we always tell people, start your business, I think that’s what America was kind of based on, start your business and you can grow to be. I mean, it’s amazing what you can do here, right? There’s so many abilities, but it’s just very challenging to do it at the moment or with these new I mean, if you’re barely coming in, and this is the it’s it’s tough, but if you’re already in there and you out all of a sudden, have to double your costs. I don’t know exactly where you’ll go from there. I’m sure it’ll be figured out. But do you think that, like these changes with the minimus are here to stay, or will it?

Marianne Rowden 

Yeah, I do. I do because of the two tracks. You know, even if the executive orders go forward, and then, let’s say we get another president of a different party, next time around, they could overturn those executive orders, but the proposed rulemaking, if it’s finalized, you know, that’s much harder to repeal. An administration can do it, but it’s just a longer process. So because we have that two tracks, and there’s a bunch of legislation, I think there is bipartisan consensus that something needs to be done about de minimis. There are some bills that will totally eliminate it. There are some bills that would add additional data requirements. Now between the executive orders and the proposed rules, the the executive branch is doing that anyhow, so we’ll see if legislation passes. It could, you know, but I think, unfortunately, you know, the political winds have turned against de minimis, and the problem is that everybody, all the policy makers, are looking at the import side. What they’re not recognizing is we have a lot of American e sellers that export because e commerce, and whatever we do on the import side is going to boomerang to the, you know, export side. So as an example, and this has happened independently, the European Union has 150 Euro demand is for customs duties, and that’s going to go away, probably by 2028 as a result of the EU customs reform package. So. So, you know, those were the two highest de minimis. I think Australia might still have 1000 bucks just for customs duties, but those other countries have a VAT that doesn’t have the de minimis, so they already have an increased cost barrier that we don’t have. So, you know, it’s sort of like a Rubik’s cube where, you know, once you change one angle, there’s, you know, misalignment on the other side. So that’s what policy makers have to be aware of. I can

Annik  

see that. And I think, you know, beside the struggle and beside the changes, I think there’s always a way to make things work if you really want to make things work. I mean, it might take a little more time and maybe a little bit more money, but maybe you will be more profitable, profitable at the end, if you know, you kind of figure it out the right way, and maybe find a supplier in America. You know, we don’t, you know, it’s, it’s hard. I guess you just really have to explore the options, as I’m

Marianne Rowden 

glad you raised it one of the most important things. And going back to what I said earlier about the biggest trade barriers, the complexity people overlook. They think that the success of de minimis is just a duty free entry, and that’s not that’s partially true. The other really important part of it was the simplified processes to get goods released on a manifest. And one of the things that we’ve done in all our comments to Congress and CBP as part of 21st century customs framework is you need a simplified process for customs for small businesses, you know, and I will be blunt as that has not gained as much traction. What I am hoping, and what I think policy makers are are not going to be aware of until we go through this is how many small businesses were shut down during the pandemic, maybe they had a brick and mortar and they just went all in online. How many of those companies are going to go out of business? Okay? And again, if we come up with a simplified process, and we have two ideas of systems based governance and global trusted to trade for supply chain security. They could come up with a system that is more simplified, but right now, all of the energy is we’ve got to know everything that’s coming in, everybody’s paying duties, and if the shipments fall off. Well, you know, we will at least get a handle on this supply chain.

Annik  

Yeah, yeah. And so we’ll see. You know, may 2 is just around the corner, I think when this and yeah, so we’ll see. And, you know, thank you so much for coming. I think this episode is gonna be just the right thing for people to listen

Marianne Rowden 

to. Well, we’re really, we’re really eager to see particularly, what happens with the Postal Service, you know, their ability to collect duties. Now, the Commerce Secretary has indicated to the President that they have a system in place. Nobody knows what that system is, you know, so are we going to start seeing that shut down. And of course, the other interesting thing is, we’ll be attending, I will be at the CBP trade Summit, may 6 to the eighth so that is the opportunity for CBP, DHS, perhaps the administration, to convey to us in the trade community what they’re seeing, what their plans are, any contingencies. So you will have 1500 very nervous trade professionals. I think in New Orleans, I will be among them, hoping to talk to a lot of colleagues. But you know, on LinkedIn, on Facebook, there’s a lot of information out there. But what’s important, and why I’m always happy to do a discussion with simply trade podcast, is there’s a lot of bad information out there. So whether it’s valuation, whether it’s Incoterms, whether it’s country of origin, so many online sellers are being approached by manufacturers to do various things, and my final message is, don’t do it without talking to your logistics provider or a trade professional or a trade lawyer, because as desperate as you are to keep your business afloat, It is not worth a customs violation, because they can go criminal. You know, if there’s fraud, there’s evidence of fraud, you, as a person located in the United States, will be the person prosecuted by the US government for customs fraud. So that’s my my final message that I want people to understand. And

Annik  

can I wish you the best of luck at the CBP Summit? I think that’s incredible that you got to go, that you’re getting to go. And

Marianne Rowden 

you know, people can check our website, www.emtc.org once and twice a month, every other Fridays, we hold an open forum that people can attend and ask questions. We do a little presentation, but we’re really here as a resource of information for anybody within the industry but particularly the online sellers. Yeah,

Annik  

yeah. Thank you so much. And we’ll, we’ll put that in the information down on the episode. So thank you again, and we’ll talk soon, hopefully, I hope you have a great week. So thank you guys so much for listening. And we’ll be back next Monday, which that’ll be an interesting episode as well. But let us know how you like this one, and if you have any questions, please, ask us email us, put it on LinkedIn and we’ll get back to you bye. Thank

Speaker 1 

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