Suppose you purchased from a retailer (in-store or electronically) a pair of shoes for $100. There is a 98 percent probability that the shoes were made abroad and a 73 percent probability that they were made in China. Suppose the retailer has indeed imported your shoes.
Consider Scenario A. The retailer imported your shoe as part of a bulk import. Importing in bulk means that nearly $20 of the price you paid is a duty/tariff the retailer must pay to the federal government for importing your shoes – and other goods – in bulk.
Now consider the slightly different scenario B. Your retailer has always imported the shoes, but instead of importing them as part of a bulk purchase, he has arranged to have the shoes shipped directly to you from the foreign manufacturer in one only shipping and selling in one day. . In addition, since the shipment is addressed to a private individual and has a value equal to or less than $800, the Tariff Act of 1930 exempts you from payment of any duties, fees or taxes. This exemption from the payment of duties, fees and taxes — called the de minimis exemption – allows the retailer to list the shoe at $85 (assuming $5 as shipping).
Why is this important now?
On Jan. 18, Rep. Earl Blumenauer (D-Ore.) introduced the Import Safety and Fairness Actas part of the Creating Opportunity for Manufacturing, Preeminence in Technology, and Economic Strength (COMPETES) Act of 2022.
The law has two main purposes. First, “prohibit goods from non-market economies, such as China, from benefiting from de minimis treatment”. Second, “require that CBP [U.S. Customs and Border Protection] to collect more information on all de minimis shipments and prohibits use by bad actors.
On February 4, the Chamber past the America COMPETES Act and caught up with the Senate, which past the United States Competition and Innovation Act (USICA) last June. On April 1, the House of Representatives appointed a conference committee to reconcile the differences between the America COMPETES Act and USICA and arrive at the final bill that could reach the president’s desk.
Who wins ? Who loses ?
The comparison of the two scenarios makes it possible to identify the beneficiaries and the carriers of the costs of the de minimis exemption.
- The de minimis exemption saves the customer $15. The transport and transportation company(ies) earns $5. Conversely, the federal government loses potential revenue of $20.
- By offering a 15% lower price, the direct selling retailer can acquire new customers and retain existing customers. Conversely, by offering a 15% higher price, the wholesale retailer is challenged to acquire new customers and retain existing customers.
- CCP advantages using its limited resources to focus on its main job – screening packages for illicit goods – rather than validating the value of the 2 million low-value shipments that are imported every day.
Let’s go back to the two main objectives of the Import Security and Fairness Act.
The first objective is to prevent companies from China and other countries from benefiting from the de minimis exemption. This objective is misleading. The beneficiaries are not businesses but American consumers and small businesses who can save on average 11 percent if they buy from a retailer who ships the imported good directly to the consumer. The second purpose is to allow CBP to collect more information about de minimis shipments. CBPs Volunteer Section 321 Data Pilot — which began in August 2019 and is currently scheduled to end in August 2023 — seeks to remedy this shortcoming.
The need of the hour is to encourage spending, eliminate friction and contain inflation so that Americans regain confidence in the economy and government. House and Senate negotiators should focus on the stated goals of the law and consider whether and how removing the de minimis exemption would achieve the goals. Removing the exemption reduces consumer choice and forces them to pay more for other methods of purchase. Such methods are simply raising taxes on ordinary Americans who are already squeezed by price increases for many of the commodities they buy.
Vivek Astvansh, Ph.D., is Professor of Marketing at the Kelley School of Business and Adjunct Professor of Data Science at the Luddy School of Informatics, Computing, and Engineering, Indiana University. It studies how politics affects businesses and what steps managers can take to capture the benefits and mitigate the costs.