The United States is grappling with challenges related to the de minimis tax exemption, which allows goods valued under $800 to enter the country duty-free. This policy was originally perceived as beneficial for consumers and small businesses by making online shopping more affordable, however, there are concerns about its fundamental negative impact on domestic competitiveness and national security.
In 2023, more than one billion packages entered the United States under the de minimis representing a significant increase from less than 150 million packages less than a decade ago. Let this number sink in. Nearly three million a day!
De minimis has been described as a commercial loophole, yet in fact it is more of a wide-open flood gate. The rule disproportionately benefits foreign companies, allowing them to bypass tariffs and taxes that U.S. businesses must pay, thereby creating an uneven playing field. Additionally, the volume of trade and the inadequate inspection mechanisms create a convenient platform for rogue actors to exploit. Small packages have become the logistic channel of choice for illegal goods, including drugs, opioid precursors, counterfeit consumer goods and products made with forced labor.
The root cause of the problem is of course made in China. Over two million Chinese packages a day. The de minimis exemption has been a key driver in the exponential growth of e-commerce platforms such as Shein and Temu. In the broader context of U.S. and China trade tension, the issue of de minimis has been subject to much talk, but lesser action.
The House Committee on Ways and Means has been actively working on legislation to address the abuse of the de minimis provision by Chinese imports. The "End China’s De Minimis Abuse Act" (H.R. 7979), introduced by Rep. Greg Murphy, is awaiting further action in the House, with potential inclusion in larger legislative packages like the National Defense Authorization Act.
The de Minimis Reciprocity Act of 2023, introduced in the U.S. Senate (S.1969) by Senators Bill Cassidy and Tammy Baldwin on June 14, 2023, aims to amend the Tariff Act of 1930 to establish reciprocity in de minimis entries, where the U.S. would set de minimis thresholds for imports based on the thresholds set by other countries for U.S. exports. It is currently in the "introduced" stage.
The Import Security and Fairness Act, introduced in June 2023, is a legislative effort led by Congressman Earl Blumenauer aiming to narrow the tax exemption, particularly targeting shipments from China. The bill proposes prohibiting goods from non-market economies, such as China, from benefiting from de minimis treatment and requires U.S. Customs and Border Protection (CBP) to collect more data on these shipments.
The future of these legislative efforts is very much dependent on the upcoming presidential elections. While many efforts are positioned as bipartisan, the determination and decisiveness of action is yet to be seen. The discussed measures may seem tough on paper, but reduction of the exemption threshold, or excluding China from the program, will likely not achieve the desired impact, if not supported by providing the necessary tools required for effective enforcement by CBP.
CBP is well aware of the De Minimis challenge and is making efforts to address it within the mechanisms at its disposal. A statement released earlier this year by CBP Acting Commissioner Troy Miller noted that the agency was “taking action to ensure compliance and minimize the exploitation of the small package, or de minimis, environment.” He was referring to CBP suspension of multiple customs brokers from participating in the Entry Type 86 Test after determining that their entries posed an unacceptable compliance risk.
But such measures are few and far between and are unable to address the magnitude and complexity of the ecommerce trade landscape. It is simply beyond human capacity. The emergence of artificial intelligence (AI) vetting capabilities can change this paradigm and offer for the first time a viable solution to this inspection and enforcement gap.
AI-driven digital vetting uses multi-dimensional data to assess shipments, identifying patterns and potential fraud by analyzing real-time and historical data from various global sources. By integrating AI-driven digital vetting into small package inspection, governments can reduce manual inspection workloads, minimize errors and ensure compliance with trade policies and regulation.
Any future legislation must therefore address the data disclosure requirements, that are a precondition for such enforcement capacity. Clear and unique information regarding the seller and recipient identity, and high-resolution description of the purchased item. Digital vetting technology can take it from there.
