The Price of What You Buy Online Is About to Go Up
from RealEcon and Greenberg Center for Geoeconomic Studies
from RealEcon and Greenberg Center for Geoeconomic Studies

The Price of What You Buy Online Is About to Go Up

FILE PHOTO: The logo of Temu is seen on a mobile phone displayed in front of its website, in this illustration picture taken April 26, 2023.
FILE PHOTO: The logo of Temu is seen on a mobile phone displayed in front of its website, in this illustration picture taken April 26, 2023. REUTERS/Florence Lo/Illustration/File Photo

Bipartisan support is growing to overhaul the de minimis rule, which exempts inexpensive imports from tariffs. However, Congress risks harming trade relations and spiking inflation if it isn't careful.

November 25, 2024 6:02 pm (EST)

FILE PHOTO: The logo of Temu is seen on a mobile phone displayed in front of its website, in this illustration picture taken April 26, 2023.
FILE PHOTO: The logo of Temu is seen on a mobile phone displayed in front of its website, in this illustration picture taken April 26, 2023. REUTERS/Florence Lo/Illustration/File Photo
Article
Current political and economic issues succinctly explained.


A regular series on the choices faced by international economic policymakers

More From Our Experts

Most Americans have shopped online at some point in time. The U.S. Census Bureau estimates that ecommerce sales accounted for roughly 15.2 percent of total sales in the second quarter of 2024. As holiday shopping season begins, that figure is likely to go up. The Pew Research Center found that just over 75 percent of American adults have shopped on their smartphones, but what most Americans do not know when they are browsing for sales online is that when they purchase something that comes from abroad, it often enters the United States duty free because of a law that exempts shipments under $800 from facing tariffs. That policy, known as the de minimis rule, could soon change.

More on:

Trade

United States

RealEcon

Bipartisan support for overhauling the de minimis rule is growing. This year, 126 House Democrats urged President Joe Biden to take action against these low-value imports, arguing that these packages “evade inspection, information disclosure requirements, or the requisite tariffs and taxes.” Two days later, the White House announced that it would propose rule changes, and recommended that Congress take legislative action as well. Bills that would reimpose tariffs on a range of products that normally enter the country duty free have been introduced by both Democrats and Republicans. President-Elect Donald Trump, who vocally supports tariffs as a primary tool of trade policy, is likely to support such congressional action.

Any of these actions will come at a cost. The question is whether policymakers have sufficiently considered the trade-offs in the various proposals currently on the table. If changes to the de minimis rule are too broad, they could have unintended negative consequences on trusted U.S. trading partners. Before taking action, Congress should weigh those trade-offs and consider whether putting more financial pressure on Americans still feeling the pinch from inflation is worth it.

Low Value Shipments and What Is at Stake

Along with waiving the duty for items under $800, the de minimis rule greatly streamlines the customs process for Americans purchasing things from abroad. While packages are still subject to customs checks, they avoid broker fees and an administrative fee. Congress raised the de minimis level to $200 in 1993, recognizing the high administrative costs of a low de minimis threshold and the need to adjust the amount to keep up with inflation. Congress raised it again to $800 through the Trade Facilitation and Trade Enforcement Act of 2015. At the time, Congress emphasized that modernizing customs “is critical for United States businesses of all sizes, consumers … and economic growth,” as higher thresholds “provide significant economic benefits to businesses and consumers … through costs savings and reductions in trade transaction costs.” Raising the threshold not only reduces costs for consumers, but also lowers the administrative burden on customs officials of assessing duties on every single package that enters the country. In fact, a recent study showed that the costs incurred from assessing those fees would outweigh the value of any tariff collected, and that the removal of de minimis would require hiring forty thousand new Customs and Border Protection (CBP) officers. Such an increase in appropriations would likely be at odds with President-Elect Trump’s promise to downsize government.

More From Our Experts

The small-value shipments that benefit from a higher de minimis threshold have grown over time, from 410 million in 2018 to over 1 billion packages in 2023. These are not just purchases by consumers for end-use—such as clothing, shoes, and electronics—but also include intermediate inputs that are later transformed into other products here in the United States, as well as prototypes that U.S. businesses source from abroad to test out an idea before moving to production. Small and mid-size businesses are major beneficiaries of de minimis because they often purchase items in small batches.

Why Have De Minimis Entries Surged?

The rapid growth of de minimis packages has motivated much of the interest around reforming the rule or scrapping it altogether. In 2015, Customs and Border Protection processed approximately 134 million de minimis shipments. By FY2023, this volume surged to more than one billion packages, marking a 636 percent increase in less than ten years. The year-over-year difference between 2022 and 2023 alone was staggering, with total de minimis entries reaching 685.4 million in FY2022, translating into a 53 percent increase in just a year. This growth trend is expected to continue.

More on:

Trade

United States

RealEcon

However, claims about the source of this influx seem to be misplaced. For one, while the increased volume of de minimis shipments is sometimes attributed to the passage of the Trade Facilitation and Trade Enforcement Act of 2015—which raised the qualifying threshold from $200 to $800—this explanation inaccurately captures the nature of the growth. If the increase in de minimis entries were attributable to the threshold increase, one would expect to see a significant rise in the average value of de minimis packages. However, this is not the case. In fact, the average de minimis package is $55, a value still well below the original $200 threshold. This means that the vast majority of de minimis entries continue to be very low in value.

The larger challenge comes from the changing nature of the ecommerce market, which has seen increasing growth in direct-to-consumer purchases. This means that people are able to buy directly from producers, instead of going through a third-party retailer or wholesaler. This increasingly popular business model, matched with the rise of ultra-fast fashion brands like Shein—whose shipments increased over 2,000 percent since 2021—contributes to the dramatic increase in de minimis entries.

In addition, there are concerns that some companies are sending large shipments to Mexico to be broken down into de minimis qualifying packages to be imported across the southern border duty free. However, research has shown that de minimis is not the main motivator for this; rather, the existing trade war tariffs on China through Section 301, which were imposed by the Trump administration and maintained by President Biden, seem to be the cause. The 301 tariffs diverted trade to third countries, which noticeably grew as a source of imports for the United States where tariffs were high, such as on furniture, auto parts, and information technology hardware and consumer electronics.

Yet lawmakers and interest groups continue to raise several concerns about de minimis entries. For most, this is about curtailing the growth of shipments from China and reducing economic competition from low-cost Chinese goods. If the concern is the avoidance of 301 tariffs, then removing de minimis would help collect duties on those products. However, the proposals currently on the table are either too broad in application, which would impact trade beyond packages coming just from China, or they are loaded with unrelated issues.

For example, the Biden administration  has raised concerns about product safety and an inability to verify product specifications with manufacturers. Since de minimis products are still subject to inspection, investing in more advanced technology for customs to screen packages would do more to increase safety than removing de minimis. Other unrelated concerns that have been added to the conversation include issues of whether de minimis allows for illicit goods or those made by forced labor to escape customs enforcement. In fact, data from CBP shows that more than 90 percent of fentanyl is smuggled through passenger vehicles at legal points of entry, primarily along the southern border. Furthermore, the congressional Select Committee on the Chinese Communist Party reports that Temu has no auditing or compliance system to verify adherence of sellers to the Uyghur Forced Labor Prevention Act, instead relying on suppliers’ agreement to general terms of service despite there being no express prohibition for the sale of products originating in the Xinjiang region. Removing de minimis will not address the underlying problem for any of those issues. Therefore, any proposals on de minimis reform should be targeted at the main issue: the rapid growth of Chinese imports.

What Is Being Proposed?

Several bills have been introduced in the House and the Senate to address de minimis shipments. The Import Security and Fairness Act, led by Earl Blumenauer (D-OR) and cosponsored by Neal Dunn (R-FL), would restrict de minimis usage for imports from nonmarket economies and countries on the priority watch list—which currently includes Argentina, Chile, China, India, Indonesia, Russia, and Venezuela. Senators Sherrod Brown (D-OH) and Marco Rubio (R-FL) introduced a similar version of this bill in the Senate that includes additional de minimis reporting requirements.

In addition, Senators Bill Cassidy (R-LA) and Tammy Baldwin (D-WI) introduced the De Minimis Reciprocity Act, which would exclude Chinese and Russian goods and also call on the Treasury secretary to lower de minimis to reciprocal levels with other countries. For instance, products from Australia could be lowered to a $750 limit and those from France to just $155. Other countries have much lower limits, some as low as $10 or $20. Representative Gregory F. Murphy’s (R-NC) End China’s De Minimis Abuse Act seeks to curtail de minimis for certain products subject to certain trade remedies, require additional information for Section 301 imports, and impose new civil penalties for violations of de minimis law.

Most recently, Senator Ron Wyden’s (D-OR) bill—Fighting Illicit Goods, Helping Trustworthy Importers, and Netting Gains for America Act—would exclude “import sensitive” products labeled under Generalized System of Preference (GSP)—such as textiles and apparel—and products subject to antidumping and countervailing duties from qualification and impose a flat $2 fee on all de minimis shipments, alongside bolstering reporting requirements and data collection prerogatives. The U.S.-China Economic and Security Review Commission released a report this month that recommended removing de minimis benefits for ecommerce platforms in particular, avoiding the collection of duties for travelers and tourists bringing souvenirs and other goods back to the United States.

While varying in approach, these proposals respond to the same set of anxieties, but could fall short of addressing the problem of the growing volume of packages from China. A question left unanswered is whether these are really de minimis problems, or whether they are reflective of broader enforcement challenges that persist across all entry types. For example, one of the proposals calls for better screening of 301 imports, which would provide more information on the scale of the problem. On the other hand, the proposed rule changes from the White House are likely to limit the types of shipments eligible for de minimis, but it is not clear that this would actually reduce the volume of shipments. The bigger question is whether lawmakers are willing to take broad action that could harm trusted U.S. trading partners, and in turn, U.S. consumers, or whether a more targeted solution can be found among the various ideas on the table.

Does De Minimis Harm U.S. Competitiveness?

In examining the proposed rule changes, it is hard to ignore the fact that for most lawmakers the main issue at play seems to be a concern over Chinese companies harming U.S. competitiveness. As Congressman Jeff Duncan (R-SC) stated, “mass distributors are using e-commerce to abuse the de minimis provision to avoid billions of dollars of tariffs designed to put American manufacturers on a fair playing ground.” The White House has likewise called for increased protection for U.S. textiles and apparel manufacturers, but these responses are misguided for several reasons.

First, the United States generally lacks the ability to compete with a majority of the products entering through de minimis, particularly apparel coming from stores like Shein. With the cost of products being so low, any additional costs imposed on the products through tariffs would be minimal because the average cost of a clothing item from Shein is approximately $10.50. Even if a 100 percent tariff were applied on all of these shipments, the average cost would only be $21. Arguably, no U.S. company can feasibly compete with those prices.

Second, de minimis serves two critical functions for American small businesses. First, it allows small businesses, like Etsy sellers, the ability to purchase inputs for their products quickly and affordably. With limited resources available to expend on administrative fees, de minimis alleviates the need to hire a customs broker to accurately determine tariff code classification and pay tariffs on inputs, making production opportunities more accessible.

Without de minimis, higher input costs for the seller would ultimately translate into increased costs for consumers. In fact, a recent study estimates that de minimis entry has saved American consumers $7.8 billion in tariffs in 2021 alone, and that eliminating de minimis would “reduce aggregate welfare by $10.9–$13 billion and disproportionately hurt lower-income and minority consumers.” For Americans already struggling financially, the increase in tariffs would be noticeably felt in their pocketbooks.

Third, raising the cost of entries for import-sensitive products such as textiles and apparels is similarly misguided. The reality is that less than 3 percent of what Americans wear is made domestically. As the Congressional Research Service notes, apparel production “is generally restricted to high-quality niche products and U.S. government defense contracts,” and focused on product design and marketing instead of manufacturing. Unless the goal is to shift U.S. manufacturing to more low-value goods (which would be difficult for many other reasons, such as high labor and input costs), these proposals do not make a lot of sense.

Furthermore, according to a recent study by the U.S. International Trade Commission, the United States is the largest apparel importer, with 27 percent of apparel industry imports coming from Bangladesh, Cambodia, India, Indonesia, and Pakistan. Therefore, taking any broad-based action on apparel and textile imports could hurt the U.S. relationship with key developing country partners and raise the cost of those trusted inputs for U.S. producers and consumers. Section 301 tariffs already apply to 90 percent of Chinese apparel products, and that action has notably reduced imports from China and increased the diversion of trade in those goods. Raising the cost of importing those products across the board would therefore increase prices for substitutable goods from other countries.

Trade-Offs Abound on the De Minimis Question

The rapid increase in low-value shipments into the United States has rightfully left many policymakers scratching their heads over de minimis. This trend picked up during the COVID-19 pandemic as online shopping surged. But this is not just an issue of a singular trend. It is also the reality of U.S. consumer culture, and a desire to “shop like a billionaire,” as Temu advertises. Amazon has responded by creating its own low-cost purchasing site, called Amazon Haul, acquiring products directly from manufacturers in China. If Americans cannot be convinced to stop buying cheap stuff, it is hard to see how any of the de minimis reform proposals will have any significant impact on consumer behavior.

The bottom line is that de minimis serves to facilitate imports and provides significant cost-saving benefits for CBP, U.S. consumers, and producers. Making adjustments to de minimis thus involves some trade-offs. Addressing the inflow of low-value shipments will require a targeted approach, as well as increased capacity for CBP to monitor entries and collect additional data.

Before taking action, Congress should request the U.S. International Trade Commission to undertake a study that examines the direct-to-consumer business model of Chinese ecommerce giants and assesses the trade-offs of de minimis reform proposals. If circumvention of the 301 tariffs is the main problem, Congress should focus its legislative efforts on that issue alone. In rushing to take action, Congress could end up applying too blunt a remedy that could harm our trusted trading partners, raise inflation, and do little to curtail the source of the problem. Furthermore, with President-Elect Trump promising to take broad-based tariff action on all imports upon taking office, Congress should carefully weigh whether it wants to further burden Americans with higher taxes on their purchases. With the holiday shopping season in full force, Americans should also be aware that if de minimis is removed, the cost of everything they buy online could go up.  

Creative Commons
Creative Commons: Some rights reserved.
Close
This work is licensed under Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International (CC BY-NC-ND 4.0) License.
View License Detail
Close

Top Stories on CFR

Israel

Israel must act firmly to enforce the Lebanon agreement or it will collapse within months--and only Israel can be expected to enforce it.

Iran

Iran’s nuclear program and missile arsenal have garnered increased international scrutiny amid its flaring conflict with Israel.

Artificial Intelligence (AI)

The rise of generative artificial intelligence (AI) has been breathtaking, and American firms are leading the way in showing the potential of a new AI-propelled world. But rivals like China are gaining ground, with major consequences for the U.S. economy and security.