Suppose you bought from a retailer (either in-store or electronically) a pair of shoes priced at $100. There is a 98 percent probability that the shoes were manufactured overseas and a 73 percent probability that they were made in China. Let’s assume that the retailer indeed imported your shoes.
Consider scenario A. The retailer imported your shoe as part of a bulk import. The bulk import means that nearly $20 of the price you paid is a duty/tariff that the retailer must pay to the federal government for importing your shoe — and other merchandise — in bulk.
Now consider the slightly different scenario B. Your retailer still imported the shoes but instead of importing them as part of a bulk purchase, it arranged for the shoes to be shipped directly from the overseas manufacturer to you as a single shipment and sale in one day. Further, because the shipment is addressed to an individual, and valued at or under $800, the Tariff Act of 1930 exempts you from paying any duty, fee, or tax. This exemption from paying duties, fees and taxes — called the de minimis exemption — allows the retailer to list the shoe at $85 (considering $5 as a shipping fee).
Why does this matter now?
On Jan. 18, Rep. Earl Blumenauer (D-Ore.) introduced the Import Security and Fairness Act, as part of the America Creating Opportunities for Manufacturing, Pre-Eminence in Technology, and Economic Strength (COMPETES) Act of 2022.
The act has two main aims. First, to “prohibit goods from non-market economies, such as China, from benefitting from de minimis treatment.” Second, to “require CBP [U.S. Customs and Border Protection] to collect more information on all de minimis shipments and prohibits use by bad actors.”
On Feb. 4, the House passed the America COMPETES Act and caught up with the Senate, which passed the U.S. Innovation and Competition 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 the USICA and arrive at the final bill that may reach the president’s desk.
Who gains? Who loses?
Comparing the two scenarios helps identify the beneficiaries and the cost-bearers of the de minimis exemption.
- The de minimis exemption saves the customer $15. The freight and shipping company/companies earn(s) $5. Conversely, the federal government loses a potential revenue of $20.
- By offering a price lower by 15 percent, the direct-to-customer retailer can acquire new customers and retain existing customers. Conversely, by offering a price higher by 15 percent, the bulk-buyer retailer is challenged to acquire new customers and retain existing customers.
- CBP benefits by using its limited resources to focus on its core job — that of screening packages for illicit goods — rather than validate the value of 2 million low-value shipments that are imported each day.
Recommendation
Let us return to the two primary aims of the Import Security and Fairness Act.
The first aim is to prevent companies from China and other countries from benefitting from the de minimis exemption. This aim is misleading. The beneficiaries are not the companies but the American consumers and small businesses who can save an average 11 percent duty if they buy from a retailer that ships the imported good directly to the consumer. The second aim is to allow the CBP to collect more information about the de minimis shipments. The CBP’s voluntary Section 321 Data Pilot — which began in August 2019 and is currently planned to end in August 2023 — aims to overcome this inadequacy.
The need of the hour is to encourage spending, remove friction and contain inflation so that Americans have renewed confidence in the economy and the government. House and the Senate negotiators should focus on the stated aims of the act and question whether and how removing the de minimis exemption would achieve the aims. Removing the exemption reduces consumer choice and compels consumers to pay more for alternative methods of purchase. Such methods are simply a tax increase on everyday Americans who are already being pressed by price increases across many of the basic goods they purchase.
Vivek Astvansh, Ph.D., is a marketing professor at the Kelley School of Business and an adjunct professor of data science at the Luddy School of Informatics, Computing, and Engineering, Indiana University. He researches how politics affects businesses and what actions managers can take to appropriate benefits and mitigate costs.