On Sunday, I did my best to describe what Trump had proposed vis-a-vis tariffs, which is always dicey since he’s willing to publicly negotiate and change positions. His legal justification for the tariffs was about blocking the flow of fentanyl into the U.S.. Yesterday he paused the tariffs against Canada and Mexico, arguing that they were negotiating and taking his national security concerns seriously. I have no insight on whether that’s true, but what is true is that the China tariffs went into effect, an additional 10% of goods imported from China on top of the already existing levies put in place in 2018.
If these China tariffs continue, it will be costly for certain dominant firms. There’s no exemption for Apple, and CNBC analysts this morning were discussing how this move could cost the company 3% of its profits. A quarter of the cost of products sold by Amazon come from China. Even Meta, which might seem immune, garners billions of dollars in advertising from Temu and SHEIN, which together make up 4% of Facebook’s ad revenue (and 2% of Instagram’s.) Those companies are likely to pull back on ad spending.
As part of this flurry of orders, Trump addressed a trade loophole that has underpinned the business models of Temu, SHEIN, and Amazon, the de minimis trade loophole that lets those companies to send Americans imports up to $800 per day without having to pay tariffs or go through formal customs procedures. It’s important to note that this Executive Order is premised on national security and ending duty free access for this stuff coming from China is only part of this.
That said, while a lot of people have focused on forcing shipments previously qualifying for de minimis to pay tariffs, and that matters, particularly for items at the high end of the $800 range. An increased tariff on a $300 bike is meaningful. Bicycle stores have to import lots of bikes and pay tariffs, and are unfairly undercut by direct to consumer middlemen like Amazon who avoid these costs.
But for the fast fashion business, a new tariff is far less important than formal customs procedures, what’s called ‘formal entry.’ A slightly added tariff cost to a $3 t-shirt is irrelevant, but having to get a licensed customs broker to handle that $3 t-shirt shipment and post a bond to insure it makes the whole model of sending low-value goods directly to consumers from China far too costly to make business sense. If Trump required formal entry for all of these low-value imports, then the biggest ecommerce firms will have to upend their supply chains, likely bringing in cheap goods in bulk and then doing the fulfillment from the United States.
As I described, in the orders put out over the weekend, Trump didn’t require formal entry for imported articles from China, only requiring them to pay the tariff but letting them avoid the normal customs procedure. That would bad for national security; the lack of formal customs procedures means lots of fentanyl and unlawful products are coming in without inspection. And given this loophole now attracts four million packages ever day, there simply is no way to inspect much of any of it to try to find the dangerous stuff. Or at least that’s what it seemed like.
It turns out, the administration might be closing both the tariff loophole for de minimis, and requiring formal entry for low-value imports from China – at least those coming in by mail. In a new order put out by the Customs and Border Patrol (CBP) that would go into effect tomorrow, CBP did what looks like a key change. I bolded part of the relevant sentence:
“Without regard to their value, no mail shipments from China will be cleared or released by CBP unless and until formal entry is properly filed.”
That sentence, notably, just says ‘mail shipments.’ If that change were to also cover air cargo and other means of bringing in these goods, that would be a huge change and require massive logistical shifts in supply chains, as well as big changes for customs. Oddly, there’s also a circular released by customs giving instructions to importers on how to comply, and that one suggests that the Customs loophole is not being closed. It says the following:
Requests for de minimis entry and clearance for ineligible shipments will be rejected. The filer/importer has the option of filing an appropriate formal or other informal entry and paying all applicable duties, taxes and fees.
The bolded part of the second sentences implies informal entry is still in effect, contradicting the initial order. In other words, it’s not clear what position CBP takes formal entry.
Aside from this inconsistency, there are a couple of serious problems with what has happened on trade. First, this order only applies to China, so even if customs is requiring formal entry from that nation, importers can just bring packages to Mexico, Canada, Vietnam, or any other country, and ship them to the U.S. for de minimis treatment. Second, this order is about national security/fentanyl, not trade. Third and most importantly, Trump may just cut a deal with China and get rid of this order.
The President has separate legal authority to end the de minimis loophole for all countries, but hasn’t used that. Instead, he’s using a weird and legally tenuous approach that applies to just China. I don’t want to be overly pessimistic, these steps are in a good direction.
But if you’re a business leader, and Trump is constantly changing his mind and giving different rationales for what he’s doing, some of which might stand up in court and some of which might not, are you going to invest in a new supply chain? What would you even invest in? At a certain point, does Trump become the boy who cried tariff?
So what gives? I don’t know. It might be the case that the administration doesn’t know either.
UPDATE: It was all a sham. On Thursday, Trump met with the CEO of FedEx. On Friday, the White House released a new executive order canceling the change to de minimis. According to this new EO, the Secretary of Commerce is authorized to re-impose the restrictions, but at this point I don’t believe there’s a serious attempt here.
It’s corrupt if Trump met with the CEO of a company reliant on the de minimis exception, and then did a huge favor for that company. Is that what happened? The timing indicates that, as CBP was implementing the original order as of Wednesday the meeting happened on Thursday, and the cancelation came out on Friday. I tweeted this, and someone at the White House reached out to tell me that the order canceling de minimis did come out on Wednesday, before the meeting with the CEO of FedEx, but was accidentally not uploaded to the White House’s website until Friday.
That’s possible, I suppose, since they are doing a bunch of stuff and these kinds of mistakes do happen. But I talked to two different trade experts, and they weren’t buying that story. At any rate, de minimis is still in force, and the fentanyl is flowing. That’s what matters.
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cheers,
Matt Stoller