To understand the origin of the free-trade excesses that created record trade deficits and set in motion US President Donald Trump’s tariff storm, consider the so-called de minimis exemption.
That law — often erroneously referred to as a loophole — allows for duty-free entrance of items with a value of less than US$800, which is a much more lenient threshold than that of any of the other major countries with similar rules. Amid the flurry of tariffs that Trump announced last week, he also canceled those duty-free entries for China and Hong Kong by applying either a fee or tariff on the imports. He also left open the door for expanding that treatment to other countries.
The only thing holding Trump back on ending de minimis — which he first tried in February — is the capacity at US Customs and Border Protection to process the packages, which have been coming in mostly unchecked.
Under de minimis, more than 1 billion packages flowed into the US in 2023, compared with 153 million in 2015, the Congressional Research Service said. The surge was fueled by low-cost Chinese sellers, including Shein and Temu, shipping directly to US consumers.
The de minimis rule needs to be fixed. A light touch would reduce the duty-free limit to US$200, where it was before 2016 — or perhaps to the level of Europe, which is about US$165 (150 euros). In fact, de minimis could be a true reciprocal tariff; in that scenario, the US would match its rate to that of each importing country. Under a reciprocal rate, the exemption for Chinese goods would be US$7 and about US$68 for Japanese products. Australia has one of the highest de minimis exemptions at US$600.
The reason the de minimis rule was created back in 1938 is still valid. For some inexpensive, imported goods, the formal customs process costs more than the item itself. The exemption for mailed items started at US$1 and was increased to US$5 in 1978. In 1993, it was unshackled from its original purpose and raised to US$200. Then it jumped to US$800 under the Trade Facilitation and Trade Enforcement Act of 2015.
That is why the de minimis law cannot be called a loophole. US Congress cranked up the threshold beyond any customs processing cost by design. The rule is not a workaround — it is an incentive to entice other countries to follow suit.
The text of the bill makes that purpose crystal clear: “It is the sense of Congress that the United States Trade Representative should encourage other countries, through bilateral, regional, and multilateral fora, to establish commercially meaningful de minimis values for express and postal shipments that are exempt from customs duties and taxes and from certain entry documentation requirements.” It did not work.
As that language shows, the free-trade fever still lingered in 2016, when the bill was signed into law. However, even then, cracks were starting to emerge. It was already clear that China’s 2001 entry into the WTO on generous developing nation terms had not, as the West had hoped, resulted in it loosening its authoritarian grip. Instead, it had targeted industries to dominate, from steel to ships to electronics to auto parts. That has since evolved to include solar panels and electric vehicles — all enabled by massive trade surpluses. Now, China is financing a military build-up that is underpinned by its massive manufacturing base and is gaining technological prowess in robotics, autonomous flight, quantum computing and space exploration.
When the US set global trade rules in the late 1940s, the world was still struggling to emerge from the ashes of World War II. Those rules unleashed unprecedented prosperity and at first, benefitted the US, then a manufacturing giant. However, as European and Asian nations rebuilt their economies and manufacturing bases, the US’ domination eroded away.
In the final stages of that catch-up process, large US companies, spurred by the North American Free Trade Agreement and the lure of China, sought to remain competitive by tapping the low-cost labor that was undercutting them. Now, as the COVID-19 pandemic made painfully clear, the US finds itself exposed, without sufficient domestic manufacturing and supply chain capacity to take care of some of its most essential needs.
China’s entrance to the WTO, which seemed like a golden opportunity for US companies to tap a market of more than 1 billion consumers, has tipped the global trade system so far out of balance that it is now vulnerable to Trump’s attacks. The expanded de minimis exemption is a perfect example — the US kept opening its market, but that action was not mutual. US consumers got the short-term benefit, but it ultimately made the country less competitive.
The trade imbalances have built up over decades. An attempt to reverse that overnight — or even over the course of a four-year presidential term — is risky at best. However, fixing the de minimis exemption is a good place to start. Rather than abruptly eliminating it, the president should lower the exemption, perhaps to the same level of other countries. The inexpensive Chinese goods would continue to flow in, but they would cost a bit more, be shipped by ocean containers instead of aircraft and hopefully be checked properly by customs.
The same argument could be made for global trade. The underlying reasons for free trade make sense and should continue, but the system must be more balanced.
In the fog of that trade war, the market is saying Trump’s tariffs went too far and too fast. Sounds familiar: On a much smaller scale and in the opposite direction, the US Congress did the same when it approved the big increase in the de minimis exemption almost a decade ago.
Thomas Black is a Bloomberg Opinion columnist writing about the industrial and transportation sectors. He was previously a Bloomberg News reporter covering logistics, manufacturing and private aviation.
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