The recent suspension of the de minimis exemption marks a significant change in U.S. import policy, affecting a wide range of businesses and consumers. In 1938, officials made things better by issuing an exemption that made imports valued at $800 or less duty-free. The goal of this modernization was to reduce burdens on customs administrations while reducing the costs of collecting low-value import duties. The policy triggered a rapidly growing e-commerce industry. It provided the ability for companies to ship small parcels without the burden of large duties or customs inspections.
Then came the criticism of both then-President Donald Trump and then-President Joe Biden, which spelled the end for this decades-old policy. Surprisingly enough, both presidents–Trump and Biden–made the same case that criminals exploited the de minimis exemption to bring in illegal nefarious goods. They argued that this practice was hurting U.S. companies. Earlier this year, Trump signed an executive order that sought to streamline the process by which the rule could be repealed. Extending sunsetting originally set to expire in 2027. In turn, businesses are presented with more complex challenges that have potentially far-reaching financial consequences.
As of July 2021, U.S. Customs reported that the de minimis exemption made up more than 90% of all cargo coming into the United States. This astounding figure underscores its crucial importance in keeping U.S. international trade and commerce moving. Now that the exclusion is paused, companies need to consider the tariffs on a country by country basis. This significant change would only increase costs for consumers.
Katherine Theobalds is founder and creative director of Zou Xou. She raised alarm over how this proposed change would harm her business. She referred to the blanket nationwide suspension of the de minimis exemption as “political theatre.” Theobalds stated, “I’ve reached the point of acceptance, but when I first heard the news about two and half, three weeks ago, I felt like it might be the end for my business.” She added, “It still might – that remains to be seen,” reflecting the uncertainty many small businesses face in light of this new policy.
Andrew Smith, managing director of Zou Xou, joined Theobalds in highlighting the sudden disruptions the shipping process has faced. “There is a lot of uncertainty at the moment,” he said. He emphasized the need for transparency in shipping costs: “We’re aiming for full transparency so people know what it will cost with certainty and then they can decide whether they want to make the purchase or not.” Smith further pointed out that companies in China are “months ahead” in getting the requisite paperwork taken care of. Companies in other countries are just now rushing to respond.
This has left Zou Xou, as keen to restart orders to the U.S., its principal export market, within a fortnight. The company doesn’t know how many customers would be scared off by increased expenses due to tariffs. Theobalds explained that most consumers are buying from her for the artisanal, homemade quality of her products, not driving away business to large mass-retailers. Our customers don’t want that, they want the artisanal quality, and that’s why they come to us. They would have otherwise had to travel to a big box retailer,” she said.
The effects of the DOT policy change go well beyond small businesses, as Zou Xou’s owners can attest. Tapestry, the parent company of Coach, recently announced a $160 million impact to its profits due to the shifting tariff policies. One-third of that loss is due directly to the elimination of the de minimis rule. Even bigger firms like Tapestry have their struggles as they adapt to these new fiscal conditions.
As trade expert Deborah Elms has cautioned, small and medium sized firms will be hit hard. They could be particularly burdened by the costly audits that are required to clear U.S. customs. She remarked, “If it’s too expensive, they’ll probably go to Walmart or Target to buy it there,” highlighting the potential shift in consumer purchasing behavior due to increased costs.
The bottom line is that consumers are already being hurt by the cascading impacts of these changes. Christopher Lundell, a 53-year-old psychologist and organic farmer, discovered this summer that the de minimis exemption had been dropped. This epiphany happened when he attempted to purchase a rare $5 record from a private seller in the UK. This unfortunate experience is emblematic of how consumers can today be surprised by onerous fees and additional complexities when buying products from overseas.
Letters and personal gifts under $100 in value will remain duty-free. Most consumers and businesses are concerned that this threshold will not mitigate the broader impact created by the suspension of the de minimis exemption. Small businesses are grappling with a changed new-normal that’s uncertain, complicated and increasingly expensive. What impact these changes will have on the future of e-commerce and international trade over the next several years remains to be seen.