Published 02 April 2024
Getting small businesses to export is a common, yet challenging, goal of almost all governments. De minimis rules provide global shipping opportunities to MSMEs. Reducing or removing the de minimis threshold will close off one of the most promising avenues for MSMEs to grow and greater consumer choice.
Smaller firms increasingly start their export journey by using an important trade provision called de minimis. Unfortunately, this key global rule that has supported economic growth and development for many smaller firms is under threat. It may be reduced or eliminated, closing off a valuable trade opportunity for micro, small and medium enterprises (MSMEs) and limiting buying options for global consumers.
An administrative convenience
De minimis means too small or unimportant to be worth the bother. In the trading regime, de minimis is a recognition that the costs of collecting duties or tariffs at the border on small value items can outweigh potential revenue collected. De minimis can provide three key benefits: a waiver of possible customs tariffs, simplified customs paperwork, and a waiver from value added taxes.
Early application of the provision, which started in the United States in 1930, was limited. When shipping was costly and difficult, firms did not send many low value products to overseas markets. Product shipments were made by sea and managed by export wholesalers and import wholesalers who took responsibility for content and value declarations, the costs of which were added to the price of products in the hands of consumers.
Benefits for MSMEs and consumers
However, with the rise of digital communications and changes in transportation costs, even the smallest firms could find new customers anywhere in the world. De minimis provided global shipping opportunities to MSMEs without worry over customs duties or value added tax collection on their low value goods.
The rise of ecommerce also allowed customers to find products from firms across the globe, dramatically expanding their choice set. Consumers could select goods from anywhere in the world, even if they lived in relatively isolated locations or had small domestic markets.
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Problems attributed to de minimis
These opportunities came with what has come to be seen as three problems. First, many governments have confronted a steep rise of volumes of packages at the border. Second, officials have become increasingly uncertain over what is contained in packages. Third, governments are concerned over a potential loss of revenue or loss of competitiveness for domestic offline retailers compared to online sellers.
These challenges have, in turn, led to new calls to adjust or even eliminate de minimis. But most changes risk undermining the best route to international growth for MSMEs and limit consumer choice. Changes like dropping tariffs to zero might end up making exports uncompetitive for smaller firms, leading to the closing of key markets. Finally, most of the worries of opponents are not actually about de minimis, but the provision has become caught up in larger complaints about trade.
Exponential e-commerce growth
In the nearly 30 years since Amazon opened the first online sales platform to sell books, the volume and scale of electronic commerce packages has skyrocketed. The ensuing tsunami of overseas shipments has put additional pressure on customs officials at the border. Many parcels arrive under a de minimis rule, which means that goods are allowed to file a more simplified set of customs paperwork and do not pay potential customs duties. In most markets, imported packages falling below the threshold are also exempt from national goods and services (GST) or value added (VAT) taxes.
The costs and complexity of collecting duties and taxes on small value purchases are often high, which can lead to revenue loss instead of revenue gain. It is precisely because the costs of recovery can be so substantial that governments originally started waiving tariffs and taxes on low-value shipments. Customs officials at the border could be freed up to focus on higher risk shipments.
The sale of physical goods ordered online by consumers worldwide reached an estimated US$2.79 billion.1 Despite an estimated compound annual growth rate of nearly 10%, e-commerce delivery of goods still only represents 13% of the market. This means that there is likely to be significant room for additional expansion, especially in markets where online penetration has been limited.
Inconsistency problems
Not all goods qualify for de minimis treatment. Any goods that are valued above the threshold are required to pay duties or tariffs, taxes, and submit full, formal customs declarations.
Even qualifying goods can face challenges. There is no consistent threshold for de minimis, and the rules can be extremely complicated.
De minimis is currently set per person per day at US$800 in the United States; at US$150 for Korea (although shipments from the US are exempt up to US$200); Malaysia at MYR500; Singapore at S$400; the European Union at EUR150; Canada’s limit is C$20 (except for shipments from the US and Mexico where the level is C$150 on duties and C$40 for taxes); and Japan has a threshold of under JPY10,000, but it can vary by tariff line.2 In some instances, the value is calculated by excluding transport and insurance costs, while other markets include both or only one.
Because the value of de minimis is not the same everywhere, smaller firms can be caught off guard, subjecting their customers to unexpectedly high import duties and tax payments. This can affect the perception of the product and the brand. Uneven de minimis levels can make it difficult for small firms to manage pricing, meaning that most firms will choose to limit their export options to one or two markets.
De minimis should not be viewed as a "get out of jail free" card. Every shipment crossing borders must uphold certain requirements. Shippers are always required to provide information on the content and customs officials have the right to inspect any package.
Anyone bringing products into the United States, for instance, is only allowed to claim one tax-exempt de minimis shipment per day, valued at under US$800. Simplified paperwork required for de minimis shipments includes the use of a commercial invoice showing an accurate value for the products. Violation of the rules can lead to significant fines and penalties.
In most jurisdictions, controlled goods such as alcohol and cigarettes are not entitled to de minimis treatment. Standard quarantine and other sanitary and phytosanitary rules apply. As a principle, all shippers are required to follow the same rules on import and export, including for controlled or prohibited goods. Firms are required to follow any rules on sanctions or penalties resulting from anti-dumping or countervailing duty (AD/CVD) cases.
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Government responses in Australia and Singapore
Despite these guardrails, many governments view a situation of growing packages with suspicion. Many officials have been subjected to furious lobbying by both offline and online retailers about the consequences of growing sales from e-commerce channels.
As a result, some governments, such as Australia, have started adjusting de minimis. The Australian government, for instance, considered eliminating the de minimis threshold completely from a generous A$1000 in the wake of strong outreach by offline retailers.3 After further study, the government decided not to adjust the de minimis threshold but to remove the exemption for Goods and Services Tax (GST). In other words, arriving packages below the threshold must pay the Australian GST but do not have to pay relevant tariffs or duties. Packages can still arrive using simplified information for customs clearance documentation.
A big part of the reason for maintaining de minimis in Australia was that the costs of collecting and remitting tariffs on low value goods was judged to be too high to be offset with whatever revenue might have been collected. Eliminating the rule would have imposed additional burdens on small firms outside Australia and limited goods available to citizens shopping online from smaller retailers.
Australia now requires platforms to collect and remit GST on behalf of every foreign supplier with goods sold via the platform. Firms that do not sell via a platform that have an annual turnover above A$75,000 have had to register with Australia’s GST system and begin paying GST on inbound shipments once they have reached the threshold.
The solution chosen by Australia was designed to improve tax neutrality between local and overseas sellers. It put the burden of managing tax collection back onto the overseas seller.4 It is possible that Australia’s actions have helped level the playing field between online foreign retailers and offline local retailers. Australian consumers are now charged GST on overseas goods and may also be paying more to platform operators that have had to take on responsibility for tax collection and remittance for all listed sellers.
The Australian Productivity Commission recommended periodic comprehensive reviews to consider adjustments, especially to the registration system and carefully monitor changes in emerging e-commerce technologies.5
Following the Australian model, Singapore imposed a similar change to the collection of taxes on low-value goods in January 2023, with GST due on all products imported via air or post from overseas GST registered suppliers.6
The challenge for US regulators
Because of its size, the US consumer market is the most appealing market for online sellers around the world.
But the solution to the problem of low-value imports that Australia and Singapore have used – treating duties and taxes in de minimis differently – is not available to the United States because the US does not have a national level GST or VAT. Instead, some members of Congress are currently working on a bill to drop the US de minimis level from US$800 to zero.
De minimis in the US originated in Section 321 of the Tariff Act of 1930 and is still often referred to as Section 321 imports. Until 2015, the US de minimis rate was US$200. It was raised to US$800 under the Trade Facilitation and Trade Enforcement Act (TFTEA) to allow consumers greater access to overseas goods and match the level of duty-free access granted to Americans returning from trips abroad.
Congressional members, however, have been carefully watching the sharp rise in the import of e-commerce goods, especially from China. There is a growing concern that Chinese sellers are taking advantage of a high de minimis level to ship a wide range of packages and to send even more goods by splitting shipments into sub-US$800 packages to further avoid tariffs and taxes.7 However, importing firms are not allowed to declare more than one Section 321 import per day.8
The size of the cross-border e-commerce market for the United States reached US$1 billion in 2023, with more than 80% of packages, totalling 880 million, arriving by air.9 Most of these goods are sent via express carriers, which means that the vast majority of shipments arrive in the US with full customs declarations.
Package content review is the real problem
Most of the goods shipped to the United States are included in several ongoing pilot programs that involve additional data collection on the content of packages. More than 50 different federal agencies are involved in monitoring and clearing de minimis shipments under existing rules. The Food and Drug Administration (FDA), for instance, maintains the same regulatory practices for all shipments, regardless of declared value at the border.
The ability to review packages is an important element of de minimis. One concern that has been repeatedly raised in the United States over e-commerce shipments has been the use of Section 321 shipments to evade inspection and send illegal products like fentanyl or fentanyl precursor chemicals across the border. However, all goods arriving through any channel needs to include information about the contents of the package. High-risk products can be screened either manually or using a variety of technologies to verify the contents of the goods.
The volume of packages has challenged the ability of border agencies to effectively screen goods. While technologies exist to facilitate clearance, there do not appear to be enough devices or sufficient staff to manage the workload.
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Eliminating de minimis rules will not resolve the package content screening problem. If governments are concerned about the contents of packages arriving through de minimis channels, a better option is to increase resources to border agencies for managing shipments of all sizes, with sufficient tools to target high-risk packages, and leverage available technological solutions for improved enforcement of existing rules and regulations.
De minimis thresholds are not unreasonable
Although inconsistent between countries, de minimis thresholds are not currently set at excessive levels. A reasonable threshold provides critically important benefits to smaller firms and consumers and supports diversified trade flows. Reducing or eliminating de minimis is unlikely to yield substantial revenue for government, but will certainly add costs and complexity to firms, particularly for MSMEs.
Retaining de minimis is essential for MSME growth for all economies
Getting MSMEs to grow is a common goal of almost all governments and the subject of a multitude of economic policies across the developing and developed world. Getting small companies to export is even more challenging. De minimis provides critically important help in reducing some of the obstacles for small businesses to engage in trade. Removing or reducing the threshold will close off one of the most promising avenues for many small businesses to grow and to support greater consumer choice.
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[1] See https://www.statista.com/outlook/emo/ecommerce/worldwide#revenue accessed March 11, 2024
[2] See, for example, the listing by the Global Express Association which provides information for 89 markets. https://global-express.org/index.php?id=271&act=101&profile_id=-1&countries%5B%5D=-2&search_terms=&question-filter=&qid_34=1&qid_34_optid=1&qid_35=1&qid_36=1&qid_92=1 accessed March 11, 2024
[3] See Collection models for GST on Low value Imported Goods, Productivity Commission Inquiry Report No 86, 2017, https://www.pc.gov.au/inquiries/completed/collection-models#report accessed March 11, 2024
[4] See the case study information submitted to the World Customs Organization on Australia, https://www.wcoomd.org/-/media/wco/public/global/pdf/topics/facilitation/activities-and-programmes/ecommerce/7_case-studies_revenue-collection-approaches_en.pdf?db=web accessed March 11, 2024
[5] See Review of GST, Board of Taxation, December 2021, https://taxboard.gov.au/sites/taxboard.gov.au/files/2022-03/bot_review_of_gst_lvig_report.pdf accessed March 11, 2024
[6] See https://www.iras.gov.sg/taxes/goods-services-tax-(gst)/consumers/gst-on-imported-low-value-goods accessed March 11, 2024
[7] https://www.cnbc.com/2024/03/06/lawmakers-stakeholders-coalition-against-de-minimis-import-loophole.html accessed March 13, 2024
[8] See https://www.cbp.gov/trade/trade-enforcement/tftea/section-321-programs and https://www.cbp.gov/sites/default/files/assets/documents/2021-Feb/Administrative%20Ruling%20One-Pager_02122021.pdf
[9] See the statistics provided by the US Customs and Border Patrol, https://www.cbp.gov/trade/basic-import-export/e-commerce accessed March 13, 2024
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Author
Deborah Elms
Dr. Elms is Head of Trade Policy at the Hinrich Foundation in Singapore. Prior to joining the Foundation, she was the Executive Director and Founder of the Asian Trade Centre (ATC). She was also President of the Asia Business Trade Association (ABTA) and the Board Director of the Asian Trade Centre Foundation (ATCF).
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