New tariff rules could reverse a ‘paradigm shift’ in retail

WASHINGTON — Major U.S. retailers including Amazon and Walmart have been quietly exploring shifting toward a business model that would ship more goods directly to consumers from Chinese factories and require fewer U.S. workers in retail stores and logistics centers.

The plans have been driven by the rocketing popularity of Chinese e-commerce platforms including Shein and Temu, which have won over consumers with their low prices. These platforms ship inexpensive products directly to consumers’ doorsteps, allowing them to bypass U.S. tariffs on Chinese goods, along with the hefty costs associated with brick-and-mortar stores, warehousing and distribution networks.

Rising competition from Shein, Temu and other Chinese companies is pushing many major U.S. retailers to consider shifting to a similar model to qualify for an obscure, century-old U.S. trade law, according to several people familiar with the plans. The law, known as de minimis, allows importers to bypass U.S. taxes and tariffs on goods as long as shipments do not exceed $800 in value.

But that trend toward changing business models may have been disrupted Friday, when the Biden administration abruptly moved to close off de minimis eligibility for many Chinese imports, including most clothing items. In an announcement Friday morning, the Biden administration said it would clamp down on the number of packages that come into the country duty-free using de minimis shipping, particularly from China.

The Biden administration’s changes will not go into effect immediately. The proposal will be subject to comment by industry before being finalized in the coming months, and some imports from China would still qualify for a de minimis exemption.

But Friday’s action may head off a change that has been looming in global retail. Amazon has been preparing a new discount service that would ship products directly to consumers, allowing those goods to bypass tariffs, according to people familiar with the plans. Even companies that preferred to keep their business models as-is — such as Walmart — have been forced to consider using more de minimis to compete.

Walmart declined to comment. An Amazon spokesperson said in an emailed statement that the company was “always exploring new ways to work with our selling partners to delight our customers with more selection, lower prices and greater convenience.”

At Apex Logistics International, Steve Story helps companies that import products from China take advantage of de minimis. Story, who is the company’s executive vice president for customs and international trade, said that de minimis had brought about a “paradigm shift” in retail. U.S. companies were having to explore the provision “whether they want to or not,” he said.

“It’s get on board or get left behind,” Story said. “The Walgreens, the retail stores, if you don’t get online, you don’t get onboard with this, you’re going to get left behind by Shein, Temu and Alibaba.”

Story said he had helped Chinese sellers bring goods into the United States tariff free by shipping through Amazon fulfillment centers. A customs ruling in 2020 allowed Chinese companies to act as “nonresident importers,” meaning they can essentially ship products tariff free to themselves, in care of Amazon warehouses around the United States.

To bring goods into the United States, retailers have traditionally arranged for shipping containers full of products to arrive from China at U.S. ports. Those goods would then be trucked to a company’s warehouses and retail stores before being sold to consumers.

But retailers have been increasingly bypassing that process by individually packaging and shipping items directly from China to consumers under the de minimis law. With that method, the shopper is the official importer, rather than the retailer or e-commerce platform, and the value of the shipments largely stays under an $800 threshold.

In addition to avoiding tariffs, sellers do not have to provide as much information to U.S. Customs and Border Protection as with larger shipments.

That model has taken off since the Trump administration in 2018 and 2019 imposed tariffs on many Chinese goods that retailers brought to the U.S. through traditional channels. The surge in online ordering during the pandemic also helped to popularize such shipments, which now make up roughly one-fifth of e-commerce orders.

The number of packages entering the United States each year under the de minimis rule has ballooned to more than 1 billion in 2023, up from 140 million a decade ago. China is by far the biggest source for such packages, sending more than all other countries combined, according to the customs agency.

U.S. companies and trade groups have complained that those rules set up a two-tiered system, in which brands with U.S. stores and warehouses had to pay higher tariffs than those that shipped directly to consumers.

For example, an importer shipping 10,000 cellphone screen protectors into the United States could save more than $7,000 in taxes and duties if it individually packaged and shipped the protectors to consumers, rather than routing them through a warehouse, according to a presentation Apex Logistics prepared for its clients.

Other U.S. businesses have complained that the de minimis exception puts pressure on retailers that employ Americans in their distribution centers. Lobbying groups in favor of eliminating de minimis have said the provision has recently led to the shuttering of some of the remaining textile plants around the United States.

Columbia Sportswear, based in Portland, Oregon, said retailers are now needing to factor U.S. trade policy into financial calculations about their supply chains, just like the price of real estate and labor. Columbia has two distribution centers in the U.S. and one in Canada.

Peter Bragdon, general counsel at Columbia Sportswear, said de minimis was like a big “tax incentive that the U.S. is giving you to take the job somewhere else.”

“It changes the math,” Bragdon added.

Mike Hesse, CEO of Blue Ox, which manufactures tow bars for recreational vehicles in Nebraska, said he recently discovered Chinese knockoffs of his products being sold on Amazon and brought into the country through de minimis.

“You’re talking about these 45-foot motor homes towing 10,000-pound vehicles,” he said. “They’re a safety issue, plus the consumer is being duped into thinking they’re buying an American-made product. That’s how de minimis is affecting me.”

In testimony in a U.S. government hearing in 2022, Borderworx Logistics, a company that arranges warehousing and customs services, said that some Chinese companies use illegal tactics to benefit from de minimis, such as doctoring invoices so the value is under $800 even when products cost more.

In other cases, companies might create fake shipping manifests and customer orders to send many individual packages duty-free to the United States, then reassemble them into larger shipments to send on to major clients, Borderworx said.

Some retailers have also moved their warehouses out of the United States, relocating them in Canada or Mexico. Then, when an American customer orders an item, it can be quickly and legally brought into the United States duty-free. During those relocations, U.S. jobs are lost.

Some companies have argued that this system gives warehouses in Canada and Mexico an unfair advantage, and that to even the playing field, the same rules should be extended to free trade zones around the United States. In this scenario, goods from China could be shipped in larger quantities into warehouses in U.S. free trade zones, then repackaged individually and sent to consumers duty-free.

As the Biden administration seeks to restrict de minimis shipments from China, there are concerns that such shipments from Canada and Mexico could spike, as Chinese companies continue to seek out a duty-free path to American customers.

A senior Biden administration official said in a briefing Thursday that there were likely to be efforts to circumvent any changes made to de minimis law, and that the administration was calling on Congress to help enact comprehensive reforms.

Republican and Democratic lawmakers have made various proposals to narrow the de minimis exemption. But it has been unclear whether lawmakers could come together around a single proposal and secure the votes to pass it. In the meantime, industry has been hedging its bets.

As U.S. retailers mull the ways they can compete with Chinese platforms, Shein and Temu have said that their use of de minimis is not core to their success. Shein says it is open to reforming the tariff exemption, and will find different ways to satisfy its customers if it goes away.

Temu this year added a green button to its website that says “local warehouse,” highlighting goods that are coming from nearby.

”These apps are packed with political risk,” said Juozas Kaziukenas, founder of e-commerce intelligence firm Marketplace Pulse. “This is clearly sort of a preemptive move, strategic move to avoid or, I guess, limit exposure to any regulator changes in the future.”

The retail sector will be watching closely to see what happens with the Biden administration proposal.

”The reason we really would like to see certainty is so everybody can plan business accordingly,” Donald Tang, executive chair of Shein, said in an interview Thursday before the Biden administration’s announcement. “If everything is hanging in the middle and I’m not quite sure if it’s going this way or that way, I think it’s not good for the business planning process.”

This article originally appeared in The New York Times.

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