Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Sam Lowe is a partner at Flint Global, where he advises clients on UK and EU trade policy. He is also a senior visiting fellow at Kings College London and runs Most Favoured Nation, a newsletter about trade.
Question: What do fentanyl, fast fashion, tariff circumvention, and customs fraud have in common? Answer: they’re being used as an excuse to slap tariffs on low-value imported parcels.
Most countries exempt such imports from tariffs. This clemency is often accompanied by a significant reduction in the administrative burden for importers.
The so-called de minimis threshold varies by country: the UK’s is £135, the EU’s is €150, and the US’s is a rather high $800.
This chart Copenhagen Economics provides a useful comparative overview:
In practice, this means that if a Brit purchases a £20 dress from a well-known low-cost fashion website, and it is shipped from China, the dress will not be subject to the normal 20 per cent tariff.
Why do countries do this?
The ‘put-it-on-a-government-press-release’ policy justification is that high de minimis tariff thresholds make it easier for small businesses to trade internationally. De minimis thresholds are promoted, as such, by organisations such as the World Customs Organization and OECD.
The actual reason is that collecting tariffs on low-value consignments, usually small parcels, is both expensive and administratively intensive. Once those costs are netted out, it is not obvious that applying the tariffs would raise any revenue.
But times are a-changin’.
The US’s de minimis tariff threshold — again, admittedly high — is coming under political attack from several directions.
Last week, United States Trade Representative Katherine Tai was told by members of the House Ways & Means Committee that the US’s policy was helping Chinese firms undercut their American competitors.
Some US politicians, such as Ohio’s Senator Sherrod Brown, claim that the de minimis threshold is facilitating tax dodging and the import of illegal drugs:
Here’s how it works: these companies split shipments into many small packages in order to cheat their way out of the duties they owe, and drug traffickers send deadly drugs like fentanyl into our country without detection, because these smaller packages don’t have to go through screenings and inspections.
Trump’s former trade chief, Robert Lighthizer is also not a fan:
Nobody dreamt this would ever happen. Now we have packages coming in, 2 million packages a day, almost all from China. We have no idea what’s in them. We don’t really know what the value is.
I’m instinctively sceptical about some of the arguments here. I’m sure some illicit products are making their way into the US, but my rule of thumb is that if a politician is asking for tariffs, it’s usually because a domestic constituent who has some influence over whether people vote for said politician is asking them to ask for tariffs.
On the fentanyl problem specifically, there’s a bigger barrier in place. As argued by Deborah Elms, the head of trade policy at the Hinrich Foundation, the US border force simply doesn’t have the capacity to properly check all the parcels entering the country. Removing or reducing the de minimis threshold wouldn’t address this.
Anyhow, Congress is currently discussing a bill that would remove de minimis treatment from Chinese goods subject to Trump-era Section 301 tariffs.
And while the US pontificates, the EU is well on its way to legislating.
In May 2023, the European Commission proposed a swathe of changes to EU customs rules. Among them, acting on the recommendations of the so-called ‘Wise Persons Group’ (note: this is not particularly relevant, I just think it’s amusing that this group of wise people is continually referred to in the Commission’s impact assessment), is a proposal to scrap the EU’s €150 de minimis threshold. Such a change would be in line with its 2021 removal of a similar low-value import VAT exemption.
Why?
Well, the official reason is to protect against fraud. The Commission points to a slightly dated 2016 study note (which specifically focused on VAT evasion, not tariffs) which finds that 65 per cent of e-commerce consignments are undervalued.
But the actual reason (imo) is that the Commission would like to raise some more money.
For the uninitiated, customs duties are considered an EU “own resource”, which means the money belongs to the EU rather than member states. In practice, 75 per cent of customs revenues accrue to the EU, while member states get to keep 25 per cent to cover administrative costs. In 2022, €25bn in customs duties went to the EU; around 10 per cent of total revenue.
And in a post-Covid, post-EU-centralised-borrowing world … every € counts. The Commission estimates that scrapping the €150 de minimis exemption would raise an additional €1 billion per year:
But wait, isn’t there a general assumption (as per the opening of this piece) that tariffs on low-value consignments don’t necessarily raise very much money? Here there are two things to note:
The cost of tariff revenue collection is borne by the member state, but the tariff revenue accrues to the EU (or at least 75 per cent of it does). This means that you could conceivably have a situation in which the cost of collection is greater than the tariff revenue collected, but it still makes the EU (as a central institution) money.
As it has done with import VAT, the EU is planning to push the collection costs onto the large e-commerce internet platforms by making them take responsibility for collecting the tariff revenue from the sellers that use them:
So yeah, unless the proposal changes quite a lot over the next year, online shopping in Europe (and maybe the US) looks set to become more expensive. Because ultimately — as this useful flowchart by Cato’s Erica York sets out — we all know who ends up paying for tariffs …
Source: Economy - ft.com
