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Proposed De Minimis Changes Could Lead to ‘Supply Chain Whack-a-Mole’

Some call it a loophole, while others call the de minimis tariff threshold a supply chain enhancement.

Proposed legislation to change who can partake in use of the country’s Section 321 de minimis import statute to avoid paying duties and taxes has some wondering if it could also force change for some companies’ complex network of fulfillment and distribution centers.

The Import Security and Fairness Act (H.R.6412), introduced in January by U.S. Rep. Earl Blumenauer (D-Ore.) and referred to the House Ways and Means Committee, aims to restrict use of the de minimis threshold by non-market economies, such as China, and those on the U.S. Trade Representative’s watch list. It would also end use of de minimis from companies using offshore distribution or processing facilities, while requiring more information about de minimis shipments to be gathered by Customs and Border Protection.

Currently, imports valued under $800 enjoy duty- and tax-free entry into the U.S. Blumenauer and supporters of the bill say overseas companies with de minimis shipments are at a competitive advantage over U.S. businesses and that gap could only widen as online ordering continues its upward trajectory.

E-commerce accounted for about a quarter of overall retail sales in 2019, according to a report from McKinsey & Co. released late last year. The firm’s research also showed shoppers planning to buy online, anything from essential items to clothing, has gone from 40 percent to 60 percent since the start of Covid-19.

Ron Sorini, a trade expert and principal at Washington D.C.-based Sorini, Samet & Associates, said it’s unlikely what’s being proposed would prompt change in companies’ warehousing decisions.

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“They would have a disincentive to do that either way the law’s currently constructed,” Sorini said. “The House bill basically says you can’t use de minimis from China, so it severely restricts the amount of goods coming from de minimis. It takes China out of the equation, but it still gives an advantage to offshore warehouses.”

Sorini had told Sourcing Journal in January the legislation has the potential to “shut down Shein and other platforms like that” and, in the case of companies that have moved their distribution and warehouse facilities to Canada or Mexico, the playing field could be equalized.

Shein, which reportedly saw its valuation balloon to $100 billion following a recent funding round, relies heavily on factories in China to source many of its products. Details of its distribution network are not well known. A company spokesperson characterized its warehouse and distribution centers as being global, but declined to provide a more precise figure on its real estate portfolio.

The company’s latest distribution center, located in Indiana, is expected to open by the third quarter and will employ roughly 850 people. The reveal of the company’s newest facility also came with news it struck a partnership with Indiana University Kelley School of Business’ Center for Education and Research in Retail.

The partnership will give students the chance to work with Shein employees, starting in the summer, along with classes featuring company executives as guest speakers.

Shein App
Online retailers, such as Shein, that are sourcing product from China and shipping it into the U.S. could be impacted by proposed changes to the de minimis threshold. Photo by Davide Bonaldo/Sipa USA via AP

Shein’s spokesperson declined to comment on H.R.6412.

Spokespeople for Amazon and eBay also declined to comment on the proposed legislation. Wish, which also has a number of its merchants based in China, did not respond to a request for comment.

“[The legislation] might increase demand for warehouse facilities near inland border crossings like Laredo, Texas or even Detroit, because you’d be coming in from Mexico or Canada and then bring it over by the truck and distribute it into the United States,” said Rich Thompson, international director of supply chain and logistics at real estate brokerage and market research firm JLL. “The other [option] is bringing it in from a market economy like Vietnam, because it might be cheaper to warehouse in Vietnam and ship to the U.S. than in Canada and Mexico.”

He likened the constant movement of warehouses in response to changes in trade law to an arcade game.

“In my mind, it becomes a supply chain whack-a-mole game. It really does. I know it sounds silly, but that’s the analogy,” Thompson said.

Salvatore Stile, president of customs brokerage Alba Wheels Up, sees the proposed changes to de minimis another way.

The company’s seen an uptick in the number of companies adopting hybrid logistics strategies that allows them to save money using Section 321.

“We’re seeing a shift actually of major retail companies that, say for the sake of argument, they have five warehouses in the U.S. The cost of labor is so expensive and there’s a shortage of space, so they’re closing some of the warehouses and putting more warehouses into Mexico and having the option of direct-to-consumer or wholesale fulfillment where, traditionally, it was more direct-to-consumer for Mexico. Now they’re starting to shift,” Stile said.

The executive said that trend began last year. As a result, he doesn’t see a wave of companies changing their real estate strategies simply due to Blumenauer’s proposed legislation.

“I don’t see that happening because the trend is a lot of the warehousing is doing wholesale. I don’t see that being retroactive. They may ship to other countries that will still allow the 321 program, even though it wouldn’t be as much savings,” Stile said. “So, I don’t see it as, ‘Oh, Section 321 has been disqualified from China. Now, all of a sudden, we’re going to be moving our warehouses.”

Instead, what should be up for consideration, the executive said, is what to do about the challenge of compliance. It becomes a big question when looking at transportation companies and, more specifically, parcel carriers.

“It’s going to be a tremendous compliance issue, especially on the factory-based e-retailers that do billions upon billions of dollars into the U.S., and how to regulate this is a whole other level,” Stile said.

If parcel carriers, such as UPS and FedEx, have to play a part in enforcement, the question becomes how those companies do that.

Stile said there needs to be greater due diligence and vetting when it comes to where goods are being sourced from and suggested the use of a system where intellectual property violations or repeat offenders can be listed for parties across the supply chain to access.

There’s a whole area of enforcement as it relates to imports that remains murky and has yet to be worked , Stile said.

“If you have a car,” he said, “and you’re going through red lights all day, but you don’t have a license plate on the back of the car and there’s a camera on the light taking pictures, how are you going to catch the car?”