Trump tightens screws on Chinese giants by shutting 87-year-old loophole

Late on Tuesday, the US Postal Service announced that it was suspending delivery of packages from China and Hong Kong. Less than 24 hours later, as the shock reverberated through the global logistics sector, it reversed the decision.

The USPS about-face is typical of the chaos and confusion generated by Donald Trump’s torrent of executive orders, which are seemingly issued without thought to how they might be implemented.

Shein and Temu had been exploiting the loophole for years.Credit: AP

Trump announced last month that he would impose a 10 per cent tariff on imports from China, along with the 25 per cent tariffs on Mexican and Canadian imports, from February 1. What wasn’t highlighted at the time was the inclusion of a ban on duty-free shipments from those three countries.

When he paused the tariffs on Mexico and Canada on Monday, he left the tariffs on Chinese imports in place, including the ban on duty-free imports.

That left the USPS and the US Customs and Border Protection agency scrambling to work out how to execute his order and handle the massive flow of low-value parcels from China that had previously been subject to very limited scrutiny and had been free of duties.

What Trump has done is to remove an exemption – known as the “de minimis exemption” – in its customs duties regime. The exemption, which dates to 1938 and which has its counterparts in many other countries’ import tax regimes, allows duty-free imports of goods worth less than $US800 ($1270).

The rationale for the exemption, which matches the threshold for the value of goods Americans can bring home duty-free after travelling outside the US, is that it costs far more to administer and police and collect duties on small parcels than the revenue raised. In Australia, the Albanese government abolished nearly 500 “nuisance” tariffs last year for that very reason.

The deliberate duty-free loophole in America’s customs fence has been increasingly exploited by e-commerce companies, most notably China’s Shein and Temu. Of the 4 billion or so small parcels that entered the US last year, the two Chinese companies accounted for about 30 per cent, or about 1.2 billion of them.

It has also – and this is a particular rationale for the Trump administration’s change to the arrangements – been a conduit for imports of fentanyl, counterfeit goods and other illicit products.

Shein and Temu have built direct-to-consumer business models to take advantage of the duty-free regimes in the US and other developed economies.

US President Donald Trump has sparked chaos with a flurry of executive orders since returning to the White House. Credit: Bloomberg

Where Amazon has built its e-commerce success on the speed at which consumers can receive their purchases, the Chinese companies prioritise price. Where Amazon can deliver within days, if not the next day, it can take weeks for purchases from Shein and Temu to arrive.

Their extreme focus on price has been extraordinarily successful and has helped drive up the volumes of small parcels – parcels below the $US800 duty-free ceiling – quite dramatically. Last year’s 4 billion or so parcels compares with just over a billion in 2023.

Trump’s move will hit e-commerce companies generally, and Shein and Temu in particular quite hard because not only will they face the new 10 per cent tariff the US has levied on all imports from China but the 25 per cent tariff Trump imposed on Chinese imports in 2018 as well.

Chinese logistics companies are already saying they will have to increase their charges, with one saying it would withhold 30 per cent of the value of the order plus Rmb20 ($4.35) to compensate for the new costs. (Unlike wholesale imports, by which the US importer pays customs duties and tariffs, in a direct-to-consumer business that has been exploiting the de minimis exception the logistics company will have to pay those imposts).

Those costs will have to be borne either by companies such as Shein and Temu, which operate on skinny margins, or the end-customer.

That could be good news for Amazon, which was so concerned about their incursions into the lower levels of its markets that it copied them, setting up its own direct-to-consumer business, Haul, in China late last year.

While Shein and Temu might not have anticipated Trump’s decision to end the de minimis exception so abruptly, they haven’t been completely blindsided.

Indeed, knowing that the sheer magnitude of their successes was starting to generate angst in the markets they have gatecrashed, the two companies have been starting to set up distribution centres in the US and elsewhere to pursue the more conventional model of importing wholesale (and paying tariffs) and then distributing the products via their own logistics networks.

The USPS and the US Customs and Border Protection agency have been scrambling to work out how to execute Trump’s order.Credit: AP

They’ve also started to diversify their supply chain out of China, sourcing product from countries such as Turkey and Brazil, which might slightly reduce their exposure to the US tariffs.

They knew the free ride was under threat because the Biden administration, last April, had already flagged a crackdown on imports of low-value, small package goods and was reviewing their duty-free status.

The trafficking of fentanyl and its precursor chemicals, the use of the exemption to dodge US bans on imports from China’s Xinjiang province and the avoidance of Trump’s earlier round of tariffs made what has now happened almost inevitable.

Implementing the changed regime for small parcels is going to be challenging, given how little notice the USPS and Customs and Border Protection had of its imposition.

The deliberate duty-free loophole in America’s customs fence has been increasingly exploited by e-commerce companies, most notably China’s Shein and Temu.

In 2016, it was the Customs and Border Protection agency, which was struggling to cope with the sheer volume of small parcel imports, which persuaded the Obama administration and the US Congress to lift the minimum value for customs inspection and the collection of duties from $US200 to $US800.

Since then, the volume of those small parcel imports has risen more than 10-fold.

Depending on how Shein and Temu and their customers respond to the increased costs and the inevitable (given the new scrutiny of small parcels) increase in delivery timelines, the new regime could have a discernible impact on China’s export revenues.

The significant excess capacity across China’s manufacturing industries and the softness of demand within its domestic economy has created a tide of cheap exports to the rest of the world.

The kind of low-value products sold by Shein, Temu and other Chinese e-commerce companies are among the fastest-growing categories in China’s exports statistics, accounting for as much as 10 per cent of China’s $US3.6 trillion of exports to the rest of the world.

Now that they are subject to a US tariff regime that covers all China’s exports to the US, the impact of Trump’s first shot in a new and trade war with China will be materially greater than had the duty-free loophole in America’s customs regime been left in place.

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