Online Retailers’ Abuse of Trade Loophole Endangers Consumers
By Melanie Foley
You do your research to find the safest infant car seat on the market and order it on Amazon. But the product that arrives at your door from China may be a knockoff. You might not even know, and the shipment almost certainly has not been inspected.
Or consider what happens when you order a high-end bicycle from Amazon. It is shipped with hundreds of others on a containership from China to an “unboxing” warehouse in Canada. There, your bike is put into its individual shipping box and sent to you. Why this seemingly useless and certainly wasteful extra step? Unlike the local shop offering the same bike, this maneuver allows Amazon to dodge border taxes and safety inspections.
Increasingly, counterfeiters and some of the world’s largest online retailers like Amazon are exploiting a loophole in U.S. trade law. Since 1938, U.S. residents have been allowed to bring into the country a “de minimis” amount of goods without paying border taxes or being subject to standard customs inspections or documentation.
The idea was for people making purchases while traveling abroad to avoid cumbersome paperwork and for customs officials to be able to focus on large-value commercial shipments. But the explosion of online retail changed the dynamic dramatically. Today, more than one million packages arrive daily via air alone from China for consignment to consumers who made purchases online.
Add to that a dramatic increase in the value of goods allowed to skirt normal inspections and other customs processes. The United States now has one of the highest de minimis levels in the world. European countries allow less than $200. Canada, Japan, Mexico and many other nations allow even less.
The online retailers also petitioned U.S. Customs and Border Protection (CBP) to consider the ultimate consumer as the official importer granted the daily $800 waiver, even though the retailers make the sale and bring in massive ocean containers of goods worth well over the $800 per day de minimis value to fulfill orders.
Anything from an Amazon fulfillment center in China could come in this way. But a primary method Amazon uses — and the new cottage industry of “third party logistics” firms that has emerged to teach companies how to take advantage of the system — is to have warehouses just across the border in Mexico or Canada to which they ship containers of products from China and other countries. The importers pay no duties when shipping to the warehouse because the good is deemed a “pass through,” as its final destination is the United States. When an order is received, warehouse staff pick, pack and put individual packages on a truck. The truck’s manifest lists them all as separate imports, so when the truck makes the short hop across the border, it clears customs using the de minimis entry process. No duties are paid or inspections done. Then the packages are dropped off at a U.S. post office or other shipper to be sent to online customers.
Customs officials are overwhelmed with the tsunami of small packages that makes it nearly impossible to effectively screen even for contraband in the form of illegal drugs or counterfeit products, much less to ensure imported products meet U.S. safety standards.
A 2019 intensified spot check operation by CBP found “discrepancies” — including spoiled food, opioids, street drugs, fake passports, gun parts and counterfeits — in 14% of parcels from China and Hong Kong.
The counterfeits are not just fake Gucci handbags. They include automotive parts that don’t meet consumer safety standards, such as airbags, brake pads and seatbelts. Packages have been found with fake prescription drugs lacking the active ingredients, children’s toys laced with lead and cosmetic products containing arsenic and human waste.
CBP reports that of the contraband products seized in 2016, 16% posed “direct and obvious threats to health and safety.”
This loophole is clearly a danger for consumers, but it also further tips the scales against brick-and-mortar stores, which, unlike the online retailers exploiting this loophole, must pay applicable tariffs on imports beyond the $800 per day and are the official importer responsible for ensuring products are legitimate and safe. Plus, the tax-dodging this system enables amounts to a significant revenue loss for the U.S. Treasury.
The Global Trade Watch (GTW) division of Public Citizen is raising this issue with Congress to pressure the Trump administration to fix the loophole. The administration has the authority to fix the problem with fairly straightforward regulatory changes. The question is, will it?