Politically, the big questions about Donald Trump's Trade Wars are: (1) Who will feel the pinch?; (2) How soon? and(3) Will it affect their votes? Due to a Trump administration decision that looks, at least to us, to be pretty foolhardy, we may start to get answers more quickly than expected.
At issue here is what is known as the de minimis exemption to tariffs. Under the terms of the exemption, a U.S.consumer can import up to $800 per day of goods without paying tariffs or administrative fees. The practical implication of this, for most people, is that if, say, someone in Iowa orders a book from a seller in the United Kingdom, the seller can just send it via regular post (assuming the book's value is less than $800). A substantial amount of commerce takes place in this manner.
The White House, for its part, is referring to this as the "de minimis loophole." This is messaging that some media outlets, even non-right-wing ones, have adopted, and it's very misleading. In fact, the de minimis exception is close toa century old, having been adopted in 1938. Since then, Congress has revisited it on occasion, to raise the daily limit(the $800 limit, for example, was established in 2016, by an overwhelming bipartisan majority). It's hardly a "loophole"if Congress has looked at the thing a dozen times and... expanded it each time. The obvious purpose here is to avoid involving multiple extra layers of red tape to relatively small-dollar transactions, where the cost of collection maywell exceed the revenue that is realized.
As part of his Trade War(s), Trump has decided to bring an end to the de minimis exception. Claiming, yet again,that there is a "national emergency," he issued
an executive order that kills the exception for most transactions, as of tomorrow. Here is Senior Counselor to the President for Trade and Manufacturing Peter Navarro, explaining the administration's position:
President Trump's ending of the deadly de minimis loophole will save thousands of American lives by restricting the flow of narcotics and other dangerous and prohibited items, add up to $10 billion a year in tariff revenues to our Treasury,create thousands of jobs, and defend against billions of dollar more in losses in counterfeiting, piracy, andintellectual property theft.
As with most things that come from this administration, and pretty much everything that comes from Navarro, this doesn't pass the smell test. For example, even if we assume drug cartels try to sneak their stuff into the U.S. viamail, why would a tariff help combat that? Do we really imagine that, in that scenario, they honestly and correctly identify their package as containing $10,000 worth of cocaine? Or that they would say "Well, if we have to pay a tariff,we're not going to make any money on that cocaine!"? Similarly, if such tariffs were to "create thousands of jobs," it would be by causing consumers to buy from Americans instead of foreigners. But if so, then there won't be tariff revenue. It's another example of "you can't have it both ways"—you can't have a tariff that is substantially revenue-generating AND protectionist at the same time.
And although the new rule hasn't quite kicked in yet, the effects are already coming home to roost. Consider, first of all,something like this ship:
We do not know too much about the inner workings of big-time international shipping. But we know enough to know that there's someone in the port of departure who is an expert in dealing with tariffs and customs. And there is someone on the ship who is an expert in dealing with tariffs and customs. And there is someone in the port(s) of arrival who is an expert in dealing with tariffs and customs. Probably many someones, in each case. And they are supported by some heavy-duty software. These folks are all professionals, and their skills are a necessity when you're dealing with cargo valued in the tens of millions of dollars (or more).
And now, the big problem with the new, de minimis-free era that is set to begin tomorrow. When Mr. John Bull in London mails out a book to his customer, Sam Uncle in Iowa, there's nobody in the chain who is an expert in tariffs, and there's no infrastructure for collecting such duties. Remember, the de minimis exception has been around in the U.S. for generations, and the same is true in most other countries.
We guess—though you never know with this White House—that the thinking was that the various foreign postal services and vendors would adapt, but that is not what is happening. Already, postal carriers in Australia,Denmark, France, Germany, India, Italy, Japan, New Zealand, Sweden, Switzerland and the United Kingdom have announced that they are stopping shipments to the United States for now. Some of them say they are going to try to retool their systems, others are not so sure. In addition, many businesses who ship product to the U.S. say they are going to stop entirely, either because they don't want to risk any sort of legal or economic peril, or because they cannot profitably sell their goods with an additional excise attached.
