The Tariff Exception That Could Not Be Reversed

During the beginning of February, President Trump eliminated a tariff exception. But then, soon after, he had to reverse his order.

A Tariff Exemption

Because cheap imports generate minimal revenue and huge inconvenience, it made no sense to tax them. As a result, since 1938, inexpensive packages have been entering the U.S. duty free. In the beginning, the threshold was $1. Raised several times by the Congress, now the no-tax amount is $800.

Then though, on February 1, the President ended the exemption and also slapped an extra 10% on all Chinese imports.

immediately, however, more than one million low value packages piled up at JFK Airport in NYC. The illogic that had been cited almost 100 years ago when the exemption began became a reality. So, on February 7, a week later, the exemption returned.

Our Bottom Line: Tariff Incentives

Until 1913, customs was the largest federal revenue source. As a result, Congress did not want to lose money on the transactions required by low value imports. (They wanted to avoid “spending a dollar to collect 50 cents.”) In 1938, the Congress added the de minimis exemption to the Tariff Act of 1930. While it began at $1, hoping to encourage trade, Congress raised the threshold to $5 in 1990 to $200 in 1993, and $800 in 2015.

As economists, we can say that the new 1993 $200 amount switched de minimis from a ceiling to a floor. Until then, the de minimis amount was a maximum which package value could not exceed. However, hoping to encourage trade, the Congress proclaimed it a minimum and thereby established a floor.

The de minimis exemption is the perfect example of tax incentives. When the US China trade war heated up during the first Trump administration, higher tariffs increased the price of importing bulk shipments of low price items. Responding, importers realized that separate packages had to enter the U.S…..and they did.

Mexican warehouse workers separated bulk shipments of low value items into separate packages that then were sent to U.S. consumers. It was called the “Tijuana two-step.”

Through Section 321’s de minimis exemption (and the “Tijuana two-step”), hundreds of millions of packages have annually cleared customs:

Affecting the future of one billion packages, de minimis’s future is unpredictable. But we can be sure that new tariffs will have unintended consequences–like a pile-up of one million parcels at JFK.

My sources and more: For tariffs, here, here, and here, the Congressional Research Service was the perfect place to start. Also though, this podcast had the De Minimis details as did The Economist,  this CATO blog and Reuters.

Please note I corrected a mistaken date for the new $800 de minimis floor. It was 2015, NOT 1915. Sorry!!