Navigating the De Minimis Exception: Impact on Fashion, Trade, and Labor Standards

Written by Tirsa Parrish 

Discover the far-reaching effects of the de minimis law on the fashion industry, international trade, and labor standards. Learn how loopholes impact fast fashion and pose challenges for regulation enforcement.

Embarking on international travel is a universal aspiration driven by the allure of diverse cultures, tantalizing cuisine, and the promise of a more expansive worldview. Exploring local markets and shops abroad isn't just about acquiring items; your purchases carry the memories of your global journey.

For many, a trip abroad isn't complete until you go to the duty-free shop on the way through the airport. These retail outlets offer products that are exempt from local or national taxes because they are sold to travelers who will not pay duties and taxes on them in their destination countries.

When travelers return to the United States they are given a form to declare purchases to pay duties and taxes on the value. However, if the total amount is less than $800 then there are no fees. 

From $200 to $800: A Paradigm Shift

The de minimis exception, Section 321 of the Tariff Act 1930, allows imports valued at less than $800 to enter the United States without duties or a formal entry. This is true for companies and individuals. In other words, as long as the value of the imported goods is under $800, the shipment can avoid other US customs regulations. Each person can bring in one package in a 24-hour period and take advantage of this exception.

For travelers, this means great deals can be had in the duty-free shop. For companies, de minimis entries offer savings on relatively small orders which is especially helpful in direct-to-customer orders placed online or e-commerce. Companies have seen a spike in such orders. Customs and Border Protection (CBP) reported a 21% increase in de minimis entries from 2020 to 2021. This increase can be attributed to two changes in the United States market

• An increase in the de minimis threshold in 2016 from $200 to $800
• An increase in e-commerce sales

Image via nftc.org

E-commerce Surge: Transforming Trade Dynamics

In 2016, Congress passed an amendment to the Tariff Act via the Trade Facilitation and Trade Enforcement Act (TFTEA). Among other changes, the TFTEA increased the de minimis threshold from $200 to $800, to reduce the burden on CBP for smaller imports.

This makes the de minimis threshold for the United States one of the highest in the world! These changes were implemented with the intention that CBP would save more money and resources than would be gained through the tariffs on these goods.

Tariffs are taxes on imported goods, imposed by governments to regulate trade, protect domestic industries, and generate revenue. They can be specific (fixed charge per unit) or ad valorem (percentage of the product's value).

However, Congress did not foresee a drastic change in the marketplace as online shopping and e-commerce has become the globally preferred transaction method. The Covid-19 pandemic further increased the amount of e-commerce transactions and exacerbated the de minimis exception problems for industries, including fashion.

Image via ecommercedb.com

E-commerce Impact: Leveraging the De Minimis Exception

E-commerce plays a substantial role in the use of the de minimis exception because these transactions create a preference for direct-to-consumer purchases. It is important to note that the de minimis exception is per package and not per order or per company.

Therefore, when a customer in the US orders clothing from a foreign brand like Shein, the manufacturer will ship the clothing directly to that person. The average consumer is unlikely to pass the $800 limit on fast-fashion purchases in a single order, so Shein can take advantage of the de minimis exception to avoid paying duties on their imports.

Duties are taxes or fees on goods crossing international borders. Collected by customs authorities, they regulate trade, protect domestic industries, and contribute to government revenue. Duties can be import taxes on incoming goods or export taxes on outgoing goods One imported couture dress that costs $1200 will be subject to all tariffs, duties, and regulations because that dress cannot be divided between shipments.

When an American consumer buys over $800 worth of clothes (for example, 15 items at $30 each, 4 items at $50 each, and 2 items at $100 each for a total order of $850), Shein could simply ship the order in multiple packages, reducing the value of each parcel, and assure that the purchase still falls within the exception.

Shein and other foreign brands can ship thousands of orders per day to customers in the United States. As long as each of those packages is individually under $800, the importing company avoids all duties and tariffs.

The de minimis exceptions have been beneficial to the market in general and reduced government costs as intended, however, they also create loopholes that allow Shein to avoid enormous cumulative duties and also evade labor standards that might be imposed if they were exporting their products for sale at brick-and-mortar stores, where the $800 threshold would not apply.

Fulfillment Center Strategies: Evading Tariffs and Exploiting De Minimis Exception 

Brick-and-mortar stores stock their shelves with products ordered in large shipments and imported in bulk to local warehouses. This means thousands of dollars worth of merchandise at a time is kept in and distributed throughout the United States and de minimus only applies if the value of the shipment is over $800.

However, there are additional loopholes importers have found to avoid the tariffs and duties. Fulfillment centers in Canada and Mexico can serve as middlemen for shipments intended for the United States. Large volumes can be shipped more cost-effectively to one of these warehouses where they are held and then separated into individual orders.

These fulfillment centers act as interim warehouses for the importer. The individual orders are then shipped to the customer's home in the United States enabling the company to still benefit from the de minimis exception. 

Image via nftc.org

Fast Fashion, Low Tariffs: A Double-Edged Sword

Fashion is not the only industry impacted by the de minimis exception. While responsible fashion brands are willing to pay duties and be regulated to help ensure humane working conditions when they sell products to the United States, the bottom line means corporate giants are going to use every loophole possible to not pay.

Also, packing and shipping providers like FedEx and UPS have a strong lobby to keep the loophole. The more packages that fast-fashion companies ship to be under the $800 threshold means a boost to the shipping company's profits. 

Beyond Tariffs: Labor Standards and Ethical Concerns

The de minimis exception and the resulting loopholes are cause for concern for the fashion industry. While allowing fast-fashion brands like Shein to send packages to the US and evade duties owed, it also removes enforcement capabilities on forced labor.

When fast fashion brands use loopholes in the de minimisexception, they do not pay the intended duties and tariffs on garments entering the United States. This helps them keep the retail pricing on their products low and feeds the fast fashion mindset of wear-and-discard.

Retailers want their consumers to buy as many products as possible. Indeed, the business model for fast fashion companies is based on minimal margins but with huge volume. The quicker consumers replace items in their wardrobes, the more money the retailers earn.

However, these discarded items generally end up in a landfill creating literal mountains of textile waste.

Section 301 Tariffs: Balancing Act in International Trade

Along with not paying the tariffs that are imposed on textile imports, using the de minimis exception means the companies and their products are also not subject to other regulations that are meant for textile and garment imports.

Regulations in Section 307 focus on excluding imports made with forced labor, and this is being evaded through the loop holes. China and other developing countries have had extensive negative press for poor and unsafe working conditions.

This is especially prevalent in clothing manufacturing. While working conditions in some factories do meet the international standards, circumventing the regulations is all too easily accomplished with direct-to-consumer shipping. The United States cannot enforce compliance with working conditions standards when brands take advantage of the exception 

Section 301 tariffs, or so-called retaliatory tariffs, authorize the Office of the United States Trade Representative to:

• Impose duties or other import restrictions
• Withdraw or suspend trade agreement concessions
• Enter into a binding agreement with the foreign government to either eliminate the conduct in question (or the burden to U.S. commerce) or compensate the United States with satisfactory trade benefits

Section 301 Tariffs: De Minimis Exception Exclusion

These tariffs are used to balance the amount of tariffs or duties on goods that US exporters have to pay to other countries with those that foreign brands pay to import into the United States.

For example, if Country A puts a 35% tariff on imported cotton garments the Section 301 allows the US to put that same 35% tariff on cotton garments imported from Country A. However, under the de minimis exception, Section 301 does not come into play as an external regulation.

Unseen Imports: CBP Challenges and Counterfeit Risks

An estimated 43% of imports that enter the United States under the de minimis exception are not in compliance with United States customs law in some manner. The billions of packages imported under the de minimis exception are not screened by CBP.

CBP can also not track these shipments. This further hampers CBP's efforts to identify and exclude suspicious imports, which may include counterfeit items.

Image via healthindustryes.com.au

Reducing Fast Fashion and Counterfeits: Pending Legislation

There are two bills that, if approved, will bring about significant changes to eCommerce between China and the US. The De Minimis Reciprocity Act of 2023 and Import Security and Fairness Act seek to address the abuse of trade laws by China and other nations. These legislative actions will:

• Exclude countries with a known history of violations from using the “trusted“ de minimis channel
• Only allow express carriers to facilitate de minimis imports into the US to help better stop counterfeits
• Require more information on every package entering the US
• Use the revenue proceeds to establish a fund for reshoring industry from China

These bills are still in the early stages, but their adoption could be dramatic for eCommerce and are meant to decrease the amount of fast-fashion and counterfeit goods imported into the US. 

All solutions that require legislation are complicated. The Department of Commerce is looking out for US industries and wants to make this right, but just as the fashion industry is opposed to the de minimis exception for the harm from fast fashion and possible forced labor violations, other industries like the express delivery services industry are strongly in favor of this exception and the high threshold.

They contend that the increase to an $800 limit benefits underserved communities and is a boon to US consumers. Lobbyists for these industries and others are all trying to get legislators to understand their concerns and make laws that benefit their industry and their customers.