Duty Free Loophole to the USA?
Disclaimer: The information in all Jet Worldwide online content, including this post, is for general information only.
A brief history of Section 321
The U.S. allows for goods valued at $800 or less to enter into the U.S. duty-free, as outlined in Section 321 of the 2015 Trade Facilitation and Trade Enforcement Act. The implications of $800 threshold (from $200) were likely not fully understood when the act was passed.
Section 321, 19 USC 1321 is the section of the trade act that provides for the admission of articles free of duty imported by one person on one day not exceeding $800.
See below discussion of Section 301 tariffs versus Section 321 Entries
Section 321 for imports from China
The trade war between the United States and China have been has subjected certain imports from China under “301 China” or “Section 301” to US-specific import duties. Interestingly, Section 321 overrides Section 301 as long as the items being shipped meet the de minimus value.
Free Trade for Opportunity for Fraud?
The volume of "section 321" imports is over 2 million per day. It has grown exponentially over the last several years. Proponents point to this as a success for free trade. The US economy is driven by consumers who benefit greatly.And businesses riding the back of low cost China production includes a who who of American corporations. But, for many, this feels different.
In theory, most polls show a "tough on China tariffs" to be popular. The lobbying in support of more import restrictions is offset by those supporting the status quo. There is growing support in congress for more controls. But the real power is in the executive branch. The Biden administration is under pressure to put in more controls. The issue of fentanyl imports was a key point in a November US China summit. But controls against apparel and fast fashion imports did not make for the same headline.
De minimis explained
Global customs processes traditional included low value thresholds -or de minimus - levels whereby the administrative cost of processing outweighed the benefits gained from duty collection. This worked well in an era of large freight shipments and niche "express consignment" sub category. But now, such low value shipments (i.e. online orders and individual parcels) have come to dominate supply chains.
The term de minimus has evolved to the mean the value of each online order that can be imported duty free.
Editors note: What is the correct spelling, de Minimis (with an i ) --or--versus de minimus (with a u)? US customs regulations spell the term with an "i" while spell check recommends using a "u"...? We use both interchangeably (we are transportation experts but not great writers!).
Useful information on global duty free thresholds.
READ MORE: UNDERSTANDING IMPORT DUTY
Millions of Duty Free Entries Per Day to the USA
The growth of duty free entries, or e-commerce shipped direct to the USA has exploded. Estimates vary but the number of e-commerce parcel imported duty free is expected to exceed 10 million packages per day in 2022 with reports of year over year volumes quadrupling!
Section 321 Manifest Submission Versus Type 86
Traditionally, section 321 was viewed primarily as a "manifest submission" more than a traditional customs entry. Via traditional processes, a section 321 does not require and HS Code. A description, for example of a shoe could be a sneaker, wearing apparel, a brake shoe, auto part, camera shoe, or electronic accessory.... and maybe more.
- The advantage to e-commerce shippers of not having to assign an HS Code is offset by ambiguity and challenges the review processes for regulatory compliance, data collection and oversight by other government agencies (PGA's).
- Type 86 Entry - rather than being a consolidated entry - requires an entry li for every item that facilitates automated process coordinated with the customs brokerage systems.
Express Consignment: The starting point for parcel clearance
To assist with the clearance of small parcels, and at the behest of FedEx and UPS, a specific section of the regulations (CFR Part 128) was carved out to assist the clearance through express facilities.
Express consignment facilities (ECCF's) used to be the only way to take advantage of high volume parcel imports via section 321 along with consolidated informal entries. However, express facilities are restricted primarily to the large carriers and a select few Express Consignment Operators.
Express processes were largely a success in that they mandated "integrated control," a set additional requirements on express operators, and a per parcel (per HAWB) charge to reimburse customs for the cost of providing express clearance.
ECCF to CFS: Free and (almost) Express clearance for e-commerce imports
ECCF's are difficult to obtain and expensive to operate. While customs tried to increase express consignment fees, they also - at the same time - granted no charge express clearance capabilities to Cargo Freight Stations (CFS). CFS facilities often literally share the same warehouse as an ECCF with a physical barrier/ fence separating the two.
- Goods consigned the express facility are charged $1.11 per shipment for the privilege of express clearance and either pre-cleared or cleared within hours of fight arrival.
- Goods consigned to the cargo/CFS facility are usually cleared in 24 to 72 hours without a per shipment customs fee.
From the Express environment to regular brokerage
As most customs brokers did not have access to efficient section 321 processes, and likely due to lobbying by interested parties, customs expanded access to section 321 entries via their Automated Commercial Environment (ACE). These entries are referred to as Type 86.
Via ABI Type 86 informal entries, duty free section 321 parcel clearance is available across all ports and modes of transport - most notably ocean. Type 86 ABI entries make it possible to import tens of thousands of individual e-commerce orders in ocean containers duty free on a single entry.
Countries and duty free thresholds
Canada and Mexico
The concept of de minimus levels is a key topic in trade discussions and free trade agreements. Under the new NAFTA /USMCA, for example, Mexico agreed to raise its de minimus level from $50 to $100. For Canada, the amount of duty-free shipments from the USA increased to 150 Canadian dollars and a limit for tax-free shipments will be CA$40. Both were previously CA$20.
Rest of the World: Duty Free but with a duty to pay VAT
Major importing countries (including Europe, UK, Australia) the focus has shifted to maintaining duty free thresholds (although most are far less than $800 US) but with value added tax for all imports.
Countries with a national tax regiment - often referred to as value added tax - mandate collection of value add tax which is often around 20%.
Online platforms and online sellers are responsible for collecting sales tax for shipments to Europe and the UK.
The Future of Section 321 in the USA
The concern from many, including the House Ways and Means Trade Subcommittee Chairman Earl Blumenauer, D-Ore., is that millions of packages per day are being imported and "nobody's monitoring it." US customs recognizes the need to better controls for such things as intellectual property, counterfeits and drugs. The concern includes goods imported via the postal system (which are historically have ben subject to less oversight than commercial shipments). Read about changes proposed by lawmakers in January 2022.
The concern for intellectual property abuses is heightened by the fact that over 80% of Section 321 imports are for online orders from China.
SECTION 301 VERSUS SECTION 321
Section 301 imports are those that are subject to higher tariffs and restriction and imposed by the Office of the United States Trade Representative (USTR). This power was used extensively by the Trump administration against imports from China. However, goods properly entered under Section 321 are not subject to Section 301 duties and restrictions.
Unintended Consequence of duties imposed on Chinese goods: The Chinese government responded to higher section 301 tariff by reducing export tariffs for e-commerce orders and shippers diverted their logistics processes take advantage of duty free Section 321.
Regulatory remedies being discussed for section 321
This policy changes under discussion regarding section 321 include;
- Reducing the de minimus level from $800
- Requiring e-commerce shippers to register as the importer of record
- Denying Section 321 import of products other restricted or subject to Section 301.
- Not allowing Section 321 entry for import of online orders
Web Only retailers from China: Shein Case and Point
Shein is the biggest web-only fashion brand in the world and upending fast fashion, challenging retailers Zara and H and M. They are a great example of how to best profit from section 321 duty free thresholds.
Shein combines technical savvy and parcel logistics: The virtual shopping mall ships directly to their American customers from their Chinese warehouses. They are the low costs leader thanks to Chinese manufacturing, no stores, no ocean container delays, no American warehousing, and... duty free import!
Shein's was the first to scale the huge opportunity - some would say loophole - of duty free import under $800. This benefit cannot be overstated.
- Decades of outsourcing production to China greatly reduced cost of goods for US retailers
- The dramatically lower cost of goods fueled the US consumer based economy for decades. Collateral benefits included retail jobs, and commercial real estate(i.e. shopping centres and malls).
- Shein's model strips away the collateral costs to the benefit of American consumers.The push back from American retailers and others -who are now more collateral damage - is building.
- No other country offers anything close to section 321* benefits. Not just a benefit of duty free but also a benefit of much simpler processing.
Shein is to be commended for their success.A success primarily attributed to scaling section 321 processes.
*Section 321, 19 USC 1321 is the provision in customs Trade Facilitation and Trade Enforcement Act of 2015 raising the duty free threshold from $200 to $800.It was a rather obscure part of a large trade act that was lobbied for by FedEx, UPS and eBay. It is no longer obscure!
Shipping from Asia via the USA
Section 321 entry processes has enabled shipping from Asia to international destinations via the USA. The simplified duty free import processes have enabled shippers from Asia to ship goods from Asia to American receiving hubs from where the goods are exported.
American Companies benefiting from Section 321
Beyond the benefit to American consumers, section 321 has been a great benefit for the air freight industry (notably FedEx and UPS), Amazon, eBay, brokerage firms and facilities specializing in express clearance. Many of these firms lobbied for the increase in low value threshold (from $200 to $800) and will likely be able to minimize the likelihood of wholesale changes.
The issue of low value thresholds is now an important part of free trade negotiations. On the flip side of imports benefitting American consumers, international orders for American retailers and business are growing faster than the domestic market.
- Trade discussions with China, for example, now include raising their de minimus level which is now less than $10.
- There is renewed discussion on rejoining the trans-Atlantic trade agreement, CPTPP
We continue to recommend multiple import processes and believe that section 321 processes will continue to be an important of global logistics strategies.
READ MORE: CERTIFICATE OF ORIGIN AND WHEN NEEDED
Comments since we published this blog include:
- "You should not use the term 'circumvent' for shippers and importers are following the regulations around section 321 with no intent to circumvent other regulations."
- "This is good for consumers and should continue."
- "The processes should be lauded for their facilitating this new category but some additional controls are probably a good thing.
- "The best solution is to bring shippers into compliance by making them the importer of record."
Disclaimer: This post and all Jet Worldwide online content is for general information only .