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The boom of the internet and the rapid expansion of e-commerce have created incredible opportunities for American businesses by connecting them to consumers all over the world. Why is it, then, that too few small businesses export to foreign markets? The primary reason is due to onerous trade barriers.
With negotiations underway on the North America Free Trade Agreement (NAFTA), one trade barrier, in particular, should be made a priority because it has a direct effect on American small businesses engaging in cross-border e-commerce: de minimis. This is the value below which shipments entering the country are exempt from customs duties and burdensome paperwork. De minimis thresholds vary by country. Last year the U.S. threshold was raised to $800. Many other countries, however, continue to maintain much lower de minimis thresholds.
Raising the de minimis thresholds of our trade partners would significantly reduce red tape for small businesses and boost cross-border e-commerce sales. According to the Ecommerce Foundation, over 1.4 billion people made at least one e-commerce purchase in 2015. That represents a huge market of e-shoppers located outside the U.S. who could be tapped by American small business.
Burdensome trade barriers, like unduly low de minimis thresholds, put small businesses at a serious disadvantage and discourage them from participating in cross-border e-commerce altogether. The Organisation for Economic Co-operation and Development (OECD) has estimated that customs and other border barriers can add a premium of up to 24% to the price of goods sold. Small businesses typically don’t have the time or resources necessary to navigate through the plethora of documentation and taxes required by foreign customs authorities.
Removing these trade barriers would greatly benefit small business growth and the American economy as a whole. Small businesses represent 99% of U.S. employers and create two out of every three jobs. Raising the de minimis thresholds of our trade partners would help small businesses gain access to consumers abroad.
Modernizing systems to lower the burden
We should also consider the impact that raising de minimis thresholds can have on customs authorities. Because pre-arrival information and full manifests are required for all shipments, regardless of value, packages under de minimis thresholds are still subject to risk-based targeting and do not undermine security. In fact, higher de minimis thresholds free customs officials from the antiquated task of processing low-value shipments and allow them to better focus time and resources on higher priority security issues.
Establishing a reasonable de minimis also improves the country’s global competitiveness and saves the government and taxpayers money. Consider Canada, for example, which has an extremely low de minimis threshold of $20 CAD — currently about $16 USD — and hasn’t been updated since 1985. According to the C.D. Howe Institute, raising Canada’s de minimis threshold from $20 CAD to $200 CAD would save the Canadian federal government $161 million per year and generate a net positive benefit of $648 million to Canadian consumers, governments, and businesses. A Nanos Research survey found that 76% of Canadians support raising their de minimis threshold. Mexico has a similarly low de minimis of $50 USD for non-postal shipments, such as express shipping.
Recent U.S. free trade agreements, including those with South Korea, Colombia, and Peru, contain commitments by those countries to match the de minimis level offered by the U.S., meaning low-value shipments flowing both ways would benefit from equivalent treatment. And in July, 28 senators sent a bipartisan letter to U.S. Trade Representative (USTR) Robert Lighthizer highlighting the impact that trade barriers have on small businesses competing in e-commerce and urged the USTR to seek de minimis parity with U.S. trade partners:
We encourage you to make small businesses a priority in trade negotiations by following through on Congressional intent and seeking de minimis parity with our trading partners. Doing so would cut red tape on American small businesses and enable them to fulfill their exporting potential by leveling the playing field with foreign competition.
The benefits are straightforward. Achieving this trade measure would facilitate cross-border e-commerce, boost small business competitiveness, and enable customs authorities to devote greater attention to security.
(Since publication, a citation for the bar graph has been added, linking to the Global Express Association's data on de minimis values.)