Silver bullet for helping small businesses trade: Plurilateral agreement on de minimis

This article first appeared at: http://e15initiative.org/blogs/silver-bullet-for-helping-small-businesses-trade-plurilateral-agreement-on-de-minimis/

On February 11, 2016, the US Senate passed the Trade Facilitation and Trade Enforcement Act of 2015, which, among other things, raises the threshold for de minimis – the maximum value of an import that is exempt from customs duties and complicated rules of origin – from $200 to $800. This move should help especially for micro- and small businesses and individuals that use ecommerce to import single shipments and small parcels. It is now time to raise these levels internationally to further spur US trade, through a plurilateral agreement on de minimis.

The new US de minimis level, long championed by trade associations, express shippers, and others in the international trade community, will deliver economic gains. The Peterson Institute has estimated that the net payoff of an increase in the de minimis threshold to $800 would be $17 million annually, taking into account the cost savings at each stage of the delivery chain, minus the revenue that is not collected by customs on shipments in the $200-$800 range. Concretely, the study calculates that it affects 3.8 million shipments handled by express shipment firms. The gains are probably even greater now – the study was published in 2011.

The new law can stimulate new trade that has been altogether “frozen” because of difficulties for exporters and importers in meeting what can be very complex trade rules for shipments above $200. The legislation helps especially the “little guy” – small businesses and individuals who, by using ecommerce, are increasingly engaged in export and import activities with overseas buyers and sellers, yet who lack the capacities to comply with complex trade rules.

The legislation also formalizes the so-called “informal entry” regime, where incoming shipments below $2,500 can benefit from expedited customs clearance, do not need a surety bond, and have reduced paperwork requirements and fees (the $25 minimum merchandise processing fee is lowered to $2 for entries filed electronically).

These policies cut time and paperwork across players in the trade supply chain – importers, express shippers, postal services – and free up resources for identifying serious threats, from terrorism to counterfeit merchandise, illegal drugs, and unsafe food products. Customs security is still a priority: full manifest detail and pre-arrival information is required for all shipments, regardless of declared value.

Now more needs to be done, globally.

Most countries have very low de minimis values. China’s de minimis is $15, Mexico’s $50, India’s $170, and European Union’s about $150 (150 Euro). The level is absurd in some countries – for example, the Philippine de minimis is 48 cents. There are two reasons behind these low numbers: governments’ reluctance to forego revenue from import duties; and protectionist lobbying by domestic retailers. Yet it is the country’s consumers who typically get hurt, facing markups due to the very duties and taxes charged at the border.

Raising de minimis levels would unlock new trade that would outweigh the revenue losses. In a study of 12 Asia-Pacific Economic Cooperation (APEC) economies (Canada, Chile, the People’s Republic of China, Indonesia, Japan, Malaysia, Mexico, Papua New Guinea, Peru, the Philippines, Thailand and Vietnam), raising the de minimis to just $200 would generate gains of $5.4 billion a year, equivalent to some $12 billion for all 21 APEC members. The gains would be multiple if the de minimis was raised higher, say, to $1,000.

A way to unlock these gains is to negotiate a plurilateral agreement on de minimis with key US trading partners. As multilateral trade talks among the 164 WTO members remain clogged, plurilateralism is emerging, alongside regional trade agreements like the Trans-Pacific Partnership agreement, as a key means for countries to negotiate trade agreements. Several WTO members are engaged in plurilateral talks in key sectors – the main one being the Trade in Services Agreement (TiSA) currently negotiated among 50 WTO members that cover 70 percent of the world’s services economy.

To be impactful, the de minimis plurilateral should aim to raise the members’ thresholds to $1,000. After all, if $800 was fixed as the target, the United States would not have any bargaining chips. The deal could be started by some of the most important US trading partners – such as the European Union, Canada and Mexico.

The de minimis plurilateral would be formed among a “coalition of the willing” that assumes the rights and obligations of the agreement. Non-members would not benefit from the higher de minimis the members apply to each other. However, just like the Information Technology Agreement (ITA) that was reached in 1996 among 29 Asia-Pacific economies, including the United States, and that has since expanded to cover 81 nations, the de minimis plurilateral should be open for outsiders to join.

To accommodate the prospective member countries’ different starting points and political concerns, the plurilateral on de minimis could, as with many trade deals, have customized schedules for countries to work toward the $1,000 threshold.

In developing countries, the deal could be introduced as a pilot supported by development banks and donors who help compensate the developing country governments for any foregone customs revenue during the pilot, and assess their net gains after the pilot.

The plurilateral on de minimis would expand opportunities for small businesses and consumers to sell and buy products across borders, accelerate customs clearance, and boost US small business exports. It would also be great foreign aid policy with a special carrot: acceding developing countries would be able to enjoy greater market access for their small business exporters in the advanced economies that are members.

If governments are serious about helping small business export, and companies and consumers access a wide variety of products to lower cost, a plurilateral on de minimis is just about the silver bullet.

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