Trump administration policies designed to protect US industry may renew supply chain chaos
During the USMCA negotiations, American negotiators pressured Canada to raise the tariff exemption on individual low cost mail and courier shipments. Whether that was solely a desire to deal with the handling complexity of charging duty on what now amounts to 1.3 billion such packages entering the US each year or whether Amazon or other American businesses were seeking a bigger opening into the Canadian market under the trade deal is not entirely clear to me. It really doesn’t matter. The US succeeded in getting Canada to raise its low value (de minimis) threshold to $150 dollars per courier shipment from the comparable $20 postal shipment limit. For its part, the US has set its limit at $800 for both courier and mail shipments.
Nobody could have predicted that Covid-19 would emerge to upset global trade the way it did. But anyone who was watching the de minimis debate play out could have predicted what happened next. Consumers started to buy everything off the internet. A lot of goods could be sold and delivered for less than $800. In fact, according to the Wall Street Journal, the average value of shipments from Shein, (the Chinese fast fashion website) is $70. Shein and Temu alone, account for a third of the total volume of these shipments. The consequence of the de minimis policy was to open the floodgates to the American market. Goods poured in from China but also from Canada.
It is easy to open the tap, not so easy to close it. In his February 1 Executive Orders imposing tariffs on China, Mexico and Canada in response to his declaration of a Fentanyl emergency, the President withdrew the availability of de minimis for shipments from all three countries. He then had to lift those provisions when major ports became backlogged and the US Postal Service was forced to halt all postal shipments from China. The system simply could not handle the processing of all those goods. De minimis is back for now but expect this issue to make a comeback in the near future. The Wall Street Journal (WSJ) estimates that roughly a third of the total volume of de minimis shipments into the US last year were accounted for by Temu and Shein. Here is a link to a WSJ video explaining this trade in greater detail: https://youtu.be/87vkVBTepVM?si=o3zInAGUUt20Cr2P
The implied reason for withdrawing de minimis from Mexican and Canadian shipments was the belief that both countries were diversion points for Chinese goods. While there are certainly resellers across North America who offer Chinese goods, there are also local brands whose products are made in China or who rely upon Chinese inputs into their US and Canadian products. Major retailers like Walmart and Costco are now caught in the crossfire as they attempt to push tariff costs back on their suppliers in order to avoid a price shock for consumers. According to China Daily, the Chinese government has waded into the issue and warned Walmart that it will face action by China if it tries to shift US tariff costs to Chinese suppliers.
We can logically expect Chinese suppliers to move product assembly and order fulfillment around the world to avoid tariffs but North American businesses will continue to feel the effect of higher tariffs. Ironically, the decision to reinstate de minimus while hiking tariffs on Mexico, Canada and China has actually improved the competitive position of Temu and Shein, whose shipments continue to enter duty free.
The Trump administration has been clear on this point. The President’s position, like Biden before him, is that China needs to address the problem or de minimis is going away. As a result, we can expect that warehousing and logistics in Canada and Mexico will be disrupted as goods prices rise and demand slows.
Another, and perhaps even more significant, Trump administration proposal that will rock logistics and supply chains is the maritime action plan that the White House has proposed to reinvigorate the American shipbuilding industry. The plan would create a “harbor maintenance tax”. That tax would be aimed at any Chinese-owned operator as well as any operator whose fleet included Chinese ships or had Chinese ships on order. Also included would be any carriers offloading cargo in Mexico and Canada who would be subject to an additional 10% fee. Talk about taxation without representation!
Lloyd’s List estimates that these fees could exceed $1,000,000 in some cases and would be applied at each port of call in the United States.
The logical consequence of this policy will be to cause operators to split into separate companies and divide their fleets into Chinese and non-Chinese vessel groups. In addition, operators who are hit by the charges will have to pass those costs on to customers and could choose to limit the number of port calls they make in order to limit the impact of the fees. If operators choose to only unload cargo in the major ports, they will quickly overwhelm those ports and cause a logistics nightmare as rail and trucking capacity at the ports will be strained.
Chinese flagged operators could still call on Canadian and Mexican ports, avoiding the US to escape punitive port fees. From there, companies could rely on ground transportation into the United States to service American customers. Needless to say, any large scale displacement of supply lines of this sort will challenge logistics across North America and cause the railways and trucking companies to have to replan their equipment, routes and delivery times.
In the worst case scenario, the one two punch of de minimis and port fees could plunge North America back into the supply chain chaos that we last felt during Covid. Hopefully these issues are on the radar of trade negotiators on both sides of the Canada-US border. Officials need to be thinking through the market impacts of these policies and how to mitigate collateral damage to the economy as a whole.
The USTR is holding a public hearing on this matter today (March 24). Businesses around the world are watching carefully and planning their next steps.
the Beatty Blog 
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