Bret Schnitker, Emily Lane
January 21, 2025
Emily Lane 00:03
There's obviously a loss of revenue to the US government on imports. Is there any kind of figure on what that looks like?
Bret Schnitker 00:11
They, they anticipate, or they, they are trying to calculate that, but they think somewhere around 10 billion a year are lost revenue.
Emily Lane 00:19
Wow,
Bret Schnitker 00:20
yeah, it's a lot of money.
Emily Lane 00:35
Welcome to Clothing Coulture, a fashion industry podcast at the intersection of technology and innovation. I'm Emily Lane.
Bret Schnitker 00:42
And I'm Bret Schnitker. We speak with experts and disruptors who are moving the industry forward and discuss solutions to real industry challenges.
Emily Lane 00:51
Clothing. Coulture is produced by Stars Design Group, a global design and production house with more than 30 years of experience.
Emily Lane 01:01
Welcome back to another episode of Clothing Coulture. Today, we're back at the bar talking hot topics in our industry that are you know, becoming almost daily conversation. Today we're going to be talking about de minimis. De minimis. Are you excited Bret?
Bret Schnitker 01:19
now sounds like a new hit record.
Emily Lane 01:25
Well, de minimis has been an active conversation in our industry for the last several years, because there have been companies getting away with skyway robbery, basically under this under this clause, and so let's talk about a little bit about the impact that de minimis has had on US businesses, some of the benefits others have been able to experience, and what might change as a result of this crackdown that the government issued a statement on earlier this year.
Bret Schnitker 01:58
Yeah, de minimis has kind of a history going back to 1938 that was when it was kind of enacted, and it and its original intent was something so trivial on imports that the government wasn't going to be bothered with. And I think back then it was like $8 and then in 2016 there was kind of a Modernization Act, and it went to $200 and then a little bit later, I think it rose to about $800 or less. Is something that you can under the Obama administration, that you can import without duties, and that the government just didn't want to be bothered with. They kept raising that kind of level of what international packages could come in at without really a ton of taxation.
Emily Lane 02:43
And that makes sense. I mean, there's only so many resources available to scrutinize over every single package coming into the United States each year. Although what we have discovered in the apparel industry that this number has risen quite significantly in the last decade as to how many packages are coming in the United States under de minimis?
Bret Schnitker 03:05
yeah, I think it, you know, in years past, before people kind of figured out how to really entrepreneurially leverage the de minimis clause, you know, you'd have about 140 million packages. So it's still, you know, quite a few, but now it's risen to over a billion packages down. They're saying upwards of a million a day under de minimis.
Emily Lane 03:31
Oh my gosh, wow. That's
Bret Schnitker 03:33
less trivial,
Emily Lane 03:35
absolutely, and some of that's been some clever opportunity founded by by companies to kind of skate around tariffs, essentially, yeah, I
Bret Schnitker 03:47
mean, and I, and there are certainly different points of view on this, but the whole kind of 301, act that was kind of put in place and and that that's been around for quite some time, too, and it allows the US trade representation, the Office of the US trade representation, to analyze any country that they feel is dealing in unfair trade practices, and then penalize or adjust or be able to make some action against these things that perhaps another country would unfairly be competing with us. And you know, certainly under the Trump administration, that section was leveraged, I think it started in 2018 against China, and it started in things like solar panels and washing machines, and then continued to expand, not only from China, but into Canada, Europe, you know, all parts of Asia and all categories. I mean today, 301, out of China represents probably over seven. 70% of the goods coming out of China are under this additional tariff penalty Tariff Act. And those penalties probably run somewhere around 7% upwards of 30 or 50% which just recently kind of happened on some of these other products, and it's in addition to our normal tariff and or what people call duty on a particular garment or item that comes into the US and our business. I would say garment, so, you know, and, and certainly, that provides revenue for the US government. Some would argue that it balances trade,
Emily Lane 05:37
right? Okay, so let's talk about that, specifically, the economic impact that that de minimus has has had. So there's obviously a loss of revenue to the US government on imports. Is there any kind of figure on what that looks like?
Bret Schnitker 05:55
they anticipate, or they they're trying to calculate that, but they think somewhere around 10 billion a year are lost revenue.
Emily Lane 06:02
Wow,
Bret Schnitker 06:03
yeah, it's a lot of money.
Emily Lane 06:05
And so not only does that, of course, compromise our coffers within what's available for the US government, but there's also a skewed advantage, or I would say more like a competitive disadvantage for US companies because of this.
Bret Schnitker 06:23
Yes I mean, you know, whenever, you know, when you have these retaliatory tariffs,you know, and they're put in place traditionally to, you know, balance trade or offset economic disadvantage. If you ask a lot of economists, that generally don't work in the long run, tariffs just don't work unless they're extremely high, where you're just shutting out a country. And when you look at 2022, to 2023 you know, after these things were put in place, you do see a difference, especially out of China, about a 25% reduction in our trade deficit. So a lot of people would say, hey, we were at 382 billion. Trade deficit with China. It's now become about 297 billion. The tariffs are working. And on its surface, you go, okay, but when you figure out how much is coming through de minimis, you realize that whenever there's a challenge, people find solutions to come at things in a different way. And when you when you look at de minimis, and you look at the sheer volume of things that are coming through, and de minimis in general, you're realizing that people are finding ways around, you know, these retaliatory tariffs and and the and the imbalance, certainly within the tariff and the duty world, is as importers in large volumes of goods that come into the US. You know, we not only pay duties, but we pay these retaliatory tariffs. Those are not things that China pays. Those are things that the US consumer pays. A lot of people are saying that the Trump tariffs are the largest taxation on American consumers ever and and and that those costs do get passed along. No one just absorbs them. They get passed along, and the consumers end up paying more for particular goods. But the off side of that is that, you know, entrepreneurial Chinese companies sit down and say, Look, how do we figure out a way in the modern world to be able to be competitive? And there's this de minimis loophole where they're like, Okay, I can ship things in under $800 direct to a consumer, because we have online business going on. It's not all built in brick and mortar anymore. And anything I ship in under $800 from me to one individual, I'm shipping it in duty free. And so there is this heavy disadvantage for people, US importers versus Chinese exporters. You know, with this whole de minimis situation,
Emily Lane 08:57
is there an inflationary impact at all?
Bret Schnitker 09:01
Certainly with tariffs, there's an inflationary impact that consumers are paying more governments collecting more money. They're collecting more taxation. There might be some shift in terms of, you know, trade imbalance, but the consumer pays for it in the end, yeah, the benefit that consumers see when they are buying goods from some of these larger Chinese companies, direct under the de minimis rule, is that there's a reduction of inflation because they're paying less for goods because they don't have to pay the government their their share of import fees,
Emily Lane 09:39
right? So, so on paper, it looks like it's better because, oh, costs aren't rising at all. Still get this item for the same price.
Bret Schnitker 09:47
And I would argue some of that whole shift and the deficit is because so much is coming into the de minimis that even though, you know, we think on, you know, the overall books on trade down deficit that China's deficit is down 25% I think they're just finding ways around. I mean, shipments to Tijuana and Mexico, that whole area, were up 30% last year. Because a lot of what's happening is these companies are shipping large amounts of goods into Mexico and these large warehouses, and then shipping small parcel right across the border and de minimis.
Emily Lane 10:31
Okay, so there's you've talked a little bit about how that creates a pressure on us, businesses, sure. So what are some of those? The key, the key challenges there.
Bret Schnitker 10:47
Certaintly, the difference between duties and tariffs and somebody who's not paying those, you know, we're, you know, everyone that's in the import business that goes through proper channels is going to be subject to duties and tariffs and and we'll pay those higher rates, and, you know, those will get passed along to the customer? Yeah? I think that's the biggest impact that we see.
Emily Lane 11:10
Higher margins, or not margins, higher costs, smaller margins are going to be competitive. Yeah? Okay, so you some of this is being fostered by you mentioned itthe E commerce growth. You know, a lot more people are buying their products online. We saw a huge growth, of course, during COVID, which really has not waned. And I think there are some conversations that you know this is even, you know, further fostering more of the health in E commerce and while, while retail experience continues to suffer. Can you talk a little bit about the impact of, you know, this whole ecosystem with with e com and the de minimis?
Bret Schnitker 12:03
Yeah, I would say that we all go through cycles, you know, in our business, specifically in the apparel business, I think that consumers still want to touch and feel items. They want to have experiential retail. And we're seeing a lot of these new concepts explode where it's not just traditional brick and mortar retail, you know, you might go in and have a drink, and you might see some apparel there. It's just, you know, it becomes this whole entertainment kind of conversation. And I think that's the evolution of what we're seeing on that side. You know, the challenges that you still have with E commerce is returns and exchanges being at a high level, lack of control on quality in some cases. You know, it is a it is a community control on quality by the star rating. And you know, we've heard some stories, obviously, about some direct imports where they haven't gone through proper testing or protocols and are causing some issues, and the community does kind of weigh in pretty heavily in case there's something they're not particularly happy with. But I think we need to continue to figure out these different ways to balance the playing field for everybody, because e commerce isn't going away. If de minimis remains and in September, they made a big announcement that, yes, they're going to be reviewing this knocking down, yeah, what that means? Who knows. But you know, these are things that that that are certainly impacting the scope and and people, even US companies, certainly have the ability, if they're shipping direct to consumer and have that kind of volume, they can set up similar deals and ship directly to consumers under de minimis.
Emily Lane 13:46
So you're talking about volume. This is a lot of volume, as you've mentioned, and we have talked about the pressure from a logistics standpoint, managing that kind of volume, and then how that dovetails into environmental challenge. We had a wonderful conversation with Mike Robinson on the last mile and all of these things, the carbon neutrality conversations, all of that, certainly there is enhanced pressure with this volume of goods being managed direct delivery to consumer,
Bret Schnitker 14:20
Sure, and it's not just de minimis that's adding to that, right? It's the whole online, you know, you throw in Amazon and every other shipper that's shipping directly to a consumer. Today, we have a massive increase in packaging issues. We have a massive increase in use of, you know, all the different particular, yeah, everything, and you have a lot more transportation on the road, delivering items to customers and also returning to main sites. So you've got a lot of carbon being used in all of these transactions, where in the past, you would have maybe a more focused affort on that,
Emily Lane 15:01
you know, because the cost of returns is so high, we are seeing examples of retailers saying, yeah, don't return it. Just give it up. Give it to somebody else. Yeah, you know, in a lot of those instances, you know, some of those things just end up going to the landfill, you know. So here again, we're just continuing to contribute to a bigger problem.
Bret Schnitker 15:19
It's just a very complicated issue, because as all businesses evolve and technology affects every aspect of our lives every day, at the same time as those challenges kind of raise, I believe there's a there's a number of people out there that we've been talking to that are finding ways to offset some of those challenges effectively.So in the short term, we're definitely going to see those impacts environmentally in the long term, hopefully, as we're seeing more environmentally friendly packaging, more consistent recycling efforts, more last mile consolidations and saving those should those should certainly help. But we, we are definitely consumer nation. I don't think that's going to change anytime soon.
Emily Lane 16:03
And we're not the only consumer nation out there.
Emily Lane 16:05
Absolutely correct, yeah,
Bret Schnitker 16:07
we are the largest consumer nation
Emily Lane 16:09
for now. Yeah,
Bret Schnitker 16:11
in respect to a trade deficit annually, today, I think America has the largest trade deficit of any country in the world. It's about 700 almost $800 billion
Emily Lane 16:21
oh my gosh, wow.
Bret Schnitker 16:22
Country is listed so, you know,
Emily Lane 16:25
holy smokes,
Bret Schnitker 16:25
we like to bring in a lot more than we like to ship out.
Emily Lane 16:27
So with that much coming in, I imagine that there's a fair amount of pressure with regards to customs.
Bret Schnitker 16:34
I think that certainly some of the challenges that are going to have as they crack down, quote on de minimis is how we're going to manage the sheer volume coming in. You know, US Customs is and no plan words, but they're already taxed in terms of manpower. You know, we've got all sorts of acts that have been put in place that they've got to be looking for. We know, we talked a little bit about the Uyghur act that, you know, they've put in place in China, where cotton goods have to be watched. I mean, the average customs officer is is got a lot on his plate,
Emily Lane 17:14
right? Of course. Well, that was a pretty awesome overview. Thank you. Is there anything else that people should know about de minimis now, or de minimis down the road?
Bret Schnitker 17:26
Yeah I think, like with everything, landscapes are going to change. There are people that have built their entire business on de minimis, and certainly they're looking for alternatives, because they know they're the US government is going to have to make some change. They're seeing these massive numbers that are all that are that are not just rounding errors that don't follow the de minimis. The reason de minimis was created right something that's just not important. It's become a very important part, and I think certainly with the right lobbyists from you know, US manufacturing organizations, understanding that we're we're in an UN level playing field that the US government is going to have to step in to figure it out. But like with everything, every evolution has different solutions and different ways to to affect future outcomes. So always be up to date on new rules and regulations and and be prepared for this one, I think, to be addressed.
Emily Lane 18:31
Great Well, thank you, and thank you for joining us on this wonderful conversation on de minimis. And don't forget to subscribe to stay apprised of upcoming episodes of Clothing Coulture.
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