Companies manufacturing in China are using a little-known trade rule to dodge tariffs on their exports to the United States and reduce the cost of US President Donald Trump’s trade war. Section 321 of the Tariff Act of 1930 – also known as the de minimis rule – is a legal loophole that allows single shipments not exceeding US$800 in value per individual or company within a 24-hour period to enter the US tariff free. “The de minimis is the green lane of trade,” said Charles Brewer, CEO of DHL e-Commerce in Singapore, in reference to the customs channels at an airport where a passenger must declare if they are carrying goods above a certain value by exiting through the red lane. Its use in the US skyrocketed after then president Barack Obama quadrupled the limit from US$200 in 2016 to boost e-commerce. Now, the US’ ceiling is among the world’s highest, and the rule has grown more important since Trump started placing tariffs on Chinese imports in 2018. Traders in China have since been alerted to a legal – if admin-intensive – way of avoiding tariffs. Meanwhile, a cottage industry of lawyers and logistics companies are springing up around Hong Kong and further afield, offering one-stop shops for buyers in the US and sellers in China looking to use Section 321 to reduce their costs. In the US, its growing use has also alerted customs authorities, and on Thursday, the Customs and Border Protection agency launched a “voluntary one-year pilot”, inviting companies using Section 321 to submit their data in advance. This is viewed by industry experts as a first step in cracking down on a loophole that is open to manipulation. The owner of one Shenzhen-based logistics company said he had been intentionally undervaluing his exports to the US to take advantage of the de minimis rule. “I know Section 321. If the value of the delivery exceeds US$800, you put a lower value on it, like US$100 or US$200, it is not realistic to put the real value. Of course, there are risks, once US customs spot it, they will confiscate it,” said the businessman, who – for obvious reasons – wished not to be named. You put a lower value on it, like US$100 or US$200, it is not realistic to put the real value. Of course, there are risks, once US customs spot it, they will confiscate it Unnamed businessman However, there are many legitimately working the system, within the rules. Nick Bartlett, director at CBIP Logistics – a Hong Kong firm that has seen growth in genuine demands for use of Section 321 in shipping to the US – said that “it cannot be used for [business-to-business] shipping or technically reselling either, so that is why it is limited US$800 per package”. Jackie Chun Kit-lee, managing director at the Hong Kong branch of Delmar International, a Canadian logistics firm, has been using Section 321 for a couple of years, “not on a big scale, but is working well for us”. “This is a very good loophole for any product that is below US$800. So for the consumer, it is a good deal, and for a lot of the brand owners, it takes a lot of pressure off from them,” Chun said. While the US$800 limit may sound small, big US buyers have been able to set up sophisticated online systems that apply de minimis to a theoretically unlimited number of products, since they are all being shipped to different buyers – online shoppers. These goods are all tariff-free, meaning the retailers are saving huge amounts of money. It amounts to what William Marshall, partner with Hong Kong law firm Tiang & Partners, described as “a safe harbour from the trade war for e-commerce”, but an “unwieldy IT issue”, since the administration work required behind the scenes is so cumbersome. Tony Leach, global supply chain director at James Cargo Fulfilment, works with high-end fashion and consumer electronics brands in the US to help get goods into the country tariff-free, using a method called drop shipping, where the retailer never actually touches the physical product before it reaches the end consumer. “This offers a viable option to circumnavigate the trade war between China and the US,” Leach said. A couple of years ago, he implemented an online solution for larger American retail customers, whose goods have a retail value of “around US$400 each”. The products are manufactured in southern China then exported to Hong Kong. Once a customer orders online, it appears on the warehouse management systems in Hong Kong and employees “do a pick and pack” – that is, take a product from a master carton, repackage it and address it to the end consumer in the US, using a label from logistics firm UPS. The product is air freighted to North America along with other parcels, each with a different importer of record – the end consumer – with the documents required to satisfy Section 321. “We have a customs broker in the US who specialises in Section 321, who processes the customs clearance within that freight station or express cargo facility. They process the 321, it is customs cleared and then they inject it straight into UPS’ home delivery service. It is quite a slick model,” Leach said. Some US buyers are also using the rule to fill their own inventories, in contravention of the rule, which states that split shipments should be treated as single cargoes. One logistics executive said they had processed orders for coffee machine exports from China to the US, and while the individual orders were each under US$800, the buyer had ordered more than one machine. They then asked the logistics provider to “stagger” the shipments over different days, so that they could all be imported tariff-free, although the shipping costs were higher, since the products are dispatched separately. “This was just an example of what we did to not alarm or tip off customs that the same individual had brought multiple items of the same product,” said the executive, who asked not to be named. Marshall from Tiang & Partners said that “this kind of evasion would presumably be easier to detect” with the customs agency’s new pilot data system. Indeed, efforts to crack down on exploitation of the law have been noticed by Chinese online retailers. On a Chinese logistics online forum, companies warned that US customs could put additional duties on products, even if the claimed value was below US$800. The administrative exemption may be denied if US customs believes that the shipment was sent as a low-value shipment for the purpose of avoiding compliance with any pertinent law or regulation Logistics company on online forum Amazon sellers from Beijing, Shenzhen and Hangzhou said on the forum that they had received notifications from logistics firm DHL that “US customs is tightening inspections on packages sent from the same seller on the same day to Amazon's warehouse”, as some sellers split the shipment into different small parcels to avoid the tariffs. “The administrative exemption may be denied if US customs believes that the shipment was sent as a low-value shipment for the purpose of avoiding compliance with any pertinent law or regulation,” one logistics company posted on the forum. Other companies are using Canada’s proximity to the US to ship lower-value items to bonded warehouses, where they can be dispatched across the border tariff free by truck. By sending the products en masse to bonded, tariff-free warehouses in Canada, they can avoid one of the main pitfalls of using Section 321, higher shipping costs. “There are a few third-party logistics companies in Canada that saw an opportunity by importing Chinese goods in big quantities into Canada, and then fulfilling orders to US consumers from Canada,” said Orlando Murrieta, general manager of OEM Brokerage & Trade Consulting Services in Nevada. “ This practice is perfectly legal, as long as they are limited to a single shipment and importer per day. ”