Introduction
American consumers are increasingly aware of the abysmal working conditions attached to some of the most prominent brands in the fashion market. Over the past decade, popular brand names like Nike, Shein, and H&M have been criticized for their use of cheap, foreign labor to produce their apparel. Despite this public scrutiny, it is unclear that meaningful change has been made in their manufacturing and supply chains. How can they get away with this?
The United States Congress has demonstrated an increasing interest in regulating labor standards on a global scale, chiefly by implementing customs provisions. These regulations, like Section 307 of the Tariff Act and the Uyghur Forced Labor Prevention Act, aim to prevent goods made with forced labor from entering the United States market. Even so, international producers can circumvent these regulations by taking advantage of the exceptions built into customs legislation. One such example, the de minimis exception – reserved for relatively low-value imports – has proven to be particularly problematic in the effort to quell forced labor.
De Minimis Exception
The De Minimis Exception, Section 321 of the Tariff Act 1930, allows imports valued at less than $800 to enter the United States without duties or a formal entry. In other words, so long as the imported goods’ value is under this threshold, it can avoid other customs regulations the United States has put in place – notably, regulations like Section 307, that are focused on excluding imports made with forced labor. De minimis entries have seen a recent spike, as Customs and Border Protection (CBP) report a 21% increase in de minimis entries from FY20 to FY21. This influx can be attributed to two changes in the United States market: (1) an increase in the de minimis threshold in 2016 from $200 to $800; and (2) an increase in e-commerce sales.
In 2016, Congress passed an amendment to the Tariff Act via the Trade Facilitation and Trade Enforcement Act (TFTEA). Among other changes, the TFTEA increased the de minimis threshold from $200 to $800, with the aim of reducing the burden on CBP for smaller imports. These changes were implemented with the intention that CBP would save more money and resources than would be gained through the tariffs on these goods. However, Congress did not foresee the drastic change in the marketplace, which has grown to favor e-commerce – a preference that the COVID-19 Pandemic exacerbated.
E-commerce plays a substantial role in the use of the de minimis exception because these transactions create a preference for direct-to-consumer purchases. For example, when an American purchaser orders clothing from a foreign brand like Shein, the manufacturer will ship the clothing directly to the customer. The average consumer is unlikely to pass the $800 limit on everyday purchases like apparel, so Shein can take advantage of the de minimis exception to avoid paying duties on their imports. While this has been beneficial to the market in general, and for preserving government resources, it also creates loopholes that allow Shein to avoid labor standards that might be imposed if they were exporting their products for sale at brick-and-mortar stores, where the $800 threshold would not apply. Prior to e-commerce, stores would stock their shelves with products ordered in large imports and shipped in bulk to local warehouses. Rather than shipping thousands of dollars worth of merchandise at a time to be kept in and distributed throughout the United States., e-commerce allows foreign companies to send their products from the manufacturer’s warehouse to the consumer’s doorstep. As a result, even if an American consumer were to buy over $800 worth of clothes, Shein could simply ship the order in multiple packages, reducing the value of each, and assuring that the purchase still falls within the exception.
Even in instances where the de minimis exception might not apply, importers have found solutions that allow them to continue benefiting from it. Fulfillment centers in Mexico and Canada serve as middlemen for shipments, allowing them to enter the United States while remaining under the $800 threshold. Acting as interim warehouses, goods are sent in bulk to these centers, where they are held until shipped to the purchaser’s destination. Such fulfillment centers consider themselves essential to eliminate duties without breaking United States law.
The Threat
The de minimis exception and the resulting loophole is a cause for concern from both human rights and national security standpoints. Congress has instituted regulations to keep forced labor out of the marketplace that can be effectively disregarded by producers that ship directly to their customers. In the clothing sector this is especially problematic, given the extensive reporting of poor working conditions in garment factories in countries like China and Bangladesh. Despite the awareness that the working conditions do not meet international standards, the United States cannot influence the supply chain or create fairness in the market so long as brands take advantage of this exception. Reports suggest that an estimated 43 percent of imports that enter under the de minimis exception are otherwise non-compliant with United States customs law. This exemplifies another issue, one of national security: billions of imports subject to the de minimis exception are not screened by CBP. Efforts at eliminating forced labor and keeping illegal substances outside of the United States’ borders are greatly curtailed by the de minimis exception, which prevents CBP from tracking shipments. CBP’s efforts to identify and exclude suspicious imports, which may include counterfeit items or illegal substances, are left futile. It seems that this exception and its workarounds, coupled with the relatively high threshold in light of the growing role of e-commerce, have led to our current situation, incongruent with trade policy objectives.
Conclusion
While Congress has already begun to take action to close the gaps in the de minimis exception, it is imperative they do so with forced labor in mind. The poor working conditions that are widely reported in the fashion industry remain a major obstacle to human rights on a global scale. In this case, the United States legislature has the ability to influence manufacturer behavior by encouraging them to comply with labor standards. Reducing loopholes and requiring compliance with stricter customs laws via statutes, like the UFLPA, or amendments, like in the TFTEA, can foster change in manufacturing and supply chain management. Accordingly, creating an amendment that reduces the de minimis threshold will encourage improved adherence by making the exceptions harder to abuse. Importers would either have to comply, or lose their sales to American customers.
Clothing and apparel companies in particular should be prevented from using the de minimis exception when shipping directly to consumers. This would push these companies, who already face public scrutiny for their practices, to remedy the issues in their supply chain in order to be able to continue selling to American consumers. Hopefully this solution will present another opportunity to make lasting strides in assuring safe and fair working conditions on an international level.
Author Biography: Alexa Kutz is a Moderator of the International Law and Policy Brief (ILPB) and a J.D. Candidate at The George Washington University Law School. She has a Master of Arts and Bachelor of Arts in Spanish Language, Literature, and Culture, and a minor in English from the University of Delaware.
Editor: Samantha Hoover, GW Law J.D. Candidate 2024.