Higher De Minimis Thresholds: A Win in the USMCA

Gary Clyde Hufbauer (PIIE) and Euijin Jung (PIIE)

October 15, 2018 10:00 AM
Photo Credit: 
REUTERS/Eduardo Munoz

Partly offsetting big negatives in the US-Mexico-Canada Agreement (USMCA) are several small positives.  Among the positives are higher de minimis thresholds, an aspect of trade facilitation that does not involve large policy changes. De minimis thresholds determine which low-value parcels can be shipped across international borders tax-free, tariff-free, and with simple customs forms.

In 1992, when the original North American Free Trade Agreement (NAFTA) was initially negotiated, online shopping was not a relevant issue because the technology to facilitate such commerce lay in the future.  Low-value parcels were a minor feature of international commerce, and express shippers like FedEx, UPS, and DHL carried a limited number of cross-border shipments.  No one gave much thought to de minimis thresholds; in most countries the thresholds were low, in the range of $200 for the United States and much less for Canada and Mexico.  For anything above that threshold amount, a tariff was applied. The subject was not covered in NAFTA or other bilateral trade agreements. 

Much has changed since 1992, but most especially a surge in online shopping and parcel deliveries. The total number of packages delivered by the United States Postal Service has jumped from well under 1 billion in 1992 to 5.7 billion in 2017.[1]  In March 2016, the United States raised its de minimis threshold from $200 to $800, but Mexico kept its threshold at US$50, and Canada at C$20 (US$16 at the exchange rate US$1=C$1.28).  Obviously, the low Mexican and Canadian thresholds discourage online shopping in those countries from US firms, whether through giants like Amazon and eBay or small retailers. 

The major payoff from NAFTA came in the form of tariffs practically disappearing as obstacles to North American commerce.  But both Mexico and Canada rely heavily on value-added taxes (called goods-and-services tax in Canada), a fiscal fact that prompted brick-and-mortar retailers in both countries to resist higher de minimis thresholds, fearing that US firms would enjoy a tax advantage when selling to local households. 

In the USMCA Chapter 7 Customs Administration and Trade Facilitation, Mexico agreed to a US$50 de minimis tax-free threshold, and a US$117 threshold for tariff-free and simple customs forms.  Canada agreed to a C$40 (US$31) tax-free threshold, and a C$150 (US$117) threshold for tariff-free and simple customs forms.  These improvements will encourage online shopping, benefitting not only US sellers but also Mexican and Canadian buyers. Canadian and Mexican consumers and small and medium enterprises (SMEs) will be able to purchase low-value US products with zero tariffs via ecommerce platforms such as Amazon, eBay, and PayPal. Also, express shipping firms such as UPS, FedEx, and DHL can expedite delivery and reduce logistic costs of low-value shipments.    

The United States agreed to a $100 threshold in the USMCA, but, as mentioned, the threshold under current US law is $800, and the much higher figure will continue to apply to purchases from Mexico and Canada, as well as the rest of the world. The United States does not have a federal value-added tax, and until a recent Supreme Court decision on the South Dakota v. Wayfair, Inc case, the states could not collect their retail sales taxes from out-of-state online sellers. The Court’s decision potentially resolves the concern that a higher de minimis threshold would exempt online retailers from the value-added taxes that domestic retailers in Mexico and Canada are required to charge.

Not now, but perhaps a decade hence, the US, Canadian, and Mexican governments will create a simple but secure internet system for online sellers to pay the appropriate value-added or retail sales tax in the buyer’s place of residence.  The system would do away with tax collection at the border. With that innovation, de minimis thresholds can be substantially raised, making online shopping easy and efficient throughout North America. 

Note

1. Data are collected from the financial statements of the United States Postal service.