The Tiny Loophole That Understates the Trade Deficit With China

When it comes to China, official U.S. trade statistics miss a big part of the story. They don’t include the value of roughly 800 million shipments a year that arrive in the U.S. under a set of rules known as de minimis, a Latin phrase meaning items too small to be bothered with, that applies to individual imports entering the U.S. valued under $800. Correcting for that suggests the deficit with China might have barely budged, and possibly grown, since the trade war. The Journal obtained data from a Customs database of known de minimis shipments and their declared value. The data showed nearly 800 million such packages enter the U.S. annually—more than two million a day—with as much as half coming directly from China. The data show that the known reported value of shipments surged from $40.5 million in 2012 to a peak of $67 billion in fiscal year 2020, with $46 billion directly from China. (In 2021, as the pandemic faded, the known value of shipments declined to about $40 billion.)There are flaws in this data. Many packages enter via the postal service. In some cases, Customs only knows their weight, not the value. Data show the country from which a shipment entered the U.S., rather than the country of origin. This is part of why it hadn’t been publicly released;Customs is working to produce official statistics.

Josh Zumbrun, "The Tiny Loophole That Understates the Trade Deficit With China,"Wall Street Journal, June 17, 2022, https://www.wsj.com/articles/the-tiny-loophole-that-understates-the-trade-deficit-with-china-11655458201

The Tiny Loophole That Understates the Trade Deficit With China

American politicians and economists have obsessed over the U.S. trade deficit with China for years.

Lowering the deficit was one of former President Donald Trump’s goals in imposing tariffs on the majority of Chinese imports. President Biden’s administration is debating whether to peel them off to alleviate inflation or keep them on to pressure China. After all, they did appear to achieve one of Mr. Trump’s purposes: reducing the bilateral deficit between the U.S. and China, which according to the official U.S. trade statistics topped $400 billion a year in 2018.

But here’s the catch: When it comes to China, official U.S. trade statistics miss a big part of the story. They don’t include the value of roughly 800 million shipments a year that arrive in the U.S. under a set of rules known as de minimis, a Latin phrase meaning items too small to be bothered with, that applies to individual imports entering the U.S. valued under $800. Correcting for that suggests the deficit with China might have barely budged, and possibly grown, since the trade war.

“The whole idea of ‘de minimis’ is you send in packages, and Customs isn’t checking the values,” said Jeff Ferry, an economist at the Coalition for a Prosperous America, a trade group that supports tariffs as a tool to help U.S. firms compete with China.

“This has implications for whether we can trust the figures on imports from China” where such shipments have become especially common, said Mr. Ferry, who in a study earlier this year determined U.S. trade statistics omit the value of such shipments.

The rise of e-commerce made it easy to search online for low-cost goods shipped directly to your door. The U.S.-China trade war created a tremendous additional incentive. One reason you find such cheap goods online is because it is increasingly common to ship them into the country de minimis, avoiding tariffs. A U.S. retailer, by contrast, would have to pay the tariff on a large shipment of the same item.

For most of the decades since its creation by Congress in 1938, the use of de minimis was small—as trivial as intended. Congress stipulated the purpose was “to avoid expense and inconvenience to the government disproportionate to the amount of revenue that would otherwise be collected.”

The Journal obtained data from a Customs database of known de minimis shipments and their declared value. The data showed nearly 800 million such packages enter the U.S. annually—more than two million a day—with as much as half coming directly from China.

The data show that the known reported value of shipments surged from $40.5 million in 2012 to a peak of $67 billion in fiscal year 2020, with $46 billion directly from China. (In 2021, as the pandemic faded, the known value of shipments declined to about $40 billion.)

There are flaws in this data. Many packages enter via the postal service. In some cases, Customs only knows their weight, not the value. Data show the country from which a shipment entered the U.S., rather than the country of origin. This is part of why it hadn’t been publicly released; Customs is working to produce official statistics.

As de minimis went from trivial to substantial, the Census Bureau’s official trade statistics didn’t change to reflect this. (Other countries have their own de minimis rules, but U.S. exports that qualify for that treatment aren’t thought to be significant. China’s corresponding threshold is only 50 yuan, or about $7.45.)

The Census Bureau said in a written statement that shipments meeting the de minimis criteria aren’t received by Census, and thus not included in its estimation process. The Census declined to comment on estimates about the scale of de minimis, but said that if Customs published official de minimis statistics “we would intend to research the quality of those statistics to evaluate whether they could be incorporated into the official merchandise trade statistics.”

Mr. Ferry, the economist, estimates the true value could be nearly twice as high as what Customs data captures. He looked at Securities and Exchange Commission filings of the largest U.S. internet retailers, and calculated they are bringing in $112 billion of goods a year that likely qualify for de minimis. Even this figure doesn’t capture China-based companies whose entire business model relies on duty-free shipments, but don’t file with the SEC.

For example, officially, the U.S.-China goods deficit reached $402 billion in fiscal year 2018 but narrowed to $302 billion in 2020, as tariffs and then the pandemic damped trade.

But in fact, de minimis shipments surged during this period, precisely to dodge tariffs and because of online shopping during the pandemic. The different measures and estimates of de minimis are crude; they have none of the precision of our data on imports of, say, cars. But they imply the fiscal 2020 deficit was probably at least $350 billion and perhaps larger than ever at $430 billion.

During those early days of the pandemic, people were ordering everything online. It was taking a long time to arrive. How much came from China? Certainly a lot. More than the statistics capture. How much exactly? No one knows.