Raising the <i>de minimis</i> threshold to enhance supply-chain connectivity

Reducing the time, cost and uncertainties of moving goods between APEC member economies is a continuing priority

A shopper in New York goes online to buy a woven bamboo basket from a handicraft maker in Malaysia selling direct to customers through an e-commerce website. Under a new APEC initiative to exempt customs duties on express and postal shipments, a US$100 basket may be exempt from customs duties.

Known as the de minimis threshold, the initiative is part of the Honolulu Declaration announced during the APEC Economic Leaders’ Meeting in November and includes a commitment to streamline entry documentation requirements.

Importantly, it expands on APEC’s commitment to improve the region’s supply chain performance by 10 percent by 2015, a target Leaders first committed to under the 2010 Yokohama Vision. It is also seen as a vital part of APEC’s efforts to strengthen regional economic integration and expand trade among its 21 member economies.

As an outcome of the Honolulu meeting, 10 APEC members agreed to implement a de minimis value of at least US$100, offering others the chance to adopt the initiative when ready – a scheme known as a pathfinder.

Dave Tan, the Executive Director of the Conference of Asia-Pacific Express Carriers (CAPEC), which represents major express delivery companies in Asia, including DHL, FedEx, TNT and UPS, sees that as a positive step, noting that a commercially useful de minimis value facilitates trade through cost savings and frees up resources without jeopardizing security.

“Collecting revenue involves manpower on the part of customs,” said Mr. Tan, who explains that the costs of collecting duties on low-value goods often exceeds the revenue generated from those tariffs.

Large amounts of paperwork eat up the flow of trade and add to time in transit, he continued. “The officials’ time would be better spent collecting duties on items that can generate higher revenues.”

Setting a de minimis threshold of US$100 could amount to cost savings of US$19.8 billion per year, according to a recent CAPEC study on de minimis thresholds in the APEC region.¹

Establishing a higher, commercially useful, baseline de minimis value is beneficial, since the large volume of low-value shipments incur high processing costs that outweigh the value of the tariffs collected from those shipments. They also create transit delays that reduce demand for such products.

The longer a product spends in transit the more likely it will spoil, become outdated or lose the interest of buyers, notes the CAPEC study, which found that a 10 percent cut in delivery times could expand exports by more than 4 percent.

A de minimis value also stimulates output by small- and medium-sized enterprises (SMEs), which raises competition and helps member economies grow.

SMEs will benefit the most from the easing of customs formalities, said Mr. Tan, who notes that because SMEs deal with the bulk of low-value shipments they face disproportionate burdens when completing customs forms.

According to a 2003 paper by the Organization for Economic Cooperation and Development, which recommends the adoption of de minimis thresholds, firms with fewer than 250 employees face trade transaction costs that are 30-45 percent higher than those incurred by larger firms.² The costs become more evident during times of economic turmoil, when SMEs become even more vulnerable to cost burdens.

Amid the economic downturn in Europe and a series of natural disasters in the APEC region that restricted trade among some member economies in 2011, Leaders at the Honolulu meeting resolved to support strong and balanced growth by exploring new approaches to trade liberalization, of which the de minimis threshold is one of the components.

“This can really show the value of APEC,” said Steven Okun, chairman of the Asia-Pacific Council of American Chambers of Commerce and former vice president for public affairs at UPS Asia-Pacific. Having all the regional economies working together will incentivize more companies to start trading, he added.

International trade and investment, business innovation and job creation that result from reducing the costs of trade all contribute to stronger economies and better regional security, say analysts.

APEC’s economic weight – its member economies currently represent 44 percent of world trade – and the sound politics that APEC promotes are also strong signals that can help restore certainty in the world economy, said Monica Contreras, chair of the APEC Committee on Trade and Investment, which oversees groups working to boost trade and liberalize investment.

That makes reducing the time, cost and uncertainties of moving goods between APEC member economies a continued priority for the CTI, which Ms. Contreras says is continuing to develop the APEC Supply-Chain Connectivity Framework.

Last year the CTI adopted a set of action plans to address eight “chokepoints” broadly related to customs inefficiencies, inadequate infrastructure and the quality of logistical services and management. Establishing a commercially useful baseline de minimis value will help address the fourth “chokepoint” of improving the efficiency of clearance of goods at-the-border.

As part of efforts to optimize supply-chain efficiency, the CTI has also launched several online resources that provide information on logistics regulations and tariffs and conducted a study to determine how improved connectivity across various types of transport could benefit APEC economies.

According to estimates from the Asian Development Bank, the direct and indirect costs associated with border procedures and documentation represents 7-10 percent of global trade. Streamlining those procedures would make such costs obsolete.

The task is to encourage the economies involved in the pathfinder to share the benefits with the others, said Mr. Tan, noting that Viet Nam is a good example of an economy not in the pathfinder that is moving in the right direction.

In February 2011 Viet Nam raised its de minimis level from US$48 to US$60, which Mr. Tan called a good sign of progress. Most APEC economies currently have de minimis regimes, but thresholds range from under US$1 to more than US$1,000, and eligibility varies.

A coordinated increase in de minimis threshold would also result in few additional revenue losses, since the revenue generated from tariffs has already been significantly reduced as part of achieving APEC’s Bogor Goals of free and open trade and investment in the Asia-Pacific region.

Cuts in government administration account for more than three-fourths of the cost savings, according to the CAPEC study, followed by savings in business compliance.

On the security front, meanwhile, reducing the workload of customs officials will help improve rather than jeopardize border security, notes Mr. Tan, pointing out that cargo reporting will still be required by most economies irrespective of the value of the shipment.

The efficacy of such benefits should come as some relief to members that have not yet agreed to the de minimis threshold.

“It is necessary to ensure appropriate risk management, safe operation and protection of transport and transportation facilities,” said Ambassador Gennady Ovechko, a senior official of Russia for APEC.

It is also necessary to ensure savings. Just by lowering the costs of trade by 5 percent between 2006 and 2010, businesses saved US$58.7 billion, explained Ms. Contreras, pointing to a study from APEC’s Policy Support Unit that assessed the outcome of the Second Trade Facilitation Action Plan (TFAP) II.

And at a time when world leaders are debating the need for austerity, Ms. Contreras said that puts APEC is in a “unique position” to help revitalize the global economy.

1. “De Minimis Thresholds in APEC,” Conference of Asia-Pacific Express Carriers; August 31, 2011

2. Walkenhorst, P. and Yasui, T., “Quantitative Assessment of the Benefits of Trade Facilitation,” TD/TC/WP(2003)31/Final, OECD; November 13, 2003.