U.S.-Canada Trade, De Minimis Exemption, and Tariff Evasion and Transshipment

I'm Scott. >> I'm [music] Bill. And we're the Trade Guys. >> You're listening to The Trade Guys, a podcast produced by CSIS, where we talk about trade in terms that everyone can understand. I'm Alex [music] Kistling and I'm here with Scott Miller and Bill Reich, the CSIS Trade Guys. Thanks for listening to the Trade Guys. On today's episode, we discuss the latest developments in US Canada trade negotiations, a recent court ruling on the Trump administration's 2025 move to end the dimminimous exemption, and a new White House report on tariff evasion and tram shipment. All that and more on today's episode of the Trade Guys. [music] Well, hello everyone and welcome back to the Trade Guys. Bill and Scott, we have a lot to cover today, but we of course have to start north of the border and discuss the latest on US Canada trade negotiations. On Tuesday, President Trump announced he would delay for 3 days his plan to impose additional 50% tariffs on some key imports from Canada. His announcement came right near the deadline as he announced trade negotiations would continue in the days to come. So, let's start there. Bill, we're recording this on the afternoon of Thursday, August 20th. So, where do things stand on the negotiations as of today? Well, as Scott said before we started recording where we're sort of in overtime now, the president g provided a reprieve late on Tuesday night which I heard just I was about to do a BBC interview on exactly this subject and they were headlining the fact that like 5 minutes earlier the president had announced that he was going to postpone this. So the new deadline is Saturday. I think it was a leverage move primarily designed to push the Canadians. I think the president was unhappy with the pace of negotiations. You know, and to be honest about it, anybody who's ever negotiated with Canadians would tell you that they're very tough negotiators. They're very difficult to deal with. They cling to their positions religiously. And past US trade representatives have all learned this. This is not news. But Trump's standard procedure, if he's not getting what he wants, is to make more threats. And so the 50% threat got things moving. Yeah, I think there was a secondary objective there too. Although there's an element to hypocrisy of all this. Canada and China were the only countries that retaliated against the initial US tariffs. And I think part of this was Trumpian message to everybody. This is what happens when you retaliate. You know, the fact that we have done something manifestally unfair to you is irrelevant. The fact that you have decided to go back after us and do the same thing to us is unfair and we're going to respond by doing something that is even more unfair than what we did the first time. But this is a Trump approach. The message to other countries, I think, is that tread carefully because if we could do it to the Canadians, we could do it to you. It didn't work very well what he tried to do with China. As we've all know and have discussed before, the Canadian situation is a little bit different. It looks like they're uh they are on the verge of a deal and to the surprise of no one I think the deal is being described in slightly different ways by both sides. I would it it appears that there will be concessions on both sides which is not the first time Trump has made concessions but it's a little bit unusual. It looks like he is going to reduce the tariffs on steel, aluminum and probably automobiles uh not to zero but to probably half of what they were before or well in the case of steel aluminum from 50 to 25% and rumor has it on cars from 25 to 15%. And that's important because keep in mind of course that cars from Europe, Korea and Japan are already at 15%. So what he had been doing is putting basically North American production at a disadvantage visa v their competitors which is exactly the opposite of what he's been claiming that he's trying to do. So getting those tariffs back down would be a good idea. Trump made a comment that amused me where he said, you know, we we are eviscerating Canadian tariffs and all of our stuff is going to get into Canada tariff-free. Well, of course, you know, it was already getting into ter into Canada the tariff-free before all this started. That was the essence of the USMCA agreement. >> Goes back to like 1988 with the US Canada agreement. >> Yes. >> It had been that way for a little while. >> Yeah. He's taking us back to square one and claiming victory. But okay, I think the other thing that will happen is, and it's already happening, the federal government in Canada has asked the provinces to remove their alcohol bans. Yeah. >> Because in Canada, this is provinially controlled, right? That's going to be amusing to watch because I think the provinces in the end will do it and it won't make any difference. The Canadians are so upset at us, they're not going to buy anything anyway. Uh, you know, to rephrase the old proverb, you know, you could take a horse to a bar, but you can't force them to drink American whiskey. We're trading an import ban to a boycott, and I don't think it's going to make any difference in Canada. The Canadians are not going to buy our product. However, they can make the concession to get rid of the ban, you know, and that's kind of a gimme. So, what will happen on dairy? I don't know. The president seems to think that he's going to get something on dairy. The Canadians have apparently the prime minister apparently in private assured the other the provincial premers that they're going to be able to maintain their supply management system. So, we'll have to see what actually comes out on that. This may be one of those cases which has littered the whole trade landscape in the last year where the two parties agree on something and then immediately afterwards disagree on what they agreed on. And we may see that happening here where Trump says this is a great victory for our dairy industry and the Canadians say we've protected our dairy industry 100%. >> Yeah. >> You know, and then we live to fight that one all over again. I I want to get I want to get Scott in here quickly, but I have to ask. I mean, when Trump made his announcement on Tuesday night that he was delaying the tariffs for three days, the online commentary almost reflexively started calling it a taco moment. Was it a taco moment? >> I don't think so. No, I think he's going to get some meaningful concessions out of the Canadians on this. And I've been sort of rethinking the taco point anyway. This week I made a comment about this. I think Trump has been comfortable with the taco joke because he believes that even when he's falling back, he's still advancing the ball and he's getting something. So, wasn't 100% but this has been his style for his whole life. Make extreme demands and then fall back often way far back, but still end up farther than where you were when you began. >> This is art of the deal. It's from his book 30 years ago. >> Exactly. >> Exactly. which is at the end you could afford to make concessions because you'll gain a little more. You gain a little flexibility as the negotiations are coming to a conclusion. So this feels like Trump. >> So not exactly taco. >> Yeah. So Scott, what are you tracking here? And can I ask you also, how are you viewing how Carney has been playing this over the past several weeks? >> Well, the Canadians, as mentioned, are tough negotiators. They take this seriously, but the entire USMCA negotiations have been characterized by a somewhat distant Canada and an engaged Mexico. So, I think that pattern holds. We'll have to see what gets delivered in the end. In my view, I think Ambassador Greer has made comments to the effect that he'd like to take this section 338 for a test drive. This seems to be a good set of facts on which to do it. I think their discrimination case is pretty solid on auto parts and spirits, maybe less so on dairy, but there's the concessions made or market access given to Europeans on dairy are restricted to US exporters. So, I think all around it was a good case. I'd like to see how the law works and put it into practice. The 3-day delay for, as I mentioned, is very art of the deal. That's very Trumpian and Carney has prime minister Carney has said the right things and his negotiators have been present but it's been tough to see movement and the comments afterwards are starkly different between the two sides. That just could be the oporadic nature of the Trump era of trade negotiations but and it could be the three-day delay but we'll have to see what comes out of it. To some extent, this reminds me of a 20-year-old South Park episode called Canada on Strike, where if you remember the episode, what Canada really wanted was respect from the world. And I think what they wound up with was benefits coupons. So [laughter] there's a respect issue here that is deeper than the domestic politics. Sure, that seems to be thwarting agreement, but I think as Bill pointed out, it would make sense for all the parties, commercial parties who are engaged in North American trade to get some of these solutions woven in. I mean, look, there is one aluminum industry in the US and Canada. It's the same industry and the tariffs there make very little sense. Let's stop hurting ourselves all the way along and not seeing it happen yet, but I have confidence that we'll find that way. We've been doing business for too long to throw it all away on what appears to be not much. Go ahead, Bill. >> I think Trump is misreading the Canadian politics on this a bit. >> Yeah, he's really created an enormous negative reaction towards the United States. Not Americans as individuals. I was there last fall and everybody was very nice, but to the American government, Trump in particular, I mean, they're really deeply offended by what he's doing. And they don't understand why he's treating a friend so badly. in fact better than he treats his enemies, which is becoming a theme of his administration. But the other problem that Carney has because of Trump's unpopularity and the unpopularity of what he's done, he's under enormous political pressure in Canada to take a strong stand. >> His parliamentary margin is only one or two seats right now. And initially, it was a minority government technically and then a couple seats changed hands. So now he's got a slight majority. He's under enormous pressure. And I think what's been happening is the more Trump pushes him, the harder it is for him to make concessions because for him to make concessions is going to be cause enormous political problems inside Canada, which means his job. So if you wanted to get more concessions out of the Canadians, I think that you would be handling this differently than the way Trump is. But that's a dream. I don't think he's capable of doing it any differently than he's doing it. I wanted to ask earlier just for argument sake here that say we have a deal that's struck over the next couple days and that that will happen before this episode airs but what does that mean for the future of USMCA negotiations that open things up here or what does it portend on that front? >> Yes, missed deadlines can be set aside. I think this thing can be put back together but it needs work and Bill's exactly right. It's tough. Our approach to global politics is making it tough for Canada to do things that are ultimately in its interest and in our joint interests. >> All right, we will continue to track and I'm sure we will touch upon this next week as well. But I want to move on to news out of the Court of International Trade where on August 13th the court upheld President Trump's decision to end the dimminimous exemption which had allowed shipments worth less than $800 to enter the United States without duties. The administration first ended dimminimous treatment for goods from China in May 2025 before extending the policy to imports from all countries later in August of 2025. Scott, if we can, let's start with the basics here. What is dimminimus exemption and what was at the heart of this case? Well, the dimminimous exemption is part of customs law that says a shipment of minimal value, which is what the Latin phrase dimminimus means. That minimal value is able to be passed through customs without additional inspection or verification. So, it simplifies customs procedures for low value shipments. It's been part of customs law in the US and elsewhere because it really helps risk management for the customs authorities more than anything else. It's a low value exemption. It was raised in the United States to $800 in, I believe, 2015. There was a bipartisan effort to pass a customs bill. At that time, it was fun to watch because back then Ohio had two senators on the Senate Finance Committee, Rob Portman and Sherid Brown. And this became sort of the Brown Portman bill or the Portman Brown bill. I think Portman came first because Republicans had the majority in 2015. They worked very well and did what was right for Ohio and one of the provisions was to raise the minimum to $800. This was good for a number of reasons. It saved a feared collapse at the customs as customs was implementing a new automated system and the relief from small packages helped them implemented that in a way that was not harmful or fairly smooth for large importers. So it worked well in the short term from that standpoint. It was preferred by many retailers, particularly small retailers, as it made it easier to hand international returns. Didn't burden your customer who wanted to return an item they bought from you online in ways that a low dominous would make that a very difficult transaction. But it became controversial with regard to China's use of it in fast fashion and other topics became almost toxic. And so the president used his authority to withdraw it from China. Subsequently, the Congress has repealed the diminous as of 2027. So by the time the court got around to considering the arguments, the Congress had already acted and dimminimus will have to fight that battle another day. It looks too much like a loophole for it to survive at the moment. >> Yeah. I mean, in a way, the court case is kind of academic. It's going to be gone in less than a year anyway by statute. So Detroit Axel was a company that brought the case. I don't know if they're going to appeal further or not. Even if they do, it's going to be kind of a pirick victory because the statute is clear going forward in I think July of 2027. The Congress may end up regretting doing what they did in the form in which they did it for exactly the reason that Scott said. This is a management tool for customs. And uh for years it was $50, you know, and then going back to 1930 it was $50. And then at some point several decades ago it went up to 200. and then it went up to 800 2015. Uh you can make an argument, I think a legitimate one, that 800 is a little high. But what they've done now, I think, is take it back to zero, which means that everything coming in is going to have to be have its value assessed, which means hundreds of millions of packages annually are going to have to go through, you know, the more or less the normal customs procedure. This is going to end up being a huge burden. having some sort of dimminimous level makes sense. And like I said, I can make an argument that 800's is too high. There was objection to it at the time, mostly from CBP who felt that it would make it easier to illicitly import drugs under the dimminimous rubric. And I think there was some evidence that that's what happened, although that's hardly the biggest issue. >> Well, that was at the heart of Trump's argument about this, right? It was fentanyl shipments and other things. Yes, he wasn't wrong about that. But if you go back to zero, I think it puts an extraordinary burden on CBP to do all the paperwork. Well, right now electronic work that's associated with it. So, um I think probably the authorities will come to regret all this in a few years of administration. But, you know, right now, you know, it's gone and we're going to have to live with it. There's not a lot of data about what this means. There was a study back last year when this was on the table that it would probably cost the US economy probably around $1 13 billion. The stronger point I think is that it probably is regressive in the sense that that removing it is going to hurt poor lower income consumers more than it's going to hurt upper income consumers >> and small business much more than big business. Yes. >> But that's not anything new for this administration. the tariffs that are supposed to generally have had exactly the same effect. >> Okay. All right. Well, I want to move on to our our final topic today and Bill, I'll start with you, but I really want to dive into this new White House report on tariff evasion and trans shipment. This report argues that exporters, particularly from China, are increasingly routing goods through third countries to evade US tariffs. And the report identifies more than 40 economies as potential trans shshipment risks. So, Bill, again, if we could start with the basics here, what is trans shipment and how does it allow companies to get around US tariffs? >> Well, let me say first, I thought this was kind of a cool report, and I don't usually compliment this administration on anything as listeners know, but this was kind of a cool report. First of all, it didn't have as much of the Trump is brilliant and everybody else is stupid rhetoric that we see in a lot of stuff that comes out of the administration. Second, it contained an acknowledgment that surprised me, which was an admission that actually what Trump has done is made the problem worse rather than better and which I'll explain in a minute. Third, it didn't have any stupid recommendations, which is also novel. It's designed to deal with a serious problem and trans shipment. I think the simplest way to explain it is country A makes something and they could export it directly to country C and pay whatever the tariff is on it. But if that is a high tariff, country A may be tempted to transship the item to country B where it is relabeled or changed in some way and labeled then a product to country B where it is then exported to country C at a lower tariff rate. Historically, customs fraud has been a problem for centuries. So, this is not a new thing. It was not a huge thing in the United States. It was mostly employed in cases where there were very large anti-dumping or counterveail duties that have been assessed against particular items or it was employed in areas like apparel where the United States has high tariffs. But up until Trump, for the most part, the average US tariff was a little bit less than 2 and a.5%. And it was the same for almost everybody, you know, except for Iran and Cuba and countries on the bad guys list. It didn't make much difference to try and ship from A to B to C because the tariff was going to be 2.5% or less no matter where it came from, unless you were paying these extra duties. In terms of how it works, you know, there's a spectrum that ranges from outright customs fraud. The most obvious example being it moves from country A to B and somebody slaps a made in country B label on it nothing more and then rehips it to United States country C and that's the extent of what goes on in country B the other end of the extreme is what's called a substantial transformation occurs and I think the cleanest example which is a true one is when China exports steel slabs to South Korea which rolls them into sheet and strip. And under international customs rules, that's called a substantial transformation. That product is a different product. It's not steel slab anymore. It's a sheet or a strip or it's wire. It's under a different tariff schedule number. That makes it a product of South Korea, not a product of China. And that is, you know, as I said, recognized under international customs rules is that's legitimate. Now, of course, between the two extremes, there's a whole bunch of questions that become very difficult. If you ship the car to Mexico from Korea and then simply repaint it, is that enough to make it a Mexican car? If you ship the parts to Mexico and then put them together in Mexico, is that enough to make it a Mexican car as opposed to a Korean or Japanese car? >> These are great questions. >> This is what gets litigated. You know, it's up the customs authorities in each country to decide these things. And one of the things that has happened that makes it worse, as I said, Trump has exacerbated the problem because, you know, if the United States tariff is essentially the same for everybody, there's no point in doing this except in the rare case of like a 300% anti-dumping duty. But when you have a system of differential tariffs like he's created where the UK is 10, the EU is 15, Korea and Japan are 15, the Southeast Asian nations are 18, 19 or 20, China is more than that, you create an incentive for what could best be called tariff arbitrage where you play the game of let's ship through a lower tariff country. So if you're China, it's in your interest now to ship to any of those other countries because if you can then convince the authorities that your item, even though it started in China, has been substantially transformed in country B, which might be any of the countries I mentioned or others, and now it's legitimately a product of country B. If you can persuade the authorities of that, you win, you know, and you get a substantially lower tariff, which was not really an issue before when everybody had a most favored nation tariff. So, it's gotten worse. And in fact, the report acknowledges some 40 countries where it assesses that this is a problem. It's not just a China problem. And I think several things where this is going is what is more worrisome than where it is right now. The report's recommendation basically was to use AI to develop a better means of tracking products and tracking and discovering a trans shipment which seems to be despite all the error rates of AI. Uh that's probably a useful thing to do particularly given the volume of trade that's involved. But I'm a little concerned about where this is going and we're going to see this first in USMCA because you know one of the things that happens when you have differential tariffs is it matters where something comes from. When everybody was paying 2 and a half% it didn't matter whether it came from Kyrgyzstan or Armenia or the United Kingdom. It was all the same tariff. Now, it makes a difference. And what one of the other things that means then is you have to have rules that help you decide when something is a product of that country and when it isn't. And we went through this with USMCA in 2018 with automobiles because the Trump administration wanted to ensure more North American content in automobiles. They wanted to make it harder for Korean, Japanese, and European auto manufacturers in Mexico to just ship their cars in with minimal value added in Mexico. So, they created very complicated rules to increase the North American share of content. It appears now that what Trump wants to do this time around is increase the share of US content. But once you start down the road of changing the rules of origin which define where the product came from, you end up talking about when is something substantially transformed and when is it not? And there have been some rather novel suggestions that have come up which so far have gotten no traction. But I'm worried about them. And the most dangerous one I think is the proposal that you should define the country of products origin by who owns the factory, not where it was made. This proposal was if it's a Chinese company, its product is Chinese. Whether it was made in China or whether it was made in the company's factory in Germany or made in the company's factory in Vietnam or made in the company's factory in Mexico, even it was totally made in those factories because the company is Chinese. the product is Chinese. By that same argument in this steel slab case, I argued those people would say once a Chinese slab, always a Chinese slab. And it doesn't matter if it becomes wire or sheet or strip, it's still Chinese steel. >> Bill, it's been a long time since we've had a good rant like this, but I see Scott jumping out of his skin to jump in here. This light lights my hair on fire because [laughter] imagine the opportunities for discrimination against American companies with international operations. It writes itself. Paul Simon had it right. The nearer your destination, the more you're slip sliding away. The more you try to turn this down and tighten down exemptions, the further you get from what you were trying to do. >> So, what do you do about it? >> Well, look, a lot of it is quite legitimate. All right. For instance, you know, in in the chemicals business, a lot of uses for citric acid. Citric acid was subject to anti-dumping. The least citric acid from China was subject to anti-dumping duties. But there are lots of sources for citric acid and lots of ways to modify it. And so a citric acid importer could import that product to Mexico from China, go to a toll processor, have a chemical reaction occur which creates a new product that's entirely legitimate as a substantial transformation and that new product then is a product of NAFTA which enters the United States duty-free. Now over time that supplier will probably figure out there's a local source of citric acid. It's not a particularly complicated product. And by doing so, he would be able to celebrate with local politicians that he's near sourced his supply, that new ingredient. Well, this is crazy. But the idea is that there's a real difference between managing your costs well by sourcing and customs fraud. Customs fraud is a problem, right? But trying to distinguish it on a case- by case basis will create a lot of problems for people who have complicated jobs the way it is. So this is one of these things at some point it's got to be practical about what the potential gain is and what you're really going to be able to catch with AI or with human beings. >> Yeah. I mean it's a fascinating question. Bill, go ahead. Well, the systemic consequences could be significant, too. >> If a US multinational and the United States develops unilateral definitions of these things, which seems to be where we're going, US companies are going to have to maintain multiple supply chains. You know, one for their supply chain of stuff going to end up in the United States. >> Yes. >> And a separate one for their stuff that's going to end up in a factory in a different country. Now this is where chemical harmonization was such a big benefit to the industry because we agreed that subject to that for non-preferential rules of origin a chemical reaction denoted substantial transformation. So simple mixing isn't substantial transformation chemical reaction is. And it makes doing business much more straightforward and it's fair to all concerned. And if you're going to unwind that in the Chinese case, for example, >> right, >> and not in other cases, you create a nightmare for supply chain managers as well as customs authorities, >> right? >> Just practically speaking, I mean, this was just a report that contained recommendation. There's no policy set forth in this report. >> Yes. And it did not recommend what we've just been talking about. I want to be clear about that. >> Right. Right. >> It was a very modest recommendation. However, my sense is that if you listen to the chatter out there, we're heading in that direction and this will be an issue in USMCA because the goal of the US and USMCA as we've talked on this subject many times is to prevent Mexico and Canada from becoming a backdoor for Chinese imports into the US. And that means inevitably, it goes right to this question. The Chinese, they ship to Mexico or they build a factory in Mexico. How do you decide what makes that product Mexican? >> And Chinese cars will be the test case. And it's terribly difficult to stop. But if you look at Europe, Chinese brands are gaining massive market share in most European countries. >> Oh, yes. Yes. All right, Bill and Scott, we're going to leave it there for today. Before we close out, I do want a bit of due to our great producer, Gina Kim, who has helped us out on this show for a long time. She has moved on to attend graduate school in New York. Gina was a terrific contributor to all that we do on the Trey Guys. Gina, if you're listening, we're wishing you all the best. We'll miss you at CSIS, but we can't thank you enough for all that you did for the Trey Guys and for the rest of the CSIS suite of podcasts. So, you will be missed. >> Thank you indeed. >> Well, Bill, go ahead. >> Gina, if you're listening, good career move, smart move. Hope you do well in school and that we all get to see you again. I know she will do well in school. She's a sharp one. So, all right everybody, thank you for joining us this week. We'll see you next week. Take care until then. [music] You've been listening to the Trey Guys, a CSIS podcast. For more audio content, visit csis.org/mpodcast. Thanks for tuning in. [music]