Businesses facing Trump tariffs prepare for more pain as U.S. plan to end a duty-free exemption

Trump tariffs aren’t the only financial concern for Canadian businesses staring at an uncertain future.

 

Just ask Jaimie Harris, founder of Toronto-based sleepwear company This is J.

 

Small businesses, like Harris’s, are already feeling the threat of a 25 per cent U.S. tariff and are scrambling to understand what will happen after the Trump administration also ends a duty-free exemption that has given them unfettered access to American customers.

 

The so-called ‘de minimis exemption’ allows products valued at up to $800 U.S. to be shipped directly to American customers duty-free and with little inspection. It was expected to end when the U.S. announced the tariffs on Canadian products.

 

But the Trump administration said the exemption would continue until there were systems in place to process tariffs on the hundreds of thousands of packages coming into the U.S. each day.

 

Last Thursday, the U.S. announced that most tariffs for Canada and Mexico would be delayed until April 2.

 

De minimis has been an essential tool for Canadian companies, but recently came into the crosshairs of the Trump administration as an alleged smuggling route for Chinese chemicals used to make opioids by Mexican cartels.

The exemption has also sparked explosive growth in Chinese e-commerce companies like Temu and Shein, the two leading apparel and skin care brands in the U.S. according to an expert, which have flooded the American market

 

When the exemption ends, it’s “going to mean a lot more complications and it’s going to be a real challenge for a lot of companies,” said Bob Kirke, executive director of the Canadian Apparel Federation. “And it’s even a big challenge for the U.S. government, because it’s not clear how long this is going to take for them to figure this out.”

 

For Harris, this has meant a flurry of phone calls last week to try and figure out how her business could handle both the tariff and the phaseout of de minimis.

 

“The biggest issue right now is understanding exactly how this is going to happen and what the implications are going to be,” said Harris, “because nothing is 100 per cent clear in this exact moment.”

 

Harris said the pandemic forced her company to move to e-commerce, a shift that meant she now does 95 per cent of her business online, with 10 to 15 per cent of those customers from south of the border

 

“We can be considered lucky that (the tariff and duties) are not going to completely shut down our business,” said Harris. “But it is still a hit. And it’s a big enough hit that we have to make some changes.”

 

Harris said it was unclear whether the 25 per cent U.S. tariff would be charged on top of duties already in place for some Canadian-made products such as hers that don’t meet the criteria set out in the free trade agreement.

 

Although her sleepwear is made in Canada, some of the fabric is made of yarns from other countries, which means that without de minimis, products shipped to online customers in the U.S. could be subject to duties ranging from 1.1 to 16 per cent as well as the tariff.

 

Harris said it was also unclear how, or if, the duty and tariff costs could be passed on to customers on the e-commerce platform that her company uses.

 

The end of de minimis will not only hit Canadian-made goods, but products made in China for Canadian companies such as Thigh Society, which is faced with the tariff imposed by Trump in February on Chinese goods as well as U.S. duties on Chinese-made products when the exemption ends.

 

Marnie Rabinovitch Consky, who founded the underwear company, wrote on LinkedIn that the loss of the de minimis exemption could result in combined duties as high as 40 per cent on orders to U.S. customers, a calculation done before Trump added an additional 10 per cent to the tariff on Chinese-made goods on Tuesday.

‘Tough decisions lie ahead … the future remains uncertain’

“I know we can count on our Canadian customers to rally behind our homegrown Canadian brand like they have since 2009,” wrote Consky, “but I don’t think that’ll be enough. We’ll need to explore all options, like optimizing our supply chains and finding creative ways to manage increased costs.

 

“Tough decisions lie ahead,” she added, “and with this situation constantly evolving, the future remains uncertain.”

 

Kirke said that de minimis was instituted in the U.S. after urging by companies such as FedEx, UPS, Amazon and Walmart, which wanted to reduce the paperwork involved in processing international shipments.

 

“You can see how useful that is,” said Kirke, noting the exemption has given companies “unparalleled access to the U.S. market.” Shein and Temu have used it to achieve explosive growth in the U.S. that has outpaced fast-fashion retailers such as H&M and Zara, said Kirke.

 

When the tariffs are instituted, it will mean even more headaches for retailers. Kirke said that since the U.S. tariffs apply to only certain countries, products will have to be separated and shipped by their country of origin.

 

Three Ships Beauty, a Canadian company that has expanded south of the border with its cruelty-free and vegan skin care products, isn’t as worried about the end of de minimis as they sell directly in U.S. stores.

 

Founders Connie Lo and Laura Burget, however, are concerned about the long-term consequences of tariffs on the Canadian economy.

”Skin care ultimately is an item that’s not necessary,” said Burget. “People use it with their disposable income. And if that goes down, they’re not going to be buying skin care products.”

 

The pair launched the company in 2017 and distribute cosmetics to 1,000 stores across North America, but still do the majority of their business in Canada.

 

Burget said she also expects U.S. investment in Canadian brands, which many companies rely on to grow their business, will decrease and that the tariffs will continue to weaken the Canadian dollar, a problem for companies like hers who are sourcing materials from around the world that are typically priced in U.S. dollars.

 

The company was able to get ahead of the tariffs after U.S. President Donald Trump promised in November to institute them. Lo said her company notified retailers that there would be a price increase in their products as of April.

 

Lo said the company also saw a 30 per cent rise in online sales in February and it continues to see sustained growth, which she attributes in part to the threat of tariffs.

 

“I think another thing that’s the silver lining of this,” said Lo, “is we’ve really seen Canadians step it up when it comes to supporting their local brands.”

 

 

 

 

This article was first reported by The Star