The UK Should Not Scrap the De Minimis Exemption

5 reasons why

Did you know that condensed milk is actually made of metal? Or at least they are in the imagination of Howard Lutnick. The rationale behind Lutnick’s bonkers claim is that it allows the Trump Administration to slap Section 232 tariffs on a whole host of goods. For those of you who are blissfully unaware of these tariffs, they were created by the Trade Expansion Act 1962 and empowers the President of the day to impose tariffs on goods for the purpose of protecting national security. I used to have to deal with them during Trump’s first term and they were a nightmare even back then when they simply applied to lumps of metal, not tins of condensed milk (spare a thought for the advisers and officials at the Department of Business and Trade).

I mention this because it’s just another in a long line of very bad trade policies implemented by Trump. However, there is another policy which has received relatively little attention but is one which the UK government is seriously considering emulating. Doing so would be a disaster.

The US ended the de minimis exemption for low value goods entering the country meaning that they are now subject to tariffs and more stringent customs checks. While it would potentially be a revenue raiser for Rachel Reeves, it would be very foolish of the UK to follow Trump’s lead on this.

First, the experience of America serves as a cautionary tale for the UK. The change has already caused pandemonium at the US border. Households and firms are now waiting longer for their orders, and not just the type which were previously exempt. More rigorous checks on low value goods places a strain on the resources of customs officials and so it takes longer for them to check and process higher value goods as well. The UK trading system has experienced three major shocks with Brexit, Covid, and Trump and the last thing it needs is for the government to create even more friction by erecting yet more barriers.

Second, it would be bad news for UK consumers. As I’ve written before, we shouldn’t be too worried about inflation being above target. However, it is still higher than it should be due to the government and many households continue to struggle to make ends meet. The government should be doing everything it can to alleviate the cost of living crisis rather than actively making goods more expensive for households.

Third, it would be a disaster for British businesses, especially the small ones. As discussed above, it would increase the cost of living for consumers. This means that they will have less disposable income to spend on other goods and services. Moreover, small firms also make use of the de minimis exemption as they import products either to use as intermediate goods for assembling their own products or for re-selling and so this will improve costs for them. What is more, the UK scrapping the exemption might mean that other countries follow suit, meaning that any low value goods exported by UK businesses will be less competitive in these markets. Businesses are already struggling due to energy costs and the very damaging tax increases introduced in last year’s Budget. Given that we’re going to see even more tax hikes in November, it would be incredibly reckless of the Chancellor to pile even more pressure on businesses.

Fourth, it would make lowering inflation more difficult. As I’ve written before, I believe that inflation is going to return to target more quickly than many commentators think, albeit for pessimistic reasons. However, we should not be complacent and, as we have already seen this past year, the government increasing costs for businesses is inflationary. Firms absorb some of the costs but they also pass them onto consumers in the form of higher prices. The UK actually has the potential to see prices coming down due to trade diversion leading to an increase in imports (assuming that the Trade Remedies Authority doesn’t get involved). The government should welcome any supply side factors which help to return inflation to target rather than actively fuelling inflation.

Fifth (and finally), it is the principle of it all. It might seem as though this is all about Shein and Temu orders, it is actually emblematic of something far more important. Free trade is a wonderful thing and we need much more of it. The ones calling for the exemption to be scrapped are established businesses. They may pretend that they are doing it because they care about consumer safety but in reality they don’t like the competition. This is what has happened throughout history as established industries and firms engage in rent-seeking in order to shield themselves from competition, often at the expense of everyone else.

Free trade does increase competition and forces incumbents to either up their game or go bust. While it is obviously not pleasant for the owners and workers of the companies which fail, this ‘creative destruction’ leads to new firms and sometimes even entire industries being born which create new goods and services which we all enjoy. In short, it leads to progress and economic growth. The government should be embracing free trade by abolishing all tariffs, quotas, and subsidies while also removing and reforming non-tariff and technical barriers to trade rather than imposing new tariffs.

So, there we have it. Five reasons why the UK would be mad to follow Trump’s example by abolishing the de minimis exemption. Free trade is great – we should have much more of it.

Other stuff

On Monday the winners of this year’s Nobel Prize in Economics was announced. I was really pleased with it and think it’s probably the most well deserved in years. It was awarded for work showing the importance of innovation and creative destruction for economic growth and progress. It’s also a helpful reminder that the Industrial Revolution is so significant not just because it led to a period of high and rapid economic growth but rather because it was the first time in human history that we experienced sustained economic growth. I wrote an article published by City AM yesterday on why all this matters and why I worry that the UK is at risk of stagnation and decline. You can read it here.

Thanks as ever for reading. I might write another short piece tomorrow on the train back from Cambridge (depending on the WiFi). Have a great weekend!