How Trump threw a wrench in the gears of Canadian e-commerce

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On any given day, Canadian-based logistics company GoBolt processes and ships nearly 100,000 items for retailers such as Holt Renfrew & Co. Ltd. and IKEA. Around 65 per cent of its deliveries are destined for the U.S., and virtually all of those are valued at US$800 and under, which qualifies them for what’s known as the “de minimis” exemption to the Tariff Act of 1930.

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In effect for nearly a century, the exemption, also known as Section 321, allows inexpensive goods to flow into the U.S. tax- and duty-free and with minimal paperwork.

“You create an electronic manifest via an online tool (that) includes simplified details like shipment type and recipient information,” said Jarrett Stewart, GoBolt’s senior vice-president of commercial. “Then you submit it to the U.S. Customs and Border Patrol (CBP). If your manifest was submitted properly, you will cross without issue.”

Or at least, that’s how it worked until earlier this month, when U.S. President Donald Trump hurled a wrench into the gears of global e-commerce by cancelling the exemption for goods originating from China and Canada as part of separate tariff orders against both countries.

Though the Canadian order was paused for 30 days, the Chinese cancellation went into effect before being halted on Feb. 1 to give the U.S. time to put systems in place to collect the tariff revenue.

Calling it disruptive is an understatement

Mackenzie West

The turmoil sparked a “chaotic moment” for Canadian retailers and logistics companies, many of whom source and manufacture products in China and ship them to U.S.-based customers, according to Mackenzie West, director of market development at Ontario-based customs broker GHY International.

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“Calling it disruptive is an understatement,” West said, noting that business scrambled to fulfill existing orders, navigate inventory transfers and reassess the origin and valuation of goods.

Behind the scenes, warehouses, logistics and delivery service providers have been “struggling” because they couldn’t move good originating from China until they developed new processes to comply with the de minimis cancellation, said Steve Bozicevic, chief executive of Ontario-based A&A Contract Customs Brokers Ltd., which helps businesses, shippers and logistics providers clear customs and process paperwork and duties.

He said if Section 321 clearance no longer applies, shippers will be forced to declare a “formal clearance” to the border agency, which is more onerous and requires duties and fees.

It would make it “very difficult to get goods into the U.S. without giving a lot of information about who’s selling them,” he said.

After Trump initially scrapped the rule for China-origin goods, providers were working around-the-clock to backfill information.

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“Warehouses were full and orders kept coming in,” said Bozicevic. “Often, little information is given by sellers on their product descriptions or who its manufacturers are when it comes to low-value goods.”

At the same time, shippers also stopped transporting China-origin goods from Canada into the U.S.

On Feb. 1, GoBolt started identifying and separating goods from China and its five Canadian fulfillment sites. It worked with its customs broker over the course of several days to develop a cross-border process for these products.

“All of our daily operations were impacted and a lot of operators were caught off-guard at the swiftness of these changes,” Stewart said.

If Trump permanently cancels the trade rule for China-origin goods, it could have a major impact on Canadian warehouses and third-party logistics providers, which have benefitted as Canada has become a staging ground for shipments into the U.S.

“Many of their clients already started shifting operations to import directly in the U.S.,” West said.

“Large-scale inventory transfers from Canada to the U.S. could be inevitable, as maintaining Canadian fulfillment for Chinese-origin goods would no longer make financial sense, ending the use of Canada as a de minimis free-trade zone.”

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Canadian sellers meanwhile, are potentially staring down extra paperwork, higher costs and slower U.S. clearances if Trump scraps the de minimis rule and slaps additional tariffs on goods made here.

It’s causing a lot of uncertainty

Nadia Ladak

Nadia Ladak, the cofounder and CEO of Marlow — which makes women’s hygiene products that are sold via Shopify Inc. and Amazon.com Inc. — said that her company benefits from the de minimis exemption, with 70 per cent of sales coming from the U.S.

“It’s causing a lot of uncertainty,” she said. For now, Ladak is exploring shifting more inventory into the U.S. and “reconsidering aspects of our supply chain.”

Bozicevic, who works with Canadian clients that primarily sell to the U.S., said that going from duty-free to double-digit tariffs “would be a death blow.”

Businesses will either eat these new costs or pass them onto the end consumer, said Anthony Pizza, vice-president and growth at SpeedX, a U.S.-based last-mile delivery provider that specializes in transporting small packages.

Among the companies that could be impacted is Ottawa-headquartered e-commerce giant Shopify, which provides software for retailers to build and manage their online shops and inventories. Around 25 per cent of Shopify’s top 100 stores have used the de minimis provision to ship goods into the U.S., according to LVK Logistics CEO Maggie Barnett.

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In a Friday blog post, the company advocated for de minimis protections, which “are crucial for small businesses in international trade… keeping costs low and improving competitiveness worldwide.  For many, these provisions are critical to survival.”

Martin Toner, an analyst and managing director at ATB Capital Markets, said Shopify’s U.S. merchant solutions revenue would be “impacted” if goods of Canadian and Chinese origin become ineligible for de minimis.

So far, any hit to Shopify seems to have been averted but “this is something we are watching,” Toner said.

Shopify could also experience a shake-up — albeit a manageable one — due to the number of low-volume businesses on its network that use a “dropshipping” model, in which a store’s manufacturers, often located in China, ship goods directly to customers rather than operate their own warehouses.

Shopify did not respond to a request for comment.

Jagath Narayan, CEO and founder of Ordoro, an app builder that aims to simplify shipping and inventory management for e-commerce platforms, said the entire dropshipping ecosystem could be severely disrupted.

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“There’s an entire industry built around selling ‘get rich with dropshipping’ courses,” he said. “I expect these to disappear as the model has completely changed now.”

For the wider e-commerce sector, Trump’s volatility isn’t making the wait for clarity on the de minimis exemption any easier.

“It’s one thing to change the rules and know that they’re going to stay in place for years,” said LVK Logistics’ Barnett. “But it’s another thing when businesses think, ‘Wait, I have to change my supply chain, and invest a lot of money in that, but this could all change again in a matter of days.’ That gives people heartburn.”

• Email: ylau@postmedia.com

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