Trump tariffs could boost Canadian warehouse business

Potential payday from U.S. e-commerce firms looking to dodge Chinese-made goods penalties

A loophole in trade regulations could allow U.S. e-commerce merchants to get around tariffs on Chinese products by detouring their products through Canada | Fevzile/Shutterstock

As the U.S.-China trade war shows no signs of abating, American e-commerce companies that have goods manufactured in China are looking at using Canadian warehouses as a way to minimize tariff impact.

Companies in the Canadian order fulfilment sector – warehouses that store bulk cargo from a seller, then process individual orders and send off packages directly to consumers – say interest has picked up in recent months among U.S. clients who had in previous years used Canadian warehouses to reach Canada’s consumers.

The concept is centred around a provision in the U.S. customs code – Section 321 – that allows any packages valued at US$800 or less to be imported into the United States tariff-free.

This has prompted some smaller American e-commerce companies to distribute Chinese-made products in the U.S. by shipping to Canada first, then having a Canadian warehouse send out the individual orders to U.S. consumers.

“Let’s say company X is buying sunglasses from China, and the current duty rates in the U.S. – let’s just make it up for arguments sake – is 20%,” said Steven Page, president of Ontario-based Stalco Inc., which has had an uptick in client interest in shipping through Canada.

“So company X goes out and buys $1 million worth of sunglasses. That shipment, when it arrives in the U.S., would be hit by that hypothetical 20% duty on the $1 million. But under our methodology, that container would come to Canada, and even if it incurs a duty, once we demonstrated to the Canadian government that we’ve exported the inventory that came into the country, they will refund the duty.

“The beauty of the scenario is this: Let’s say company X is using a third-party fulfilment centre in the United States. Stalco is a fulfilment centre; we make our money by providing fulfilment services. In the instance of this scenario, we are simply charging fulfilment services to the client.… The entire duty saving is money in their pockets.”

International trade and sales tax lawyer Cyndee Todgham Cherniak confirmed the practice is completely legal within the existing duty regulations of the United States. Cherniak noted that the U.S. customs system infrastructure is set up in such a way that low-value shipments can come through without the payment of duty and taxes.

Any lowering of that US$800 threshold – which could theoretically shrink the duty-free loophole provided by Section 321 – may require more resources for U.S. customs at Canadian border crossings, something that American officials may be unable to provide.

“They really don’t want to get into a situation where every package coming into the U.S. would require it to be stopped and have paperwork completed,” Cherniak said.

On August 1, U.S. President Donald Trump announced an additional 10% tariff would be levied on $300 billion worth of Chinese imported goods starting in September. Trump has since reduced the total value to $110 billion, temporarily sparing consumer electronics and other retail items.

However, Washington and Beijing have been imposing tariffs on one another’s exports since last July, and Stalco’s Page said the company’s existing clients have been spurred to explore the possibilities of shipping through Canada as a result.

“We actually had a client [tell] us that they were looking to bring in some stuff from China, and they were looking at Canadian duty rates and U.S. duty rates,” Page said. “And we knew about the existing rules that allow this program to happen.… So we looked at it and said, ‘Because we are shipping to the U.S. everyday, for us to add this duty aspect really isn’t a challenge for us.’”

A key factor that allows this to work, Page said, was that companies like Stalco have already had some success winning small and medium-sized e-commerce clients from the United States because of those clients’ desire to ship to consumers in Canada. Because Canadian sales volumes are much smaller than those of the U.S. market, Stalco uses the ability to serve both U.S. and Canadian consumers from a Canadian warehouse as a selling point to potential clients, thus gaining a portion of new clients’ fulfilment needs in the United States – in addition to the Canada-specific business.

While the US$800 shipment exemption works for shipments from anywhere in the world, Mexico is the only true competition for Canadian warehouses capitalizing on American firms looking to minimize duty costs – and even then, the U.S. customs process at Canadian crossings tends to be less cumbersome than that seen at Mexican crossings, Page said.

As for companies shipping directly to consumers from China through the postal service, Page said that business model simply does not work.

“In today’s world of Amazon Prime, nobody wants to wait two to three weeks with no clear idea where their order is,” he said. “You want the product in your customers’ hands extremely quickly – and in a cost-effective manner. If you ship from anywhere without close proximity to the United States, you are not getting there in two to three days, and you are not doing it at the shipping cost that is necessitated by most e-commerce companies.”

Page added that Stalco has decided in the last few months to promote the China-Canada-U.S. e-commerce route more, and it will take some time to truly assess the program’s full potential.

Cherniak, however, cautioned that the Trump White House can be erratic in its tariff policy, and the risk is always there for a sudden announcement if Section 321 is seen as too big of a loophole for what Washington is trying to accomplish – putting pressure on Beijing to gain favourable trade deals.

“You can’t say there is no risk,” she said. “You hope that not too many parties make this too salient and poke the president in the eye with it.”

But Cherniak added that the upcoming U.S. presidential elections next year may help in that regard, noting that Trump’s decision to pull back some tariffs in September shows the White House’s sensitivity when it comes to moves that may hurt everyday consumers in the U.S.

“If they do change [the customs rule], it would be seen as going after the individual consumers, going after the middle class, whereas U.S. officials currently are saying that China is paying the duties,” she said. “So it would be unexpected if Trump targets the consumers, because Republicans are also among that consumer group. And the president certainly doesn’t want to alienate his base – especially with the upcoming election year.”