De minimis thresholds in APEC

Abstract

A de minimis regime provides streamlined border clearance and exemption from customs duties and other taxes. These features generate economic benefits by refocusing public revenue collection on more efficient revenue sources, reducing the costs borne by importers, and accelerating the delivery of imports. Most APEC economies have de minimis regimes but thresholds range from under USD1 to more than USD1,000, and eligibility varies. These design features affect the balance of economic benefits and costs that a regime produces. This study assesses, in some detail, the de minimis regimes of Canada, Indonesia, Japan, Malaysia, the Philippines, and Thailand - the APEC-6 economies for ease of reference. We chose them as being broadly representative of the APEC region in terms of geography and economic development. The study has estimated the net economic benefit of four alternatives - representing de minimis thresholds of USD50, USD100, USD150, and USD200. Tables 1 and 2 have the key results. The USD200 threshold generated the largest net economic benefit - around USD5.9 billion a year for the APEC-6, equivalent to about USD30.3 billion for all 21 APEC members. In relative terms the latter is around 0.086% of APEC-21 gross domestic product (GDP). Resource savings in government administration are the largest benefit. Under all scenarios, cuts in government administration accounted for 76% of the benefits, while savings in business compliance were virtually all of the rest. The latter are particularly important for small and medium sized enterprises (SMEs) as they generally face disproportionate burdens in completing customs formalities. Savings in time in transit have a clear economic benefit. The longer products take to get to market, the more likely they will perish, become outdated, be displaced by superior alternatives, or lose the interest of potential buyers. Previous research has shown that a 10% cut in delivery time will, other things being equal, expand exports of time-sensitive manufactures by over 4%. For low value consignments, however, the transit time savings are generally small compared to the others. A notable characteristic of the results is the relatively small impact that an increase in threshold has on government revenue. The loss of tariffrevenue is less than 1% of the savings under the USD200 scenario and only 0.7% of those under the USD100 scenario. Although the loss of VAT revenue is more difficult to estimate, at worst it is no more than 4% of the savings under the USD200 scenario and less under the rest. The revenue loss is much lower than many may have expected. The potential revenue base has been substantially eroded by preferential tariffrates under Free Trade Agreements (FTAs) and the existing de minimis exemptions. This is true even for those economies that have relatively high applied Most Favoured Nation (MFN) tariffrates. The composition of the results is broadly the same for each of the scenarios and reflects the basic economics of this category of imports - relatively large numbers but relatively low aggregate value. Hence the volume-based impacts, such as those on customs and business processing costs loom larger than the value-based ones, such as those involving transit delays and tax collections. Overall we judge our results to be robust. Indeed the conservative nature of our approach means that more refined estimates are likely to yield higher net benefits than we have estimated not lower ones. Most, if not all, APEC economies would benefit by increasing their existing thresholds by a substantial amount. APEC could assist this process by agreeing to recommend a minimum threshold level to its members with the option of a higher level to better suit individual circumstances. This would leverage the benefits from unilateral action. These conclusions have been strongly reinforced by recent research. For example, the Productivity Commission, the Australian Government's independent economic advisory body, is currently reviewing Australia's de minimis regime. Although Australia has the highest de minimis threshold in APEC and a substantial GST rate (10%), the Commission has found that any reduction in the threshold would impose a substantial net cost on the economy. An increase in de minimis thresholds need not jeopardise border security as advance cargo reporting is required by most countries, irrespective of the declared value of the imports. A higher de minimis threshold can free up the resources to address the more pressing security issues. The policy implications are straightforward. A commercially attractive de minimis arrangement makes sound economic sense. While the optimal level of the threshold remains an open question, the direction of change in APEC is clear.