I'm Scott. I'm Bill. And we're The Trade Guys. You're listening to The Trade Guys, a podcast produced by CSIS where we talk about trade in terms that everyone can understand. I'm H. Andrew Schwartz and I'm here with Scott Miller and Bill Reitch, The CSIS Trade Guys. This is Trade Guys Scott. Welcome back to this episode of Trade Guys. This week we have a special guest, John Pickel, from the National Ford Trade Council. And we'll talk about all
things, customs and border related. Thanks for joining us on The Trade Guys. Well, welcome everybody. Trade Guy Bill here along with Scott and we have a guest this week, which is really exciting for us. We have John Pickel actually in the room. John is currently the Senior Director for Supply Chain Policy at a Steam organization, the National Ford Trade Council, which is one of the premier trade associations in Washington. I say that since I used to run it.
Prior to that, John spent 10 years at Customs and Border Protection and worked on the implementation of the Trade Facilitation and Trade Enforcement Act of 2016. And he was also reminiscing to a couple weeks ago, who moved to DHS and was involved in standing up the Uffelpop provisions and getting them off the ground and in implementation. And so one of the topics we'll get to today will be some follow-up to our conversation with John foot a couple weeks ago about Uffelpop.
But let's begin with some other issues and back to Scott for the opening question. Well, John, welcome. I'm delighted to have you on the program. And perhaps since Customs is something that's been a fact of the government revenue source since the very founding of the country, you know, the Customs Service, the act they created it was signed in the law by President
Washington. So it really has a very long history. Why don't you talk a little bit about what Customs Service or the Customs and Border Protection Agency is today and what the priorities are and how it relates to dealing with international commerce. Great, thanks. And thanks for having me Scott and Bill. It's an honor to be here. And thanks for the question. The U.S. Customs Service does have a fascinating history. It goes back to 1789, one of the earliest facts of the first Congress.
Now U.S. Customs and Border Protection processes all goods coming into the U.S. economy at 300 ports around the country and they ensure that those goods coming into our economy comply with over 500 U.S. trade laws. Realizing the importance of trade to the U.S. economy, CBP is constantly balancing their enforcement responsibilities and facilitating the entry of legitimate trade
coming into the country. So their authorities are broad and they've been applied to implementing most of the topics that you all talk about in this show such as implementing FTAs, anti-dumping countervailing duties, forced labor prohibitions and many other areas. It's also constantly evolving. They're always taking on new responsibilities and frequently have been seen as a little bit of a
hammer that can address any nail when it comes to enforcement in the trade space. Fair enough, many could talk about what's changed since the 2016 Act that I think was intended to modernize but it had fairly broad scale changes to the way customs operates. What's new and different, how's it working? Since the passage of TFTIA back in 2016, the role of customs has morphed. It has
changed to reflect the realities of the modern economy. At that point in time, the legislation now statute focused on codifying existing infrastructure that helped CBP address challenges around evasion of duty collection responsibilities as well as giving authorities to different entities within the Department of Homeland Security. Now, there has been an emphasis on responding to the
shifting dynamics in the global economy and how goods actually come to the United States. Since 2016, there's been a significant increase in the volume of e-commerce direct to consumer shipping as well as some other interesting developments around customs enforcement and how they collect data and
the parties that they collect data from. As we look at perhaps a next round of customs modernization legislation that has been rumored for some time within Congress, I'd expect that we would see more wholesale modernization of things like technology, the use of technology to identify illicit goods as well as how data is collected and synthesized to actually identify risks in import streams. That's excellent. Could you talk a little bit about Diminimus? It was one of the
changes in 2016. Diminimus has always existed, of course, where it refers to shipments that are so small that it's really not worth the attention and distraction of the customs official to mess with it. Used to be small parcels, things of relatively minimal value. It was raised to the current level of $800 for a ship, but which included a lot more than the main rationale was to improve risk
management at CBP. So I'd like to hear your views on that. It also has a very selective high priority group of opponents, who anytime that it gets mentioned, they have recommendations to do away with it entirely or to modify it dramatically. So how's it working? Who uses it? What's it changed from a customs order protection standpoint? So Diminimus has been a fixture of US customs law for over 100 years. Within the last eight years,
it's been endorsed in statute three times, three separate times. So it is not a loophole as some of those opponents that you reference have described it. It simply says that goods valued under $800 don't pay duty, which I would also consider attacks. All other US laws apply to diminimus shipments and CBP has said that they enforce all of their other statutory responsibilities within the Diminimus space. Diminimus lowers prices and expedites product availability for US
consumers and small businesses. The average diminimus ship in value is $54, which would double in cost when factoring the cost of hiring a customs broker and paying a merchandise processing fee if Diminimus were degraded. Currently, 89 countries around the world have a Diminimus standard that improve the competitiveness of US exports by making sure that those US exports are not subject to much higher duty rates in other countries that we'd like to have our exporters be able to access.
We would expect that any signal in diminishing US leadership on Diminimus policy would precipitate that change in other countries' commitment to similar standards. A recent study that was done by Yale and UCLA scholars found that degrading Diminimus would reduce aggregate welfare by as much as $14.8 billion and it would impact the poorest zip codes twice as much as wealthier zip codes,
which would make this change a very regressive tax. The one idea that always gets missed, but I think some of the biggest users or the users who find Diminimus most valuable may not even know it exists. That's right. The small sellers, whether it's the eBay or whatever the online platform is, and it comes in the form of returns, that it's a very normal part of retail business, is you sell something to a customer and they don't like it, it doesn't fit, whatever.
And you have to work a return. That's an international transaction for an American e-commerce company. They love selling to the world, but that customer who wants to return the good becomes an exporter and a US importer. And I think Diminimus really helps them handle that transaction seamlessly, which is what a customer wants, wherever the retail store is. They want to be able to handle returns without a lot of an eruption. All right, customers who are to handle the return
would be pretty burdensome. Yes, that alone would add about $30 to the cost of the transaction. To your point, one of my members recently told me that approximately 20% of the transactions done in the e-commerce space are actually returns. So this would be a significant subset of the
overall economic activity related to e-commerce. And just as a broad competitiveness issue, US companies that are trying to export small companies who want to be able to offer those free returns would not be in a position to do that if they would be required to pay duty on the returns. I'm going to be double-sided because for a minute here, because it's all sounds good, but it's clearly not where the Congress is at the moment because there are ways of means to be
reported legislation that would make some changes in Diminimus. Maybe John, you could comment on what they did and also comment on what I think is one of the more interesting arguments that have been made, which is the drug issue and the fentanyl issue in particular. How big a problem is that in the Diminimus context and how do you deal with it without changing the Diminimus rule? That's a great question. As I said earlier, Diminimus does not exempt shipments from
complying with US trade laws that don't involve the payment of duty. If something is entered illicitly, CBP still has authorities to pull them out of the Diminimus space to inspect them. They do that regularly. CBP gets information prior to products arriving, whether they are Diminimus or more valuable types of entries. In the specific case of drugs, there's been some
misperception about how fentanyl flows into the country in particular. CBP has said that over 95% of fentanyl that comes into the country is coming across the southwest border through traditional drug smuggling pathways, so that is not a Diminimus vector. That is not a way that Diminimus shipments typically come into the country. They have been on the lookout for noncompliance in Diminimus for quite a while now, given the volumes. I mean, we are talking about significant volume trends of
potentially 1.3 billion shipments this year. It is the most popular way that products come into the country. Now, they are opening packages. They are scanning them. They are receiving data to run against their targeting systems, and the drugs are not in this environment in the volumes that some would have you believe. The bill that was marked up in the ways it means committee would subject Diminimus shipments to through one tariffs if those products would have been subject
at a higher entry rate. So, if it was coming in as part of a shipment that was valued over $800 and the product would have been subject to 301 tariffs, that Diminimus shipment will now be subject to 301 tariffs. It has gotten some support. It was reported out of the committee on a partisan basis. Of course, Mr. Blumenauer has his own preferred approach on how to address Diminimus.
I will say that there are some concerns with how at an operational level at ports of entry, application of 301 duties would impact the ability of Customs and Border Protection to actually process those shipments in a timely manner, particularly in the mail environment. Let me say the use of Section 301 authority in the Diminimus environment would actually hurt U.S. competitiveness
and would be the reverse of what the intention of the Section 301 tariffs are. Customs and Border Protection would spend a disproportionate amount of resources to actually apply tariffs that would be about $15 per shipment, and they would spend way more money to collect that than they would actually be receiving. In addition to needing more officers and taxing CBP systems, there's also a question of are shipments backing up behind that shipment that they're choosing to process
for that low amount of revenue collection? Could they be opening a package that actually had fentanyl in it and doing enforcement actions rather than collecting that small amount of revenue? I don't want to beat the proverbial dead horse here because we do have other topics, but I can't resist doing one more thing about that, and that's the apparel and fast fashion issue. Tarros on
a lot of apparel are not low. They're quite high, and one of the concerns that's been expressed about Diminimus is that Chinese exporters in particular have become adept at basically packaging their imports into small packages and less than $800 in value, but if you add them all up together, it's a lot more than that, so that it's essentially a duty evasion scheme. Is that right?
If so, what do you do about that? For those who are importing in excess of $800 per person per day as the way the statute reads, CBP currently has the authority to be able to pull those shipments out of the Diminimus stream and be able to require an informal or a formal entry depending on the requirements. If the concern is revenue, that's an appropriate response to concern of duty evasion. CBP has recently said that they are going to be able to have more visibility into how those
product values are aggregated. So on one day, if somebody brings something into the country and they have a $200 product coming into Boston, a $300 product coming into LA and more products coming into other ports, they are increasing their ability to be able to understand what the revenue implications are and actually apply additional requirements to those packages. That's an authority
that exists today and CBP could certainly utilize. Let's turn to a different topic. CBP is obviously a critical element, but it's not the only game in town when it comes to imports and it's not the only way to secure shipments that come into the United States. Another part of the picture is looking at the source of the shipments. What other policy tools does the US have available for that part of it? There are 50 government agencies that regulate imports coming into the United States.
Each of them has their own areas of responsibility, obviously. They have the ability to work with customs to say, you know, we would like to exercise our enforcement prerogative, our regulatory responsibilities. We would like for you to hold that shipment and that's based on information that comes to the government prior to those shipments actually arriving at the port. So before those products even arrive, there is a risk analysis that's done and in the vast majority of cases several years
ago, the number was 85%. Cargo is released before it actually arrives at the port. So that obviously is a significant facilitation fixture that allows cargo to move through ports more quickly and not have cargo containers backing up at ports and so forth. There is the opportunity based on information that's provided in advance for those other government agencies to exercise their regulatory prerogative. Preclearance is a pretty important factor for many shippers daily across
the US Canada or US Mexico border. There's an awful lot of really routine, interplant shipments, things like that that are well known, well established routes, well established shippers and carriers that all happens fairly smoothly and in fact couldn't happen without the cooperation of the customs organizations, at least in North America. I'm sure that's true with
the other parts of the world that act as a factory. Yeah, here and I think in particular the authorized economic operator constructs, the trusted trader programs in the US, we have the customs trade partnership against terrorism. Of course, that's an international standard. We would like to see expanded and used broadly around the world. These programs frequently have mutual recognition, assuming they employ similar standards to the United States or whichever countries are
entering into the mutual recognition arrangement. And so those programs do provide benefits in terms of expedited treatment, get across the border quickly. When you are selected for exams, you have priority for being examined, move through the port more quickly as well. Thinking important aspect here though, is that the level of due diligence and internal controls that need to be exhibited to qualify for these programs are quite high, one to to become a member
and then through ongoing validations, they're called. What's very important in these programs is to have an ongoing assessment of what are the benefits in these trusted trader programs? It's a question of sustainability for the programs, bringing in new members, but also adapting the types of membership to reflect the different actors in the trade community who would benefit from such
treatment and really to get that risk out of the system. Somebody's a trusted trader, the customs organization, whether it's coming to the US or going somewhere else, would really rather use their resources to look at riskier shipments. Let's look at Opholpah, Weger Force Labor
Prevention Act. I said we had John foot on a couple weeks ago and talk about that. And one of the points he made that I like to comment on is the think relatively high percentage of detainement that are ultimately released back into commerce is number was 51 and a half percent, which suggests that the system may not be working quite as efficiently as people think if there's that large number of shipments that ultimately are determined by a CPP to be benign. That suggests that I'm
not sure what it suggests. So talk to us about what it suggests. The two-year anniversary of enforcement of the law is coming up actually in about 10 days, a couple weeks, and we're expecting CPP to come out with a report at that time. What are you expecting? What's going to happen next? And from your perspective, how's it going? To the point about targeting, a 50% targeting effectiveness rate is not great. One, don't want to lose sight of the fact that this program is
fairly new, right? It's two years old. In other types of illicit activity, CPP has been targeting for much longer periods of time. So I want to be fair to them. On the other hand, I think it speaks to a concern around what are the indicators of risk. Ultimately targeting is just that. Is there a risk that a product coming to the United States is subject to the UFLPA? And that's something where industry can help. And where I think that more communication between government and industry
can help give both parties insight into where the risk resides. Government would benefit from understanding the due diligence that industry has kind of put their supply chains through the paces of. And the industry would greatly benefit from understanding where government sees risk and how industries can actually inform their sourcing decisions based on some of those concerns. As to the UFLPA annual report, the first one of these reports was due six months after
implementation back in 2022 when I worked in the government. And one of my prouder moments was actually meeting that deadline six months after an act of a statute. It's a very dedicated team who works on these issues across DHS, CPP and the various agencies that make up the force labor enforcement task force. The report is actually a product of the Fleta, I'll call it for short. The chair of the Fleta is the DHS under Secretary for Policy, Rob Silver's Myel Boss.
And the report is due every year on June 21st. I do expect this year based on some of the announcements related to the UFLPA entity list that we will see some new priority sectors being identified. Based on the UFLPA entity list editions, I believe we'll see some interest in the textile areas as well as critical minerals and certain types of other metals. I think those are areas to watch. Those have been forecasted pretty regularly by different NGOs as well as through some groups
that look out for where CPP is targeting based on the UFLPA. I would expect those to be included in the report later this month. The UFLPA implemented many novel authorities and applied them to a broad range of products coming from very significant producers, not only in the Xinjiang province of China, but really any province of China that uses labor transfer programs, poverty alleviation programs. However, they're implemented largely through border enforcement measures. The concern there is
that border enforcement measures, they happen after the forced labor has occurred. We're not stopping those products until they arrive at US ports and where the emphasis on addressing forced labor should be placed is actually earlier in the supply chain. A significant portion of the UFLPA vision was also related to a diplomatic engagement. The statute required a diplomatic strategy that state department was to put together and USCR has been working on a forced labor and trade strategy
for at least two years now. So really exploring how those relationships can be used to identify and mitigate forced labor presence on the ground at the source is a much more efficient place from a supply chain standpoint as well as a US consumer US importer standpoint to address risks and supply chains rather than subjecting them to enforcement at our ports.
John, I'd like to switch gears to supply chain resilience in particular. And here it strikes me, you've got a unique view, your former government official now working for a whole host of private sector importers and exporters. Could you talk about kind of not just what you're doing, but it strikes me that most private sector entities build their production networks and supply chains from the bottom up. They're trying to solve a problem, trying to source a material or something
like that. That's the genesis of their activities. Meanwhile, we have this government looking from the top down and abstracting things and looking for patterns and coming up with good marketing ideas like fringeoring, but that really had nothing to do with what happened underneath it all. How the companies got where they got. So given your dual history thus far, you're now representing corporations
as a former official. What do you think comes next in supply chain resilience and how do the business groups like NFTC address that? Well, I think that each industry sector has their own ideas about what are the most concerning elements surrounding resilience and what they are seeking to address when we talk about de-resking. And so I think we talk about friend-shoring, near-shoring. I like to think about it as a broader category of de-resking. And certainly we've seen a move geographically
to manufacture in other countries. So a move from Southeast Asian in particularly to manufacture in Mexico, for example, or a movement of manufacturing from China to Vietnam might be another example. That seems to be where many of the trend lines are. I think that the movement in those directions to achieve the desired outcomes of friend-shoring and near-shoring also come
with some inherent risk themselves. We saw a situation last fall where Mexico has now become the number one importer of products into the United States and a big driver of that is the relocation
of manufacturing from China. And that's been pretty well documented in the press. However, they encountered a challenge when there was a surge of migrants coming to the US-Mexico border and US customs and border protection had to make the difficult decision to say we're going to have to close our cargo processing facilities so that we can help the border patrol to process these
migrants for reappearance or whatever the outcome would be in those cases. Situations like that were not necessarily envisioned when we hear talk about bringing manufacturing back to the Western hemisphere and friend-shoring and prioritizing where some of that manufacturing should be happening. And in terms of the long-term investment potential in some of these areas, I think fragile borders, the ability to quickly process and cross-borders is increasingly going to become a concern.
I think we're also going to continue to see cost of shipping recently hit $10,000 from China to the West Coast. So that's another driver of how manufacturing may choose to relocate. So I think it's a confluence of factors and part of that is certainly perception of what should be de-risking criteria, but I think it all goes into the same equation. Who are the big winners likely to be mentioned Mexico and Vietnam? Are there others? I think the early focus has been Mexico and
Vietnam. I think it may be too early to see who the next wave of winners might be. I would focus on Mexico and Vietnam at this point. Are you seeing a lot of reshoring, meaning companies coming back to the United States as opposed to third countries? The companies who are coming back to the United States and establishing a manufacturing presence here are still realizing that there are inputs and intermediate products that they have to incorporate into their manufacturing process
that they do need to get from elsewhere. So I think this kind of gets to the idea that supply chains are longer than most people think, right? There are many, many inputs going into the development of a single finished product. Autos is a great example. Automani-facturing in Mexico brings in parts from countries around the world. Consumer electronics, who are certain extent as well.
But I would say that companies who are coming to the United States are realizing that those inputs, whether you do the final manufacturing in Mexico or Vietnam or China or elsewhere, you still need to source those input products from a variety of sources. That's an interesting insight. I think it's a very powerful one because as I recall, there's a great run of globalization up till about the start of the global financial crisis in 2008 or so. At that point in time,
roughly 2008, 2009, if you looked at the world, there were three factories. There was factory North America, centered around then the NAFTA. You had factory Europe, which included all the association agreements in and around Europe, but it was this single market that drove it. And you had factory Asia, which was by and large, a bunch of bilateral free trade agreements created beginning with Meta's work in what were called the Asian Tigers. And then it evolved over time.
In 2008, China was the center of factory Asia because of its scale, because of its manufacturing prowess. And a lot of reasons, just population and the size of the working age adults, population. And that's changing now. They're shifting within those three factories and also among them. So does that map of the world still make any sense?
I think it does make sense, certainly for historical context, and how global markets are moving, and how trend lines in terms of manufacturing and how supply chains flow have established
infrastructure and ways that companies are used to doing business. I think the supply chains are structured now in a way that they seem to be so agile and responsive to changing business models that I think they would be much more susceptible to, you know, we say disruption, we usually mean in a bad way, but disruption in, you know, the sense that it could fundamentally
change, you know, for the good or for the bad. And so I think that your explanation makes sense in the current state of affairs, but I would say that it could very quickly change. There's a lot of talk about friend-shoring, the commercial coming on here, everybody. CSI has been a part of that debate. We just put out a third of three papers on battery supply chains,
where we recommended more of a friend-shoring approach. And we had had two papers on the pharmaceutical sector, which, where we recommended trusted partnerships, there are some people, namely me, who have argued that the Biden administration's emphasis on friend-shoring is mostly lip service and what they're really focused on are reshoring. Do you think that's right,
or am I just making this up? I think there was an aspiration for reshoring, but the realization that the inputs and the raw materials that are needed for the type of manufacturing that was trying to be reshored entirely from end to end in their supply chain is simply not available.
So I think this goes back to the idea that while the final manufacturing of a product, the end goal may be to reshore the reality of the availability of the products that are needed, and where they can be sourced at scale, is really driving the shift from reshoring to to friend-shoring. But I think that the long-term aspiration is certainly still reshoring. Have your members talk to you about how long it takes to adjust a supply chain, and how difficult it is?
I want to make an analogy to turning a cruise ship. So this is the pervert, the aircraft to your air analogy? Exactly. I think the analogy to how quickly a large vessel turns, whether it's a cruise ship or an aircraft carrier, it depends on the length of the vessel and how agile it can be. So I think in the case of supply chains, generally speaking, the longer they are, the harder they can be
to change quickly. I think in the cases where you have supply chains that have relied on sourcing for longer periods of time, there's a little bit of entrenchment, if you will. How certain companies are used to doing business. They're tried and true partners. If you're moving a supplier, then the same country, using the same carrier, able to use the same broker, freight forwarders, etc. If it's changing one discrete part of a
supply chain, I think that might be a little bit easier. But we say changing supply chains, and what we mean by that is changing a country of manufacture. You're actually changing so many parties in that supply chain that the lead time to be able to do that is considerably longer. So I can't give you an exact number, but I think the age-old Washington answer is it depends. Well, I think that calls for strategy. It's one of those things that I agree with you totally.
How difficult and complex that task is. But what it says is, rather than coming up with bumper stickers like French-oring, we have to be thinking about, for instance, do we really want to rely on critical minerals from allies or not? Because we do. There are two prominent allies, Canada and Australia, who are mineral powerhouses already. The United States has a fairly large share of the Earth's crust and a long history and mineral development. Nevada is the silver state,
as I recall, long before there were casinos. There was silver. So, I mean, she goes into the casino. So, there's a loop there. Yeah, that's a movement from goods to surfaces. But what are your thoughts about, how do we get strategic about some of these core issues that matter in geopolitical terms? Sure. So I think the significant barrier here is when we talk about critical minerals, we should be talking about usable critical minerals, right? So they're not usable as they come
out of the ground in many cases. They need to be processed. And I think a significant barrier to actually having a domestically sustainable source of critical minerals is what do we do with it when it comes out of the ground? So you may be able to extract it here in the United States, but do we want to actually expend the energy, the water usage, the potential environmental ramifications
of processing those minerals here? And so I don't know that it's necessarily where do they come from in terms of domestic versus allies countries that could provide these minerals, but I think the focus needs to be on how do we refine them and prepare them for actual use? There's a big NIMBY issue here too, not in my backyard and another commercial just earlier this week. On June 11th, we had Senator James Langford from Oklahoma in on a public event. You can get it off our website
to talk about critical mineral supply chains, battery supply chains. And he raised an interesting issue that he's talked about in the past. I hadn't really thought much about which is to deal with some of the problems you just described and really the NIMBY problem by locating processing facilities at brownfield sites, clothes to have plants, clothes locations where there already was something. And he thought the NIMBY issues would be less significant there because there used to
be something there that was also messy and dirty. Does that make any sense? It's an interesting idea. I haven't talked to companies in industry who would have a dog in the fight on that question.
I'd be curious to get their thoughts about whether that would be a suitable area for them to locate not only their facilities, but also their employees realizing that in some ways the contaminants that are there may not be as easily contained as some of the modern technology in terms of capturing pollution that would be generated by critical minerals processing. Well, that just illustrates what we said about this before. It's complicated. No, it's definitely.
It's going to stay complicated and we're going to continue to talk about it, but not today. John, thanks so much for coming on the program. I was delighted to talk to you. It's great to have somebody with your depth of knowledge to address these issues, so you're welcome back anytime. Great. Thanks for having me. To our listeners, if you have a question for the trade guys, write us at tradeguysatcs.org. We'll read some of your emails and have the trade guys react to it.
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