Ashley Freeborn, Co-founder, Principal and CEO of B.C.'s Smash + Tess, says you can't scale a business without the U.S. market.Tijana Martin/The Globe and Mail
Fashion executive Ashley Freeborn had big plans for 2025.
After building a following in Canada, the CEO and co-founder of Richmond, B.C.-based apparel brand Smash + Tess was looking south for growth. U.S. shoppers account for roughly 10 per cent of the company’s e-commerce business.
“You can’t scale without the U.S. market,” Ms. Freeborn said, adding that Smash + Tess had set aside the bulk of its advertising budget this year to target shoppers there. “But now, it has us all on pause. We’ve scaled way back on our ad spend.”
The cause of Ms. Freeborn’s uncertainty, and that of many other e-commerce entrepreneurs, is U.S. President Donald Trump’s threat to suspend the “de minimis” exemption – a rule that allows shipments valued under US$800 to enter the country duty-free.
Many businesses depend on the rule, and worry that its removal could drive U.S. shoppers away and make their operations unsustainable.
“Canadian retailers that are selling direct to consumers in the States, they’ve structured their businesses, their pricing, their entire business model around those de minimis thresholds,” said Matt Poirier, vice-president of federal government relations for the Retail Council of Canada. “The volatility caused by all this is very bad for business.”
While Canada and the U.S. have a free-trade agreement in place, duties still apply to some products – depending on the category and where they are manufactured.
Last week, Vancouver-based lingerie company Understance sent an e-mail to its U.S. customers advising them that prices would go up. While the de minimis change was put on pause for Canadian imports until early March, the U.S. did remove the exemption for goods coming from China earlier this month. Understance was affected by this because most of its products are manufactured in China.
After U.S. agencies were overwhelmed by the millions of packages suddenly requiring more onerous customs processing, the country reinstated the exemption for Chinese imports. But before that happened, Understance’s communications to its customers provided a glimpse into the havoc such a change would wreak on retailers.
The company explained that without the exemption, 25-per-cent tariffs that were imposed on Chinese imports in 2018 would now apply even for items below the US$800 threshold; as would the additional 10-per-cent tariffs introduced on Feb. 4. Understance would also be subject to standard commodity tariffs of around 17 per cent – varying by category, but generally applied to bras, underwear and sleepwear. Added up, that meant a US$59 bra would now cost American shoppers closer to US$95, the company explained. (Understance later corrected its calculation, and said the price of the bra in this circumstance would be US$89.)
Understance has since told U.S. customers it does not have to raise prices – yet.
“We are preparing for tariffs to resume,” the company wrote in a social-media post.
Jean-Philippe Robert, president of Montreal-based outerwear brand Quartz Co. and luxury brand Want Les Essentiels, is also watching the situation closely. Quartz largely produces its merchandise in Canada, while Want Les Essentiels has a number of products in its Montreal warehouse that were made in Vietnam and China. If those items are suddenly subject to duties, “that’s a big problem,” he said. “Because the business case and the pricing we have for these products did not take that into account.”
In addition to duties, the exemption is also important because it allows shipments to cross the border quickly, with less paperwork, said Antonio Rivera, a customs lawyer and partner with ArentFox Schiff LLP in Washington.
“Aside from the duty impact, there is also the reporting impact,” he said, adding that it is not atypical for a shipment falling under the threshold to be released in around one day. “With de minimis, there’s a lot of importance for companies that rely on moving goods quickly.”
This week, Shopify Inc. SHOP-T president Harley Finkelstein told analysts on a conference call that merchants on its e-commerce platform depend on the exemption to compete.
“Rather than eliminating de minimis, countries should really try to streamline these customs processes and improve digital duty collection to make things a lot easier,” he said.
The loophole has come under scrutiny, however, for allowing more than just e-commerce purchases through: U.S. Customs and Border Protection (CBP) has said that traffickers use de minimis packages to sneak chemicals used to make fentanyl into the country.
More than four million packages per day are processed at the U.S. border leveraging the de minimis exemption, according to CBP.
Not all retailers are upset by the prospect of that changing, however. While de minimis benefits many small Canadian online sellers, it has also been a massive boon to Chinese e-commerce players such as Shein and Temu.
“We are of the opinion the elimination of the US$800 de minimis exemption on Chinese goods will go a long way to levelling the playing field against Chinese DTC [direct-to-consumer] brands and suppliers that operate in a disruptive asset-light manner, flooding the market with duty-free merchandise,” said Andrew Lutfy, CEO of Montreal-based retailer Groupe Dynamite Inc., which operates more than 100 Garage clothing stores in the U.S. Because the company ships U.S. e-commerce orders from its U.S. stores, the effect of a change would be “negligible” for Dynamite, he added.
Some other retailers caught up in the changes are coping by shipping more products to U.S. warehouses now in order to be able to fill orders from within the country if needed, said Maggie Barnett, CEO of New York-based third-party logistics company LVK, which operates warehouses in both the U.S. and Canada.
“It’s going to be very disruptive for e-commerce sellers, and I think it’s going to unfortunately really hit the small businesses more,” she said. But as the U.S. administration announces – and then changes – policies, it can be difficult for companies to plan for the future.
“Changing your supply chain is expensive,” she said, adding that the uncertainty has been challenging for operators. “We’re happy to play by the rules, but we want predictability.”
This article has been updated to include new information the company Understance provided to its customers regarding how much tariffs would add to the U.S. retail price of a bra.