Without the actual rule to look at, and going on what the article quotes, it seems to me that if the buyer handles the shipping arrangements and costs, separate from the purchase of the dog, you would be exempt.
We are in the same boat that you are (small GSD breeder), but we allow anyone to come and look at the dogs, and generally prefer to sell locally, shipping only rarely; and during the summer we cannot ship by air anyway, so most drive in to pick up. We have had people drive from the east coast (mainly because they don’t trust air shipping anymore).
And about the localized bloodlines: as long as you can ship semen, and if this new set of rules doesn’t affect the actual breeding, you can still breed to anyone anywhere.
And you are right about local puppy mill laws: there is enough local control in most cases to handle things. This is one more case of the Feds overstepping their boundaries, and making it difficult to do any sort of business at all; and regulating things they have no knowledge of.
The actual rule is at
http://www.aphis.usda.gov/. From the Q and A PDF:
We are proposing to revise the definition of retail pet store and related regulations to bring more pet animals sold at retail under the protection of the Animal Welfare Act (AWA). Specifically, we would narrow the definition of retail pet store so that it means a place of business or residence that each buyer physically enters in order to personally observe the animals available for sale prior to purchase and/or to take custody of the animals after purchase, and where only certain animals are sold or offered for sale, at retail, for use as pets. Retail pet stores are not required to be licensed and inspected under the AWA. We are also proposing to increase from three to four the number of breeding female dogs, cats, and/or small exotic or wild mammals that a person may maintain on his or her premises and be exempt from the licensing and inspection requirements if he or she sells only the offspring of those animals born and raised on his or her premises, for pets or exhibition.
http://www.aphis.usda.gov/publications/animal_welfare/2012/retail_pets_faq.pdf
While I do allow people to come look at my dogs, I have taken deposits before people actually choose puppies. That would be monetary exchange before the people physically see the dog, which would be a "no no". Also, you seem to think that shipping semen would be the answer to everything, but what if I wanted to purchase a dog from a breeder who is no longer able to ship? Bloodlines would certainly suffer, because outside of semen shipment, you would not be able to obtain an outcross OR whatever specific line without doing that. Not to mention, shipping of semen would be a PIA as well as costly, with less of a chance of it working.
Ironically, I'm looking into having my male's semen frozen, I will still do this as he is absolutely wonderful and needs to be saved to be used at a future time, but this did give me a brief pause. Personally, I would not have to change much outside of not taking deposits until people see the dogs first, but that is still a hindrance. I have also offered to meet people halfway if we're planning a trip, that would be out. I do not show my dogs, but I can imagine this impacting those that do show dogs and may not necessarily have many litters. Breeds will suffer.
In the end though, it's about control, not the dogs or cats or rats (yes, RATS!), all of which is included in this catch-all regulation.