The rock-bottom prices that have made Chinese-linked e-tailers like Shein and Temu so popular with American consumers could soon be a thing of the past if the Biden administration tightens restrictions on a trade law loophole.
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The $5 T-shirts and $10 sweaters that these e-commerce giants are known for could see prices rise by at least 20% if the de minimis provision is changed. This estimate was shared by a spokesperson for the Republican majority on the House Select Committee on the Chinese Communist Party, which has been investigating Shein and Temu for over a year.
Neil Saunders, a retail analyst and managing director of GlobalData, agreed that the policy change would likely raise prices, although the exact increase is uncertain.
“If the de minimis exemption is removed, then the cost of products from marketplaces like Shein and Temu will rise. They will still be affordable marketplaces, but they won’t have the same price advantage they currently enjoy,” Saunders told CNBC via email. “This could result in some loss of market share or slower growth, but the companies will likely shift toward offering higher-priced items to balance their value propositions.”
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On Friday morning, the Biden administration announced plans to ban overseas shipments of products subject to U.S.-China tariffs from being eligible for the de minimis exemption.
The de minimis exemption, a tariff law loophole dating back to the 1930s, allows packages valued at under $800 to enter the U.S. without import duties and face less scrutiny compared to larger shipments.
This announcement follows over a year of scrutiny from lawmakers on both sides of the aisle, particularly the House Select Committee on the Chinese Communist Party.
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Both Shein and Temu declined to confirm to CNBC whether they would raise prices due to the proposed changes. They also disputed claims that their low prices are driven by the de minimis exemption, stating that their business models are what allow them to offer such low prices.
A Shein spokesperson emphasized the company’s support for de minimis reform and noted that Shein had recently joined a voluntary pilot program with U.S. Customs and Border Protection, agreeing to provide additional data on packages and shipments.
Risk to Their Competitive Edge?
In recent years, both Shein and Temu have taken the U.S. market by storm with their ultra-low prices and ability to churn out trendy styles faster than their competitors. Shein is estimated to generate over $30 billion in annual revenue, although Temu’s revenue figures remain unclear. Its parent company, PDD Holdings, saw $34.9 billion in revenue in fiscal 2023, marking a 90% year-over-year increase.
As these companies have become go-to shopping destinations, they’ve claimed market share from rivals catering to similar consumer segments, such as H&M, Zara, Target, Walmart, and Amazon.
If Shein’s prices were to rise by 20%, its pricing would be closer to that of its competitors, which could make it harder for the company to compete.
For example, as of June 1, the average price of a dress on Shein was $28.51, according to data from Edited, a London-based research firm that analyzed Shein’s pricing strategy and shared its findings with Reuters.
At the time, this price was significantly lower than the average cost of dresses at H&M and Zara, which were $40.97 and $79.69, respectively, according to Edited. However, a 20% increase would raise Shein’s average dress price to $34.21, bringing it much closer to H&M’s pricing.
While there’s no guarantee prices would rise by 20% if the Biden administration’s proposal goes through, combined with longer shipping times, a smaller price discount relative to competitors could lead some customers to choose retailers closer to home.
“Ultimately, reforming the de minimis rules will create a fairer and more level playing field, but like any tariff, it will ultimately cost consumers more,” Saunders said.
Scrutiny of Digital Retail Giants
Last year, the committee began investigating Shein and Temu over allegations of slave labor in their supply chains, focusing on their use of the de minimis exemption. In a June 2023 report, the committee claimed that neither company paid import duties in 2022. Shein denied this, stating it had paid millions in import duties in 2022 and 2023. However, the company did acknowledge that cotton from banned regions had been found in its supply chain and said it was working to resolve the issue. Temu did not respond to inquiries regarding slave labor in its supply chain.
“The Select Committee’s investigation revealed that the majority of products from Shein and Temu qualify for the de minimis exemption, allowing them to bypass U.S. Customs and avoid the scrutiny that other retailers face. The U.S. must act swiftly to curb these shipments and force these companies to improve their weak compliance practices,” a committee spokesperson told CNBC.
The spokesperson added, “Congress must urgently make de minimis reform law.”
As scrutiny of Shein intensified, its long-awaited U.S. public offering ambitions began to fade.
Lawmakers, eager to curtail the influence of Chinese-linked retailers on the U.S. economy and create what they described as a fair playing field for American companies, were unlikely to propose an outright ban on Shein and Temu, similar to actions taken against social media company TikTok.
Instead, numerous lawmakers called on the U.S. Securities and Exchange Commission (SEC) to block Shein’s IPO and viewed reforming the de minimis exemption as the best way to curb the company’s growth.
More than a year into these efforts, and with Shein’s own charm offensive faltering, the company’s plans for a New York IPO are nearly dead, prompting Shein to shift its focus to London in search of a friendlier reception.
In June, CNBC reported that Shein had confidentially filed for a public listing in London after facing backlash in the U.S.
It remains unclear how the proposed changes to the de minimis exemption will impact Shein’s IPO plans.
