Critics say a favourable trade law has been used by Temu and its larger Chinese rival, Shein, to avoid paying millions or even billions.
Duty-free shopping: A billion little packages from Chinese retailers like Temu and Shein have come into the U.S. this year under a trade loophole that exempts them from taxes.
Frederic J. Brown/AFP/Getty Images
Last holiday season, mail carrier Aubrey Fry hadn’t even heard of Temu. That’s not surprising — the Chinese retailer was only a few months old then. This year, however, Fry is drowning in Temu.
Fry said she delivers at least 20 Temu packages a day on her route in rural Pennsylvania and lately she’s noticed they’re getting bigger and heavier. That suggests American shoppers are dropping more money on orders as they grow comfortable with the online dealer, and shows how it’s gaining ground on the 50 to 100 Amazon packages Fry drops off every day.
She and other mail carriers even have a term for it that they share on TikTok. They call it “Temu tired.”
Temu, created in September 2022, has rocketed this year to an estimated $16 billion in gross merchandise value, an industry metric that calculates the value of goods sold. Analysts project it will double that to $34 billion next year and mean the meteoric upstart will begin passing a list of top U.S. retailers, such as the venerable Macy’s and the ubiquitous Dollar Tree, with its 16,000-plus North American stores. Nobody has ever seen anything like Temu, with its rock-bottom prices on clothing, toys, kitchen gadgets and other googaws shipped directly from Chinese manufacturers to American doorsteps. Some say it’s the fastest rise in retail history.
That success, however, was built in part on a favorable trade law. The loophole, called de minimis, was created in 1938 to allow American tourists to bring home souvenirs without the hassle of declaring them to customs. Today, it permits merchandise under $800 in value to enter the country without inspection or taxation. Critics say de minimis has been used by Temu and its larger Chinese rival, Shein, to avoid paying millions or even billions, giving them an unfair advantage over domestic businesses and making it possible for them to skirt laws restricting imports made by forced labor.
“Major retailers are hurting because of this,” Kim Glas, CEO of the National Council of Textile Organizations, told Forbes.
The days of de minimis could soon be over. Overhauling the tax break has won bipartisan support in a Congress that otherwise can’t seem to agree that two plus two is four. Sorting out the details, of course, is another matter. Lawmakers have come up with different solutions, and they’re mindful that constituents may not be eager to change a rule that gives them prices like $15 jeans, $5 toys and $2 earrings on Temu, where items are typically 30% to 70% cheaper than other ecommerce merchants, according to a JPMorgan analyst. Whether Congress will pass legislation to close the loophole in the coming year “is the bajillion-dollar question,” said Glas.
Spending And Saving
For American retailers, it’s been a confusing time. Shoppers continue to spend robustly even as post-pandemic inflation pushed up prices and borrowing costs rose to 20-year highs. But there are signs that Americans are also being more prudent with their purchases. They’re turning to Walmart for cheaper groceries and pulling back on discretionary items like toys. Temu and Shein, which undercut pretty much every competitor on price, have already been chipping away at dollar stores’ business. The retailers that look the most vulnerable to losing sales in 2024 are department stores like Kohl’s, low-price apparel retailers popular among younger shoppers like Old Navy and American Eagle and discount stores like Five BelowFIVE, according to analysts at Bank of AmericaBAC. All of them compete with the low-cost online Chinese retailers.
Meanwhile, the tidal wave of packages from China is only growing. This year, a whopping one billion packages came into the U.S. under the de minimis trade loophole, up sharply from 685 million last year, according to U.S. Customs and Border Protection. One-third of those packages can be attributed directly to Temu and Shein, according to a congressional report, although that percentage is likely higher now because it was released in June 2023 and didn’t account for Temu’s subsequent weedlike growth.
“Chinese companies are using de minimis to get an unfair toehold,” said Representative Earl Blumenhaur, an Oregon Democrat who’s introduced legislation with Senator Marco Rubio (R-Florida) that would prevent goods from trade partners on a government watch list, like China and Russia, from using the loophole.
Retailers and lawmakers have been growing louder in their calls for the trade rule to be changed. In addition to Blumenhaur’s proposal, Senators Bill Cassidy (R-Louisiana) and Tammy Baldwin (D-Wisconsin) suggest a country-by-country approach. For instance, if the U.S. can ship items under $7 to China under its de minimis rule, then only items under $7 can enter the U.S. from China. Others have suggested lowering the threshold to something below $800.
A Flood Of Imports
The whole thing is essentially an unforeseen consequence of a 2016 policy, which raised the de minimis threshold from $200 to $800, years before the pandemic-era online shopping boom and the rise of Shein and Temu.
“Nobody, and I mean nobody, had any idea that the Chinese would weaponize this with a flood of cheap, dangerous imports,” said Blumenhaur, who voted in favor of that policy. Blumenhaur was referring to products from overseas that don’t meet U.S. safety regulations.
For example, the Consumer Product Safety Commission issued a warning in December about a magnetic toy sold on Temu that could be dangerous if swallowed. Temu said it immediately removed the product from its site and when the seller refused to issue a recall, it banned them from the site, issued a recall itself, refunded customers and disbursed safety information. “In matters affecting consumer safety, our platform will take full responsibility. Going forward, we aim to intervene more proactively in similar situations,” said a Temu spokesperson.
Spokespeople for Temu and Shein told Forbes that the de minimis provision isn’t critical to their success. Temu told Forbes it supports policy adjustments to the de minimis rule as long as they’re fair and align with consumer interests. In July, Shein executive chairman Donald Tang called for a “complete makeover” of the de minimis rule in a letter to the American Apparel & Footwear Association. He didn’t offer specifics on the changes the company supports.
Changing the de minimis rule would likely mean that U.S. Customs and Border Protection would keep a closer eye on the Chinese retailers’ imports. Customs already inspects some larger shipments from China to enforce the 2021 Uyghur Forced Labor Prevention Act. The burden is on companies to prove their supply chain can’t be linked to areas of the world, like the Xinjiang region in China, known to use forced labor. Shein said it doesn’t, but Bloomberg found evidence to the contrary in 2022 when it tested some products. Temu told lawmakers earlier this year it does not expressly prohibit items made in Xinjiang.
In the meantime, those one billion packages shipped directly from China to American shoppers aren’t subject to taxes or fees, giving Shein and Temu a leg-up on traditional retailers who typically ship large quantities into the U.S. from factories abroad and then distribute them to stores and households. (In 2022, Shein opened a distribution center in Indiana.) Last year, for instance, GapGPS paid $700 million in import duties, while H&M paid $205 million and David’s Bridal paid $19.5 million.
The sweetheart deal is so good that some U.S. retailers have begun looking to get in on it, going so far as to close U.S. warehouses and open new ones in places like Canada and Mexico so they, too, can ship items under the de minimis rule, according to Ron Sorini, a trade expert and lobbyist.
“Some retailers have lost faith that Congress will ever do anything,” said Sorini, who is working with Columbia Sportswear, David’s Bridal, REI and others to change the rule.
Deep Pockets
Temu also benefits from the deep pockets of its parent company, Chinese retail giant PDD HoldingsPDD, which has decided it’s okay to lose gobs of money as it subsidizes low prices, free shipping and spends freely on marketing and advertising.
Temu is also leveraging a vast network of manufacturers, which now have a direct avenue to American shoppers. Previously, they may have sold their products in the U.S. via Amazon, which gave them easy access to a pool of buyers. But it also meant they had to set prices high enough to offset Amazon’s fees for shipping, storage and the like.
“Amazon is facing its first real competition ever,” said John Deighton, a marketing professor at Harvard Business School.
Amazon spokesperson Maria Boschetti said that the company works hard every day to offer low, competitive prices, and that its efforts have always been centered on customers, not other retailers. She added that Shein sells on Amazon, and that it welcomes such partnerships.
Temu has also intensified its rivalry with Shein, an 11-year-old company that’s expected to sell $30 billion of mostly apparel this year and has filed confidentially for a U.S. IPO. The high-stakes battle has prompted dueling lawsuits, with Temu most recently suing Shein for engaging in “mafia-style” intimidation to scare off Temu suppliers. A Shein spokesperson said the lawsuit is without merit.
Colin Huang, the founder of Temu’s parent company, has rapidly become the second-richest man in China, with a fortune that has nearly doubled to $52 billion since the beginning of the year, according to Forbes. Shein founder Chris Xu has an estimated $11 billion fortune.
No matter what they say, the end of de minimis would be a setback for the two companies, which would face tariffs on goods like apparel, which is taxed at least 12.5%, said Sorini. That cost would have to be absorbed or passed along to the customer. It would also bring the U.S. in line with other countries, where de minimis thresholds are typically much lower. For instance, the threshold is about $175 in the U.K., $15 in Canada and $7 in China.
“Our customs laws are outdated,” Cassidy, the Louisiana senator, said in a statement. He said it’s time for companies “to compete fairly for U.S. store shelves.”
This post originally appeared on Forbes.com
Look back on the week that was with hand-picked articles from Australia and around the world. Sign up to the Forbes Australia newsletter here or become a member here.
