The rock-bottom prices that have made Chinese e-tailers Shein and Temu so popular with American consumers could quickly rise if the Biden administration clamps down on their use of a trade loophole.
The companies, known for their $5 T-shirts and $10 sweaters, could see their prices rise by at least 20 percent if the so-called de minimis provision is changed, a spokesman for the Republican majority of the House Select Committee on the Chinese Communist Party told CNBC. The committee made the estimate after opening an investigation into Shein and Temu more than a year ago.
Neil Saunders, retail analyst and director at GlobalData, agreed the policy change would likely lead to higher prices, but he could not say by how much.
“If the de minimis exemption is withdrawn, the cost of products from marketplaces like Shein and Temu will go up. They will still be low-cost marketplaces, but they won’t have the competitive advantage they do now,” Saunders told CNBC in an email. “That may cost them some market share or slow their growth, but they will likely respond by pushing out some more expensive products to balance out their propositions.”
On Friday morning, the Biden administration announced plans to exclude overseas shipments of products subject to U.S. tariffs between China and foreign countries from the de minimis exemption.
This exemption is an obscure loophole in the import duty law that has existed since the 1930s. The exemption allows packages worth less than $800 to enter the United States without the shipper having to pay duties and with less scrutiny than larger containers.
The announcement follows more than a year of scrutiny of the companies by lawmakers from both sides of the political spectrum, and in particular by the House Select Committee on the CCP.
Both Shein and Temu declined to tell CNBC whether they would raise prices as a result of the proposed changes. The companies also disputed that their low prices are driven by the de minimis exemption and said their business models allow them to offer their ultra-affordable rates.
A spokesperson for Shein noted that the company supports de minimis reform and was recently accepted into a voluntary pilot program with U.S. Customs and Border Protection. Under that program, the company agreed to provide additional data on packages and shipments.
A risk to their competitive advantage
In recent years, the two companies have won over American consumers with their ultra-low prices and ability to quickly produce trendy styles, far faster than competitors. Shein is expected to generate more than $30 billion in annual revenue, but it’s unclear what Temu’s sales are. Its parent company, PDD Holdings, saw $34.9 billion in revenue in fiscal 2023 — a 90% increase from the same period last year.
As these companies have become popular shopping destinations, they have taken market share from rivals targeting similar consumer segments, such as H&M, Zara, Target, Walmart and Amazon.
If Shein were to increase its prices by 20%, its product range would be more in line with its competitors. This could make it harder to compete.
For example, the average price of a dress at Shein on June 1 was $28.51, according to data from Edited, a London-based research firm that analyzed the company’s pricing strategy and shared statistics with Reuters.
At the time, that price was well below the average cost of dresses at H&M and Zara, which were $40.97 and $79.69, respectively, according to Edited’s data. However, if costs were to increase by 20 percent, the average dress price at Shein would be $34.21 — much closer to H&M’s average price.
There’s no guarantee that prices will rise 20% if the Biden administration’s proposal goes into effect. Still, a smaller discount relative to Shein’s rivals, combined with the company’s long shipping times, could lead some shoppers to opt for retailers closer to home.
“Ultimately, reforming the de minimis rules will create a fairer and more level playing field, but like any other tariff, it will ultimately cost consumers more,” Saunders said.
Researching a digital darling
Last year, the commission began investigating Shein and Temu over slave labor in their supply chains, focusing on their use of the de minimis exemption, claiming in a June 2023 report that both companies had paid no import duties in 2022. Shein disputed that claim, saying it had paid millions in import duties in 2022 and 2023. However, it has acknowledged that cotton from prohibited areas was found in its supply chain and said it was working to resolve the issue. Temu did not respond to questions about slave labor in its supply chain.
“As the Select Committee’s investigation into Shein and Temu found, most of Shein and Temu’s products fall under the de minimis exception, which allows them to evade U.S. customs and avoid the scrutiny that other retailers face. The U.S. must urgently restrict these shipments and force these companies to correct their lackluster compliance practices,” a committee spokesperson told CNBC.
The spokesperson added that “Congress urgently needs to pass a de minimis reform bill.”
As Shein faced mounting scrutiny, hopes for a long-awaited US IPO faded.
Lawmakers are eager to limit the influence of Chinese retailers on the U.S. economy and take steps to level the playing field for American companies. It is therefore unlikely that they will propose an outright ban on Shein and Temu, as has been done with social media company TikTok.
Instead, several lawmakers called on the U.S. Securities and Exchange Commission to block Shein’s IPO, citing the de minimis exemption as the best way to limit the company’s growth.
Now, more than a year after the launch of these efforts and Shein’s own tentative charm offensive, plans for an IPO in New York are all but dead and the company has headed to London in hopes of a friendlier reception.
In June, CNBC reported that Shein had confidentially filed for a London stock exchange listing after the company faced backlash in the US.
It is unclear what impact the proposed de minimis changes will have on Shein’s IPO plans.
This article was originally published on NBCNews.com
