A man walks past a logo outside the office of fast-fashion e-commerce company Shein in Guangzhou, southern China's Guangdong province.
Jade Gao | Afp | Getty Images
The rock-bottom prices that have made China-linked e-retailers Shein and Temu so popular with American consumers could soon rise if the Biden administration restricts their use of a loophole in trade law.
The companies, known for their $5 T-shirts and $10 sweaters, could face a price increase of at least 20 percent if the so-called de minimis rule is changed, a spokesman for the Republican majority on the House Select Committee on the Chinese Communist Party told CNBC. The committee came to that estimate after launching investigations into Shein and Temu more than a year ago.
Neil Saunders, retail analyst and managing director of GlobalData, agreed that the policy change would likely lead to a price increase, but could not say by how much.
“If the de minimis exemption is removed, the cost of products on marketplaces like Shein and Temu will increase. They will still be low-cost marketplaces, but they won't be quite as competitive as they are now,” Saunders said in an email to CNBC. “This could cost them market share or slow their growth, but they will likely respond by pushing some higher-priced items to balance out their supply.”
On Friday morning, the Biden administration announced plans to exclude foreign shipments of products subject to U.S.-Chinese tariffs from the de minimis exemption.
This exemption is an obscure loophole in customs law that has been in place since the 1930s. It allows packages valued at less than $800 to enter the United States without shippers having to pay import duties and under less stringent inspection than larger containers.
The announcement comes after the companies were subjected to more than a year of extensive scrutiny by lawmakers from both parties, and in particular by the House Select Committee on the Chinese Communist Party (CCP).
Both Shein and Temu declined to tell CNBC whether they will raise their prices as a result of the proposed changes. The companies also denied that their low prices were due to the de minimis exemption, saying their business models allowed them to offer their extremely low prices.
A Shein spokesperson noted that the company supports de minimis reform and was recently included in a voluntary pilot program run by U.S. Customs and Border Protection, under which it agreed to provide additional data on packages and shipments.
A risk to your competitive advantage
In recent years, the two companies have taken U.S. consumers by storm with their ultra-low prices and ability to bring trendy styles to market much faster than the competition. Shein is estimated to generate more than $30 billion in annual revenue, but how much Temu generates is unclear. The parent company, PDD investmentsgenerated revenue of $34.9 billion in fiscal year 2023, an increase of 90% over the same period last year.
As the companies have become popular shopping destinations, they have taken market share from competitors that serve similar consumer segments, such as H&M, Zara, Target, Walmart and Amazon.
If Shein were to increase its prices by 20%, the company's product range would become more similar to that of its competitors, which could make it more difficult for the company to compete.
For example, the average price of a dress at Shein was $28.51 on June 1, according to data from London-based research firm Edited, which analyzes the company's pricing strategy and shared the figures with Reuters.
At the time, that price was well below the average price of dresses at H&M and Zara, which were $40.97 and $79.69, respectively, according to Edited data. However, if costs were to increase by 20%, the average dress price at Shein would be $34.21 – much closer to H&M's average price.
There is no guarantee that prices would increase by 20% if the Biden administration's proposal goes into effect. Still, a smaller discount compared to Shein's competitors, coupled with the company's long shipping times, could lead some consumers to opt for retailers closer to home.
“Although reform of the de minimis rules will lead to a fairer and more level playing field, like all tariffs it will ultimately result in higher costs for consumers,” Saunders said.
A digital darling under observation
Last year, the committee began investigating Shein and Temu for slave labor in their supply chains, focusing on their use of the de minimis exemption. In a June 2023 report, the company claimed that both companies paid no import duties in 2022. Shein denied that claim, saying the company paid millions of dollars in import duties in 2022 and 2023. However, it has acknowledged that cotton from banned regions was found in its supply chain and said it was working to fix the problem. In a statement, Temu said it was “committed to maintaining ethical labor practices” and “prohibits the use of any form of forced, child or penal labor and requires compliance with all local labor laws.”
“As the Special Committee's investigation into Shein and Temu found, the majority of Shein and Temu's products fall under the de minimis exemption. This allows them to bypass U.S. customs and evade the scrutiny faced by other retailers. The U.S. must urgently curb these shipments and force these companies to correct their poor compliance practices,” a committee spokesperson told CNBC.
The spokesman added: “Congress must urgently pass a de minimis reform bill.”
As Shein came under increasing scrutiny, the company's hopes of completing its long-awaited U.S. IPO faded.
Lawmakers want to limit the influence of Chinese-linked retailers on the U.S. economy and take steps to level the playing field for American companies, but they are unlikely to propose a complete ban on Shein and Temu, as was done with social media company TikTok.
Instead, numerous politicians called on the US Securities and Exchange Commission (SEC) to block Shein's IPO, citing the de minimis exemption as the best way to curb the company's growth.
Now, more than a year after those efforts began and Shein's own sputtering charm offensive, plans for a New York IPO have all but collapsed, and in the hope of a friendlier reception there, the company has turned to London.
In June, CNBC reported that Shein had confidentially filed for an IPO in London as it faced backlash in the United States.
It is unclear what impact the proposed de minimis changes will have on Shein's IPO plans.
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