The bottom of the barrel prices that have made Chinese-linked e-tailers Shein and Temu so popular with American consumers could soon rise if the Biden administration curtails their use of a trade law loophole.
The companies, known for their $5 T-shirts and $10 sweaters, could see prices rise by at least 20% if the so-called de minimis provision is changed, a spokesperson for the Republican majority of the House Select Committee on the Chinese Communist Party told CNBC. The committee made the estimate after launching investigations into Shein and Temu more than a year ago.
Neil Saunders, a retail analyst and the managing director of GlobalData, agreed the policy change would likely increase prices, but couldn’t say by how much.
“If the de minimis exemption is removed, then the cost of products from marketplaces like Shein and Temu will rise. They will still be cheap marketplaces but they won’t have quite the competitive edge on price that they do now,” Saunders told CNBC in an email. “That may lose them some market share or slow their growth, but they will likely respond by pushing into some higher-priced items to balance out their propositions.”
On Friday morning, the Biden administration announced plans to bar overseas shipments of products that are subject to U.S.-China tariffs from being eligible for the de minimis exemption.
An obscure tariff law loophole that’s been around since the 1930s, the exemption allows packages with a value of less than $800 to enter the United States without the shippers paying import duties and with less scrutiny than larger containers.
The announcement comes after more than a year of scrutiny into the companies from lawmakers on both sides of the aisle and in particular, the House Select Committee on the CCP.
Both Shein and Temu declined to tell CNBC if they will raise prices due 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 where it agreed to provide additional data about packages and shipments.
A risk to their competitive edge
Over the last couple of years, the two companies have taken U.S. consumers by storm with their ultra-low prices and their ability to rapidly churn out trending styles far faster than competitors can. Shein is estimated to take in more than $30 billion in revenue annually, 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 year ago period.
As the companies have become go-to shopping destinations, they’ve taken market share from rivals that cater to similar consumer segments, such as H&M, Zara, Target, Walmart and Amazon.
If Shein’s prices were to rise by 20%, it would put its assortment closer in line with those competitors, which could make it harder for it to compete.
For example, the average price of a dress on Shein was $28.51 as of June 1, according to data from Edited, a London-based research firm that analyzed the company’s pricing strategy and shared metrics with Reuters.
At the time, that price was well below the average cost for dresses at H&M and Zara, which were $40.97 and $79.69, respectively, according to Edited’s data. However, if costs were to rise by 20%, that would make the average dress price on Shein $34.21 — far closer to H&M’s average price.
There’s no guarantee prices would rise 20% if the Biden administration’s proposal takes effect. Still, taken together with the company’s long shipping times, a smaller discount relative to Shein’s rivals may lead some consumers to opt for retailers that are closer to home.
“Ultimately, while reforming the de minimis rules makes for a fairer and more level playing field, like any tariff it will end up costing consumers more,” said Saunders.
Scrutiny of a digital darling
Last year, the committee began investigating Shein and Temu for slave labor in their supply chains and zeroed in on their use of the de minimis exemption, claiming in a June 2023 report that both companies didn’t pay any import duties in 2022. Shein disputed that claim and said the company paid millions of import duties in 2022 and 2023. It has, however, acknowledged that cotton from banned regions has been found in its supply chain and said it’s working to rectify the issue. Temu didn’t respond to inquiries about slave labor in its supply chain.
“As the Select Committee’s investigation into Shein and Temu revealed, the majority of products from Shein and Temu fall under the de minimis exception. This allows them to dodge U.S. Customs and evade the scrutiny other retailers face. The U.S. must urgently curb these shipments and force these companies to correct their anemic compliance practices,” a spokesperson for the committee told CNBC.
The spokesperson added that “Congress must urgently make de minimis reform law.”
As scrutiny of Shein intensified, its hopes of pulling off a long awaited U.S. public offering dwindled.
Lawmakers, eager to curtail the influence that Chinese-linked retailers were having on the U.S. economy and take steps they said would level the playing field for American companies, were unlikely to propose an outright ban of Shein and Temu, similar to what was done with social media company TikTok.
Instead, numerous lawmakers called for the U.S. Securities and Exchange Commission to block Shein’s IPO and targeted the de minimis exemption as the best way to curtail the company’s growth.
Now, more than a year into those efforts and Shein’s own sputtering charm offensive, its plans for a New York IPO are all but dead and it has turned to London in hopes of finding a friendlier reception.
In June, CNBC reported that Shein had confidentially filed for a public listing in London as it faced backlash in the U.S.
It’s unclear what impact the proposed de minimis changes will have on Shein’s IPO plans.
This article was originally published on NBCNews.com
