The U.S. tax loophole that made Shein and Temu rich is changing. What will happen to the brands now?
For years, Shein and Temu used a U.S. tax loophole to keep their costs low and send items to the country ultra-quickly.
Not anymore.
U.S. President Donald Trump signed an executive order on April 2 to end the de minimis exemption — a rule that allows small packages worth less than $800 US to enter the U.S. tax free — for packages from China and Hong Kong, effective Friday.
The de minimis rule exists to prevent customs agents from spending too much time processing small packages that don't yield much money for the government in import taxes. But now, the Trump administration is reversing the rule for imports from China, saying the exemption has allowed illegal drugs to come into the country.
Companies like Shein and Temu, both of which were founded in China, have used the rule to their advantage, shipping orders to the U.S. as individual packages rather than bringing shipping crates full of items in, storing them in warehouses and distributing to consumers from there, as most retailers do.
The exemption is a big part of what helped keep Shein and Temu's prices so low, according to Samuel Roscoe, a lecturer in supply chain and operations management at the University of British Columbia's business school.
"I would expect them to take a significant hit, but still trying to compete in the United States," Roscoe said.
But while price increases, supply chain factors and a possible slowing of packages at the border will be obstacles, experts say the hits won't take out the companies completely, nor the fast fashion model they accelerated.
Price increases already taking effectAs of Friday, small packages under $800 US in value entering the U.S. from China will be subject to duties of 120 per cent, or a $100 flat rate fee. The flat rate is set to rise to $200 as of June 1.
Assuming the company passed on most or all of that duty to consumers, the cost of items on Shein and Temu's sites could more than double for Americans.
Both Shein and Temu have already announced price increases due to tariffs, which came into effect last week. An analysis by Bloomberg found that products on Shein's U.S.-facing site had increased by as much as 377 per cent in some cases, and by an average of eight per cent for women's clothing.
Temu has also added "import charges" to items on their site of about 145 per cent, according to CNBC. Its analysis shows that an $18.47 US sundress will now cost $44.68 after import charges, for example.
Canadians aren't likely to see any price increases today, Roscoe says, given there are no changes coming to import rules or duties between our country and China. (There is a similar de minimis exemption in Canada for packages under $20, $40 or $150 in value, depending on where the package is being shipped from.)
At the time of writing, prices on Shein and Temu's Canadian sites appeared to be unchanged.
Despite the increased charges in the U.S., Roscoe says this doesn't take the Chinese e-commerce sites out of the game.
"Even if their prices go up by one and a half times, they're still competitive with the retail stores in North America," Roscoe said.
He gives the example of a $10 bikini on one of the platforms that might cost $22 or so after the tariffs come in. Bikinis from H&M, Zara and Abercrombie are still much more expensive, at averages of $50, $80 and $120, respectively, meaning Shein and Temu will still have room to compete in the U.S. market.
Low-income Americans likely stand the most to lose from a price increase, according to Sheng Lu, an assistant professor of fashion and apparel studies at the University of Delaware. He says basics like t-shirts and socks might see the biggest price jumps because they're staples shoppers are likely to buy even if they become more expensive.
In the past, competition with Shein and Temu has also kept prices at other fast fashion retailers down, according to Lu. Now that the Chinese e-commerce giants are raising their prices, Lu says it might allow other brands to up theirs as well without fear of losing customers.
Supply chain issues also a factorThe tariff hit and disappearance of the de minimis loophole also poses a host of supply chain issues for Temu and Shein, according to both Roscoe and Lu.
While neighbouring countries like Vietnam and Cambodia are facing tariffs far lower than China's, Lu says simply shifting production to these other nations isn't so simple.
For one, those kinds of shifts take a lot of time and money. Lu says its unlikely the companies will commit to switching where they manufacture their products any time soon, given how back and forth Trump's tariff policy has been so far.
He says Chinese factories can also make a variety of products, and in small batches. Companies like Shein design a product and generally make a few hundred of it initially to see how well they sell before making more. Lu says Chinese factories are accommodating to this practice, whereas factories elsewhere typically have a minimum quantity of 3,000 or 4,000 for orders.
"They rely on factories in China based on their very sophisticated and integrated local supply chain to make such products, [so] it's not easy to remove the production out of China," Lu said.
The new rule will also likely hamper how quickly products come into the country, Lu says. The de minimis rule allowed these small packages under $800 US to avoid processing by border agents upon arrival from China. But taking away the rule means they'll be subject to all checks.
He says around one million small packages come into the U.S. every day under de minimis right now, so that added processing could impact how quickly people get packages that consumers expect to receive in a matter of days.
In order to make up for the potential loss of business, Roscoe says Temu and Shein will likely push into other markets that don't have high tariffs — like Canada, for example.
"We're probably going to see a lot of targeted advertising to Canadians," Roscoe said.
Lu says that kind of expansion will help, but adds that no retailer can realistically stand to lose access to the U.S. market.
"We simply do not have another market out there that can be as large and as lucrative," Lu said.
With fast fashion costs rising as a result of tariffs, some reports have suggested this could push consumers toward the resale market or to buy less in general — making it a win for sustainability.
Lu said his Gen Z students (part of the core demographic for companies like Shein) have said that price increases for cheap clothes would lead them to buy less or shop second-hand in an attempt to dodge the tariffs.
But the added import taxes might actually exacerbate current sustainability issues that Shein and Temu have faced, says Anika Kozlowski, an assistant professor of design studies at the University of Wisconsin-Madison who researches sustainable fashion. It could result in the companies using even cheaper inputs, which tend to be less sustainable, to try and keep costs low, she says.
She says the cost of clothing repairs might go up as parts like buttons or zippers, which tend to be imported, will also get more expensive — a possible hit to the second-hand clothing market as well. If there's more demand and economic pressure at second-hand stores, too, Kozlowski says sellers might also raise prices as a result, making this sustainable option less desirable to shoppers.
As a whole, Kozlowski says tariffs won't disrupt fast fashion because they don't address the root cause — our desire for ultra-cheap stuff.
"We're still going to have a culture of consumption," Kozlowski said. "It doesn't break that addiction."
She says any real solutions will have to start there — as does Roscoe.
Roscoe says Shein and Temu came along and supercharged the fast fashion model that companies like Zara started in the late '90s. Whereas a fast fashion garment used to take months to go from a concept to a real product, Shein in particular can turn around a new item in as little as 25 days, making the churn of the clothing industry even more rapid than in the past.
Roscoe says slowing this pace would require efforts such as government legislation against wasteful and exploitative processes, as well as consumer boycotts of brands that take part in those practices.
cbc.ca
