Focus Trade loophole keeps cheap Chinese products flowing to US
Focus Trade loophole keeps cheap Chinese products flowing to US
The Rise of Chinese Shopping Platforms in the U.S. Market
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The popularity of shopping platforms selling Chinese-made goods, such as Shein and Temu, has skyrocketed in recent years. Much of their success can be attributed to a loophole that allows these platforms to sell cheap products, like $10 dresses, in the United States without incurring tariffs. This loophole is provided by a “de minimis” rule that exempts packages valued at $800 or less from tariffs, as long as they are addressed and shipped to individuals.
A report published by a House of Representatives committee estimated that Shein and Temu likely account for over 30% of all de minimis shipments into the U.S. This revelation has led to increased scrutiny from Congress, as critics argue that these companies are evading higher tariffs on Chinese goods and bypassing customs inspections under a law that prohibits products made from forced labor. Shein, in particular, has faced significant attention as it contemplates an initial public offering in the U.S.
Despite the controversy surrounding the de minimis provision, Shein claims to be in compliance with U.S. tax and customs laws since entering the market in 2012. According to Peter Pernot-Day, Shein’s Global Head of Strategy, the company’s success is not dependent on the exemption. Instead, it can be attributed to their practice of closely monitoring online trends, ordering small initial batches of apparel, and increasing production only if the styles sell well. This approach allows Shein to avoid expensive excess inventory.
To further demonstrate its commitment to compliance, Shein sent a letter to the American Apparel and Footwear Association (AAFA) in late July, calling for de minimis reform. However, the company did not make specific policy recommendations. Shein’s U.S. Senate disclosures indicate that it has lobbied lawmakers on “trade and tax-related matters” in recent quarters.
On the other hand, Temu, which entered the U.S. market in 2022, did not respond to requests for comment. Similarly, TikTok, owned by Beijing-based ByteDance, did not provide any immediate comments on the matter.
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Data from the U.S. Customs and Border Protection reveals a significant increase in de minimis shipments into the U.S., reaching 685.5 million in 2022, a rise of almost 67% since 2018. This translates to approximately two to three million packages being delivered each day, as highlighted by Robert Silvers, the Under Secretary for Policy at the Department of Homeland Security.
In response to concerns about the unfair advantage enjoyed by Chinese goods and China-founded companies, a bipartisan group of U.S. lawmakers introduced bills in June that would ban de minimis shipments from China once enacted. This move reflects the frustration felt by some lawmakers, including Republican Representative Jason Smith, who described the provision as a “free trade agreement for China” during a congressional hearing in May.
The exemption granted by the de minimis rule has raised concerns among rival U.S. retailers as well. Senate records show that over a dozen retailers, including Tapestry (the parent company of Coach) and Mercari (a Japanese e-commerce platform), have lobbied on the exemption since 2018.
While some retailers and industry groups, such as Columbia Sportswear and the AAFA, support maintaining the $800 threshold and extending the exemption to retailers using foreign trade zones in the U.S., others advocate for lowering or entirely eliminating the cap. Conversely, some businesses that regularly utilize the provision seek to keep it unchanged to continue benefiting from the cost savings associated with the e-commerce paradigm shift.
The House committee report released in June highlighted an interesting disparity. H&M and Gap paid import duties of $205 million and $700 million, respectively, in 2022. In contrast, Shein and Temu, whose packages are shipped directly to customers under de minimis, paid nothing in import duties.
Steve Story, from Apex Logistics International, a firm that assists companies in shipping goods under de minimis, emphasizes that the exemption is available to everyone. He believes that failing to take advantage of this e-commerce paradigm shift and save money would be a missed opportunity.
In traditional retail, merchandise is typically imported in bulk via ocean freight, and duties are paid upon arrival at port. These goods are then moved to warehouses and shipped to stores or individual customers who place online orders. However, de minimis shipments, thanks to the exemption, avoid duties and often bypass customs inspections altogether. These smaller packages are usually handed over to carriers like UPS or FedEx for final delivery.
In some cases, goods are shipped in bulk from China to bonded warehouses located in Mexico or Canada. Once an online order is placed, these products are individually packaged and driven into the U.S. duty-free. The de minimis rule, which has been in place since 1938, was initially intended for low-value gifts mailed from abroad and souvenirs brought back by Americans traveling overseas. In 2015, Congress raised the cap on de minimis shipments from $200 to $800, making the U.S. threshold one of the highest in the world.
According to Erik Autor, a trade attorney with Barlow & Company, the exponential growth of e-commerce around 2015 played a significant role in increasing the number of packages shipped under the exemption.
The rise of shopping platforms selling Chinese-made goods in the U.S. market has disrupted the traditional retail landscape. The de minimis rule loophole, which allows for tariff-free delivery of inexpensive products, has enabled companies like Shein and Temu to gain a significant market share. While the provision is not exclusive to these companies, their utilization of it has drawn the attention of lawmakers, leading to calls for reform. As the debate about the de minimis rule continues, it remains to be seen whether changes will be made to level the playing field for all retailers.
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