The Tax Loophole That Helps Temu and Shein Keep Prices So Low

On Super Bowl Sunday, the e-commerce giant Temu flaunted their alluringly low prices in multiple ad spots during the game, encouraging customers to “shop like a billionaire.” Halsey Cook, the CEO of the South Carolina-based textile manufacturer Milliken & Company, was less than enthused. For the past couple years, he’s been watching as products similar to Milliken’s apparel lines have popped up on Temu and Shein for shockingly low prices. This incursion has had an outsized financial impact on the company: last fall, Milliken was forced to close two plants in the Southeast and laid off hundreds of workers, in part due to the newfound competition. “What we're experiencing now in the domestic textile industry is another level of pain and plant closures compared to anything in our past,” Cook says. 

Temu and Shein are among the fastest growing companies that do Business in the U.S.: they now send almost a million packages a day to American consumers, frequently top the App Store, and are racking up billions of dollars of revenue every year. Temu and Shein ship packages straight from Chinese warehouses on the cheap, allowing American consumers to buy fast fashion, electronics and other products for astonishingly low prices. American small Businesses argue that these e-commerce juggernauts are threatening their livelihoods—and tell TIME that if their rise continues unabated, many shops will close and American warehouses will shutter their doors and move abroad. 

In response to this worrying trend, several Congresspeople have drafted legislation that aims to reduce one of the main trading advantages Temu and Shein have: a trade rule known as de minimis that allows them to ship packages without paying duty and certain taxes as long as shipments are under the value of $800. “It is a huge loophole that particularly enables these two companies to send a gusher of product to the U.S and undercut American Businesses that are literally being driven out of Business by this comPetition,” Congressman Earl Blumenauer (D., Ore.) tells TIME. 

But lawmakers might not make time for a very wonky issue in this highly contentious congressional session. Meanwhile, fierce defenders of the provision argue that de minimis is now an inalterable part of how Americans buy things, and that this wave of e-commerce is here to stay, American brick-and-mortar retailers be damned. “This is the new model; this is the future,” says Steve Story, a business executive who helps companies ship goods under de minimis. “Why hold inventory in the states when you can let your supplier hold that inventory and ship? If American companies don’t get on board with this, they’ll be left behind.” 

From Souvenirs to Everyday Goods

De minimis is far from the only reason why Temu and Shein have thrived in the last couple years. Temu has found success with its gamified shopping experience, which encourages users to win discounts by sharing the app on social media. Some analysts argue that Temu is offering unsustainable prices in order to win market share: Goldman Sachs estimated Temu loses about $6 for every order in the U.S., while the financial company China Merchants Securities has calculated that Temu is losing between 4.15 billion RMB and 6.73 billion RMB ($580 million to $950 million) per year. (A Temu spokesperson disputed this claim in a statement to TIME, writing that such third-party analyses “do not reflect our actual financial situation and are far from reality.” The company declined to share its specific performance figures.) Many startups have endured years of losses in their paths to profitability, including Uber, which subsidized rides in order to reach new customers.

Read More: Designers Are Accusing Temu of Selling Copies of Their Work

But many experts say that de minimis, a century-old trade rule, is central to Temu’s success in the U.S. The de minimis provision allows companies to ship packages worth less than $800 to the U.S. without incurring duties and fees. The law’s primary purpose was to allow tourists who bought gifts abroad to avoid paying a fee when they returned home, and was previously capped at $200. 

For years, de minimis was a minor factor in the American retail landscape. But in 2016, the de minimis threshold was raised from $200 to $800, allowing pricier items to skip the formal customs process. Companies like Temu were able to ship products directly from warehouses to customers, sliding under this higher threshold and thus avoiding typical entry fees. By creating shopping apps for smartphones, they could operate under the branding of a single company while shipping products from a web of different warehouses and sellers across China. 

The number of de minimis packages coming into the U.S. has increased dramatically, and many of them are from Temu and Shein. Nearly a third (30%) of all small packages coming into the U.S. were ordered from those two websites, an interim report from the House Select Committee on the Chinese Communist Party found. Experts say that American companies like Walmart and Amazon are now following their lead, using de minimis to ship products to Americans from overseas and keep their prices low.  

“Temu's growth isn't dependent on the de minimis policy,” a Temu spokesperson wrote in an emailed statement. “We are open to and supportive of any policy adjustments made by legislators that align with consumer interests. We believe that as long as these policies are fair, they won't influence the outcomes of competitive business dynamics.” 

Last year, Shein published a statement acknowledging that de minimis disadvantages “American companies that can no longer comPete on price,” and argued that the policy “needs a complete makeover.”  

Unlike foreign businesses, most small and mid-sized American businesses don’t benefit from the de minimis rule. Many of these companies receive products or materials in bulk from overseas, then assemble them in American warehouses. This mode of production requires paying hefty fees. Jim Marcum, the CEO of the dress retailer David’s Bridal, says that the company paid $100 million in fees over the last six years to U.S. customs, which forced it to charge higher prices for its dresses. “Our largest competitor sells about a million dresses a year in the U.S., and they come in duty free,” says Marcum. “That’s hard to compete with.” In April, the company filed for bankruptcy—and Marcum says that the proliferation of de minimis “had an enormous impact” in leading to that decision. 

“I’ve never seen a piece of legislation that has created more unintended consequences,” Marcum says. “And it’s largely being driven by the acceleration of tech.” 

The bicycle industry has been similarly impacted. Matt Moore, the policy council for the trade association People for Bikes, says that since the pandemic, hundreds of new eBike brands have come onto the market shipping directly from Asia, leaving local bike retailers in the lurch. “Sales have incrementally gone to the foreign online sellers that would have gone to domestic businesses,” Moore says. 

American entrepreneurs now worry that de minimis will result in warehouses moving out of the country. Some companies have already established warehouses to Mexico or Canada, where they can receive large shipments of composite parts, then assemble them into products and send them via de minimis to the U.S. “Most U.S. companies, if they haven’t started to avail themselves of the opportunity, are exploring or evaluating it,” says Marcum. He said that David’s Bridal was considering moving warehouses out of the U.S. “I do not want to export jobs out of the country,” he says. “But you have to be able to compete.” 

Even Steve Story, a pro-de minimis advocate whose Apex Logistics International helps retailers including Temu ship goods under de minimis, acknowledges that the law could lead to American warehouses being cut out of the supply chain. “I don’t want to take American jobs,” he says. “But for the right company and the right model, this fits very well.” 

Legislation

De minimis has clearly altered the e-commerce landscape. But what can legislators do about it? There’s some precedent here: for many years, Amazon used a loophole to avoid paying most state sales taxes for decades, giving it a competitive advantage. Eventually, states fought back by passing a slew of laws. “There are often these laws set up for another purpose—and people figure out how to leverage them,” says Douglas Schmidt, a computer science professor at Vanderbilt University who researches digital privacy. “And it takes a while for the legislative process to catch up.”

There are currently a few bipartisan de minimis bills floating around Congress. While they vary slightly in their implementation details, each of their main objectives is to stop allowing Chinese manufacturers from using the de minimis channel. One of them, the Import Security and Fairness Act, is a bipartisan project with supporters in both chambers of Congress: it was introduced by Representatives Blumenauer, Neal Dunn, a Florida Republican, and Senators Sherrod Brown, an Ohioan Democrat, and Marco Rubio, a Florida Republican. Blumenauer says that the bill’s bipartisan nature is proof of how worrisome the issue has become to a wide swath of Americans. “The case is stronger and stronger to prohibit access from people who cheat and cut corners to the American market,” he says. 

Crucially, politicians like Blumenauer and Wisconsin Republican Mike Gallagher believe that de minimis is facilitating the entry of products made by Uyghur people forced to labor against their will. The House Select Committee on the Chinese Communist Party argued in an interim report this year that de minimis packages are much less likely to be screened for compliance with the Uyghur Forced Labor Prevention Act, and that Temu in particular does not have any system to track whether its products are in compliance with the act.  A 2022 Bloomberg article found that Shein products contained cotton from Xinjiang, which would be banned under that legislation. 

Blumenauer says there’s “no question” that products being made with forced labor are coming into the country via de minimis. He says that even if doing away with the provision raises prices for consumers, it will be well worth it. “We're not going to have lower prices for American consumers by using slave labor or convict labor: That’s a nonstarter,” he says. 

The Temu spokesperson called allegations linking Temu products to forced labor “completely ungrounded.” “Our current standards and practices are no different from those of major U.S. e-commerce platforms, such as Amazon, eBay, and Etsy,” the spokesperson wrote.

Separately, Blumenauer and other critics also believe that de minimis has become a pipeline for fentanyl to enter the country. Christa Brzozowski, the acting assistant secretary for trade and economic security policy at the Department of Homeland Security, said in a recent House hearing that the rise of de minimis had created a “challenging environment for our folks at the border.” 

John Pickel, the National Foreign Trade Council’s senior director of international supply chain policy, argues that discarding de minimis would cost both the government and American consumers billions of dollars while doing little to prevent counterfeits or fentanyl being shipped into the country. “De minimis just works. If you buy something online and it shows up at your door two days later, you don’t necessarily know that de minimis was used,” he says. “Quite frankly, some of the businesses who are speaking out against it benefit from the use of de minimis in their supply chains.” 

Matt Moore, from People for Bikes, also acknowledges that changing de minimis rules might raise prices for consumers. But de minimis, he says, “simply sends that capital overseas” as opposed to keeping the money in the country. “If you take the broad view of what’s best for American consumers and jobs,” he says, “You want those industries to be based here.” 

One of the hardest-hit industries has been the textiles industry. Milliken’s plant closures were two of ten textile plant closures that have unfolded since September. Cook, Milliken’s CEO, says that the COVID pandemic—when Americans desperately needed masks and other personal protective equipment supplies—showed the importance of having local manufacturers. Now, he says, due to the iNFLux of de minimis shipments, those producers are disappearing. “If there were ever times of emergencies when we needed our textile industry,” he says, “It simply won’t be there.”