Marketplace Briefing: How changes to de minimis imports could upend online marketplaces
This is the latest installment of the Marketplace Briefing, a weekly Modern Retail+ column about the ever-changing e-commerce marketplace landscape. More from the series →
The U.S. trade rule known as de minimis has powered the meteoric rise of China-founded e-commerce marketplaces like Temu and Shein, but a White House proposal that would drastically limit this trade provision may force companies to raise prices, revamp their supply chains and slow down shipments.
In recent years, overseas online platforms likes Shein and Temu have become synonymous with de minimis, a nearly 100-year-old trade law that helps retailers bypass duties and taxes, with little scrutiny, for imports below $800 that ship from China to U.S. consumers. For this reason, Shein and Temu are able to offer bargain prices on their wares, like $5 baseball caps and $8 Apple AirPod dupes.
Shein and Temu have hustled to build marketplaces that compete with e-commerce behemoth Amazon, which accounts for about 40% of total online sales in the U.S., per eMarketer. That’s involved a concerted push to court more sellers to their platforms — including ones that already sell on Amazon. Part of the value proposition for these sellers has hinged on the de minimis exemption, which helps companies like Shein and Temu subsidize the cost of international shipping. Temu emphasized its fee structure in a pitch deck to prospective merchants, Modern Retail previously reported.
But if de minimis is no longer an option for Shein and Temu, that stands to dampen the value proposition of their marketplaces.
Potential changes ahead
Earlier this month, the White House issued a sweeping executive action that would curb alleged “abuse” of the U.S. trade loophole by barring overseas shipments that are subject to tariffs, particularly those from China, from qualifying for the import-tax exemption. The proposal also called for additional paperwork and data requirements for de minimis shipments, which the Biden-Harris administration said would help customs agents better identify illegal or unsafe products.
As a result, companies that rely on the de minimis loophole to ship packages between the U.S. and China would likely face higher shipping costs, which industry experts say would be passed on to consumers in the form of price hikes. Companies may also respond by diversifying their supply chains, like ramping up manufacturing in countries other than China, including Mexico and Canada. Shipping times may be prolonged as a result of the White House’s proposal, experts said. .
The number of de minimis shipments entering the U.S. every year has exploded, in part thanks to tariffs imposed by the Trump administration on a huge swath of Chinese consumer products. The popularity of online shopping during the pandemic also helped to accelerate the rise of such shipments. Over the past decade, the number of de minimis packages entering the U.S. has swelled from about 140 million to more than a billion in 2023, according to the White House.
The de minimis exemption is a provision in the Tariff Act of 1930 that was historically intended for U.S. tourists traveling abroad, according to Patrick Penfield, professor of supply chain management practice at Syracuse University. But companies like Shein and Temu have leveraged the provision to gain market share in the U.S., which has sparked outrage from legislators and trade groups who argue that the de minimis exemption unfairly puts U.S. companies at a competitive disadvantage.
“Basically, these Chinese companies have been using this loophole to their advantage,” said Margaret Kidd, program director and instructional associate professor of supply chain and logistics technology at the University of Houston. “This just levels the playing field.”
Both Shein and Temu, however, have said that their businesses are not dependent on de minimis.
“We are closely monitoring any developments related to the policy and remain open to changes that would benefit consumers,” a Temu spokesperson said in an email statement to Modern Retail.
“Shein makes import compliance a top priority, including the reporting requirements under U.S. law with respect to de minimis entries,” according to a Shein spokesperson. “We look forward to working with all stakeholders on reform.”
Other impacts
But companies with links to China aren’t the only types of merchants that have been leveraging de minimis.
Matthew Hertz, founder of logistics consulting firm Second Marathon, likened the overnight popularity of de minimis to “the pretty girl at the high school prom.” Hertz said his company has increasingly helped U.S.-based brands partner with third-party logistics providers to ship imported goods to warehouses in Mexico or Canada for merchants looking to avoid U.S. duties. Three years ago, the words “de minimis” cropped up only in rare conversations with clients. Now, the topic is practically unavoidable, he said.
“Up until the last couple of weeks, for many brands, it would be silly or stupid to not take advantage of [de minimis],” Hertz said. “If you were an apparel brand, say a new Lululemon competitor sourcing in China and bringing in products from overseas, where your tariff rate might be 20 percent to 30 percent, it would be really difficult to not pursue an option in Mexico or Canada.”
Hertz isn’t alone.
“What people don’t get is that there are probably thousands of American businesses also leveraging this model,” said Izzy Rosenzweig, founder of fulfillment startup Portless, which helps brands mimic the direct-from-China approach made famous by Temu and Shein by chartering de minimis shipments via air cargo. “Fundamentally, this model that American brands use allows them to be more nimble, have better cash flow, hire more people and be more successful.”
In a move to capture some of the demand that drives sales for Shein and Temu, Amazon has reportedly hatched a plan to open a discount store on its website that would ship products from warehouses in China directly to consumers’ doorsteps, per The Information.
It’s unclear to what extent amendments to the de minimis trade rule would impact China-based sellers on Amazon’s platform. In general, Amazon leans on its vast network of warehouses and fulfillment centers in the U.S. to ship packages to customers at lightning-fast delivery speeds. But China-based sellers make up a significant share of the company’s marketplace, representing nearly half of the top 10,000 sellers on Amazon in the U.S., per Marketplace Pulse, and driving nearly half of the third-party gross merchandise volume.
In an annual filing earlier this year, Amazon described the risks associated with its international operations. The company said, “China-based sellers account for significant portions of our third-party seller services and advertising revenues, and China-based suppliers provide significant portions of our components and finished goods.” As such, “regulatory and trade restrictions, data protection and cybersecurity laws, economic factors, geopolitical events, security issues, or other factors negatively impacting China-based sellers and suppliers could adversely affect our operating results.”
Amazon declined to comment.
Meanwhile, Shein and Temu are poised to take a financial hit from substantial changes made to the trade rule. In all likelihood, retailers like Shein and Temu will need to raise their rock-bottom prices in order to pay for higher costs associated with shipping and warehousing, according to Penfield. Packages will also take longer to get to customers, he added. “I could foresee it being double the time,” Penfield said. De minimis imports from China usually take around 10 days to reach U.S. customers.
A private company, Shein has been tight-lipped about its earnings numbers. But in January, the CEO of Authentic Brands Group, one of Shein’s retail partners, said the Singapore-headquartered company’s sales were “a lot more” than $30 billion. Shein has also previously claimed it is profitable. Changes to the de minimis rule are the latest hurdle facing Shein, which has looked to list on the London Stock Exchange as a public company. Shein initially tried to list in New York but reportedly pivoted to London due to intense scrutiny from U.S. lawmakers.
Temu is facing headwinds of its own. Last month, its parent company PDD Holdings said the global business unit, which includes Temu, is up against intense competition and an “evolving external environment.” The company added that a downtrend trend in profitability was inevitable.
That said, Temu has taken steps to protect itself from such regulatory enforcement. Since March, Temu has been onboarding China-based sellers with warehouses in the U.S., according to Marketplace Pulse. “The shift to sellers with local warehouses has reduced its reliance on the de minimus loophole, improved shipping speed and allowed it to sell more sizes and weights of products,” according to Juozas Kaziukėnas, founder of Marketplace Pulse.
Meanwhile, Shein has lured thousands of Amazon sellers to its U.S. marketplace, many of which have a physical presence in the U.S., according to Marketplace Pulse. At the same time, Shein has expanded its warehouse and distribution facilities beyond China and into the U.S., Modern Retail previously reported.
The White House’s proposal won’t be put into effect immediately as it will undergo a public comment period. In the meantime, retailers and supply chain operators will be watching the proposal closely to see what happens next.
As Tim Kraft, an associate professor of operations and supply chain management at NC State University put it, “There will likely be extensive lobbying efforts on both sides in the coming weeks and months.”
Marketplace news to know
- The Wall Street Journal profiled Rohit Prasad, the man tasked with helping Amazon win the AI race.
- Wall Street is warming up to the Latin American e-commerce platform MercadoLibre.
- EBay unveiled new AI tools to help sellers streamline their listings.