Key trade loophole keeps cheap Chinese products flowing to US

A keyboard and a shopping cart are seen in front of a displayed Shein logo in this illustration picture taken Oct 13, 2020. REUTERS/Dado Ruvic/Illustration

NEW YORK  – The meteoric rise of shopping platforms selling Chinese-made goods, including Shein and Temu, has been fueled by a decades-old loophole that allows cheap products like $10 dresses to land in U.S. mailboxes tariff-free.

This happens thanks to a “de minimis” rule exempting packages valued at $800 or less from tariffs as long as they’re addressed and shipped to individuals. The exemption is open to all retailers but is most heavily used by Shein and PDD Holdings’ Temu, and potentially by TikTok’s new e-commerce business.

A June report published by a House of Representatives committee estimated that Shein and Temu likely account for more than 30 percent of all de minimis shipments into the U.S.

Its publication reflected growing congressional scrutiny of the provision, which critics say is allowing the companies to evade higher tariffs on Chinese goods and customs inspections under a law banning products made from forced labor. Shein has become an especially high-profile target as it weighs a U.S. initial public offering.

The China-founded company told Reuters it has been compliant with U.S. tax and customs laws since entering the market in 2012.

Its Global Head of Strategy, Peter Pernot-Day, told Reuters that Shein is not dependent on the exemption for its success. Instead, he attributed it to the company’s practice of monitoring online trends and ordering small initial batches of apparel from its manufacturers. They only increase production if the styles sell well, allowing it to avoid expensive excess inventory, Pernot-Day said.

Shein sent a letter to the American Apparel and Footwear Association (AAFA) in late July calling for de minimis reform, but did not make specific policy recommendations. Its U.S. Senate disclosures show it has lobbied lawmakers on “trade and tax related matters” in recent quarters.

Temu, which launched in the U.S. in 2022, did not respond to a request for comment. TikTok, owned by Beijing-based ByteDance, also did not immediately respond to a request for comment.

Data from U.S. Customs and Border Protection shows that de minimis shipments into the U.S. rose to 685.5 million in 2022, up nearly 67 percent over 2018. That equals roughly two to three million packages a day, Robert Silvers, Under Secretary for Policy at the Department of Homeland Security, told lawmakers in July.

A bipartisan group of U.S. lawmakers in June introduced bills that would ban de minimis shipments from China upon enactment.

The fact that Chinese goods and China-founded companies are benefiting from de minimis has frustrated some lawmakers. Republican Representative Jason Smith, chairman of the House Ways and Means Committee, described the provision as a “free trade agreement for China” during a May hearing.

Unfair advantage?

Rival U.S. retailers also have grown increasingly concerned about the exemption as Shein and Temu have gained market share. Senate records show that more than a dozen retailers have lobbied on the exemption since 2018, from Tapestry, the parent company of Coach, to Mercari, a Japanese e-commerce marketplace.

Some retailers and industry groups, including Columbia Sportswear and the AAFA, support maintaining the $800 threshold while allowing retailers sending merchandise from distribution centers in U.S. foreign trade zones to also use the exemption.

Others would like to see the cap lowered or eliminated entirely, while some who regularly use the provision don’t want to see it changed at all.

The House committee report released in June said H&M and Gap respectively paid $205 million and $700 million in import duties in 2022, while Shein and Temu, whose packages ship directly to customers under de minimis, paid nothing.

Steve Story, whose firm, Apex Logistics International, helps retailers and other companies ship goods under de minimis, said the exemption is available to everyone. “If you don’t want to save money and take advantage of this e-commerce paradigm shift, then you’re losing out,” he said.

Duty-free

Traditional retailers typically import merchandise in bulk by ocean freight, paying duties once the goods arrive at port, then move it to warehouses and ship it to stores or individuals who place online orders.

In the U.S., the small shipments covered by de minimis aren’t subject to duties, and often sidestep customs inspections, too. They’re typically handed off to UPS, FedEx or other carriers for delivery.

Goods can also be shipped over the ocean from China and arrive in bulk at bonded warehouses in Mexico or Canada. Once a customer places an online order, the products are individually packaged and driven into the U.S. duty-free.

The de minimis rule has been in place since 1938 and was originally 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 to $800 from $200, making the U.S. threshold one of the highest in the world.

Around the same time, there was an “explosion in e-commerce” that led to more packages shipped under the exemption, according to Erik Autor, a trade attorney with Barlow & Company.