With the De Minimis rule allowing duty-free entry for packages under $800, overseas ecommerce giants flood the U.S. market—leaving domestic oversight struggling to keep up.
April 30, 2024 — Tuesday — Ecommerce North America
What is the De Minimus Tax Rule in the U.S.?
The De Minimis tax rule is a trade regulation that permits imported goods valued under a certain threshold to enter the U.S. without being subject to customs duties or significant tax assessments. Originally established to simplify the customs process for low-value items, it has been leveraged significantly in the ecommerce sector.
In 2016, the U.S. raised the de minimis value from $200 to $800, allowing higher value items to bypass traditional customs checks. This adjustment has facilitated ecommerce giants like Temu and Shein to ship large volumes of goods directly from overseas warehouses to U.S. consumers without incurring typical entry fees, substantially affecting domestic manufacturing and retail sectors.
How are companies like TEMU and SHEIN selling items so cheaply?
On-demand production: Shein uses an on-demand production model, manufacturing items in small batches. This approach minimizes costs related to unsold inventory and allows the company to respond quickly to fashion trends without significant financial risk. TEMU employs a similar model, keeping production aligned closely with consumer demand.
Direct manufacturer shipping: Both companies ship directly from manufacturers in China to consumers, bypassing traditional warehousing and distribution costs typically incurred in the U.S. This direct-to-consumer model reduces overhead and logistics expenses.
Quality and cost trade-off: While TEMU claims to have stringent quality control measures, the overall product quality is typically reflective of the low prices, meaning that consumers may not always be receiving high-quality goods. Both companies have return policies, but the low cost of items sometimes leads consumers to discard or donate them instead of returning them.
Labor and manufacturing practices: Concerns have been raised about the labor practices of the manufacturers these companies use. There is a noted lack of transparency regarding their manufacturing processes and vendor relationships, with some vendors potentially engaging in questionable labor practices.
Temu is operating at a loss: Despite these low prices boosting consumer demand, they have resulted in financial losses for Temu, with projections suggesting a $3.65 billion operating loss for the year on $13 billion in global sales. In contrast, Shein, which specializes in fast fashion under its own brand and has a much larger global footprint, reported $22.7 billion in sales last year and enjoyed record profitability.
De Minimis exception: All of these cost-reduction factors, paired with the De Minimus tax rule, which allows shipments under $800 to enter the U.S. without undergoing the standard customs processes or incurring duties and import taxes, enables these overseas ecommerce companies to offer extremely competitive prices to customers in the United States.
How are companies like Temu and SHEIN impacting air freight?
Air cargo prices from China to the U.S. are on the rise, diverging from the global trend of declining rates, driven by the increasing demand from Chinese ecommerce retailers like Shein and Temu. These companies are intensifying the pressure on air cargo capacity by shipping goods directly from Chinese factories to U.S. consumers, particularly during what is usually the off-peak season. As a result, this week’s air cargo rates from China to the U.S. have surged by 14% compared to the same period last year, while global averages have decreased by 8%, and rates from the U.S. to China have dropped by 29%.
The demand from Shein and Temu, responsible for nearly 600,000 packages per day entering the U.S., is causing shortages in air cargo capacity. This is particularly concerning as the industry anticipates even greater challenges during the fourth quarter, traditionally the busiest season. In response to the ecommerce demand, Atlas Air and Chinese freight forwarder YunExpress have increased flights between the two countries.
Complicating the situation further, geopolitical tensions and the avoidance of Russian airspace have reduced the number of available passenger flights between the U.S. and China, which also carry cargo. Currently, passenger flight capacity between these countries is only at 22% of pre-pandemic levels. Despite some increases in passenger flights, it is unlikely to significantly alleviate the cargo capacity crunch. Logistics companies are competing fiercely for limited air cargo space, which is also being squeezed by delays in ocean shipping due to the Red Sea conflict.
