Tariff Truce Offers Shein and Temu a Reprieve, But De Minimis Remains Elusive

A newly forged agreement between the United States and China, designed to temporarily ease trade tensions through tariff reductions, provides a crucial window of opportunity for online retail giants Shein and Temu. While the agreement falls short of reinstating the coveted de minimis duty exemption on low-value e-commerce packages from China, it offers these companies a chance to adapt their operational strategies in the face of evolving trade dynamics.

Shein and Temu have rapidly ascended in the U.S. market, disrupting traditional retail models and capturing significant market share from established players. Their success is largely attributed to their ability to offer exceptionally low-priced goods, directly shipped from Chinese factories to American consumers, leveraging the de minimis policy that allowed duty-free entry for packages valued under $800. This policy fueled their explosive growth, catapulting them to the top ten most downloaded apps in the U.S. and even prompting Amazon to launch a similar service, Amazon Haul, to capitalize on the same advantage.

However, the Trump administration’s decision on May 2nd to eliminate the de minimis exemption for goods originating from China and Hong Kong drastically altered the landscape. Suddenly, Shein and Temu’s shipments became subject to potentially crippling tariffs, reaching as high as 145% on many Chinese products. This development posed a significant threat to their business model, which hinged on offering rock-bottom prices. In response, both companies reportedly curtailed their advertising spending in the U.S. and began exploring alternative markets in Europe. Amazon, anticipating the shift, strategically launched Amazon Haul in the UK and Saudi Arabia.

The recent tariff agreement, while not a full restoration of the de minimis policy, offers a temporary reprieve. The agreement stipulates a reduction in tariffs to 30% for a period of 90 days, a significant decrease from the previous 145%. Trade experts believe Shein and Temu will likely seize this opportunity to replenish their U.S. warehouses with bulk shipments, mitigating the impact of potential future tariff increases.

Yao Jin, an associate professor of supply chain management at Miami University of Ohio, highlights the strategic advantage this offers: "This is great for Shein and Temu, if nothing else, to replenish their U.S. inventory." Instead of relying on individual, air-shipped packages, the companies are expected to prioritize bulk shipments via container ships, allowing them to stock up their U.S. warehouses at a reduced cost before any further tariff adjustments take effect.

Despite the tariff reduction, the absence of the de minimis provision in the agreement signals a likely permanent shift in the trade environment. This implies that Shein and Temu will need to adapt their business models to maintain their competitive edge in the U.S. market. One strategy already being implemented is a move towards utilizing locally based sellers and emphasizing products already stocked in U.S. warehouses. Temu, for example, announced on May 2nd that all sales in the U.S. would be handled by domestic sellers, signaling a move away from the direct factory-to-consumer model that initially fueled its growth.

The removal of the de minimis exemption has had a significant impact on air freight traffic between China and the U.S. Niall van de Wouw, chief air freight officer at pricing platform Xeneta, notes that approximately 50% of air cargo shipments on this route were attributed to low-value e-commerce prior to the policy change. Since May 2nd, the overall daily average freighter capacity on this route has decreased by a substantial 39%, as reported by consultancy Rotate, reflecting the reduced reliance on air freight for individual package deliveries.

However, despite the challenges, some experts believe that Shein and Temu can still maintain a competitive edge by selectively shipping certain low-value products directly from China, even with the reduced 30% tariff. Hugo Pakula, a customs expert and CEO of trade automation platform Tru Identity, suggests that for exceptionally cheap products, the added tariff may still result in a lower overall price compared to competitors like Amazon. "There are some commodities that are low enough value that you can add 30% to the retail price and it still makes sense as that would still be cheaper than Amazon or anywhere else," he explains. "For a really, really cheap product, it’s very possible they continue [shipping] direct from China."

The temporary tariff reduction may also provide some relief to Amazon’s third-party sellers, offering them a window to expedite orders from China in preparation for the upcoming holiday shopping season. However, the extent to which merchants will capitalize on this opportunity remains uncertain.

In summary, the temporary tariff agreement between the U.S. and China provides a crucial breathing space for Shein and Temu to adjust to the new trade reality. While the de minimis exemption remains absent, the tariff reduction allows them to restock their U.S. warehouses at lower costs and refine their operational strategies. The long-term impact of the policy change remains to be seen, but it is clear that Shein and Temu will need to innovate and adapt to maintain their competitive position in the dynamic U.S. e-commerce market. The agreement also offers a glimmer of opportunity for Amazon’s third-party sellers to strategically manage their inventory for the holiday season.