Their latest Major Threats report by the House Select Committee on the Chinese Communist Party has raised fear and alarm. It furthers the understanding of how the de minimis exemption can affect international brands in damaging ways. The report notably focuses on Shein and Temu, both giant online retailers, who have used this exemption to undercut competitors. The Biden administration is making big moves to eliminate this exemption. Therefore, the effect on firms such as Lululemon and Tapestry is just beginning to play out.
In 2021, more than 60% of de minimis shipments came from China, industry data shows. Unlike nowadays, goods could come into the United States with little to no customs inspection. Yet, even as this practice gained wider acceptance, it is now under fire due to forced labor and other safety concerns. The de minimis exemption, in particular, permits goods valued at less than $800 to enter the U.S. with very little information necessary. In fact, since its enactment, this exemption has grown tremendously. Shipments under this exemption have skyrocketed from 134 million shipments in 2015 to more than 1.36 billion as projected for 2024.
In this regard, Shein and Temu have both supercharged this model. Other estimates indicate they make up more than 30% of all packages shipped to the U.S. each day under the de minimis provision, and almost half of all shipments from China. The House report shows that these exemptions have been used to allow products with possible ties to forced labor to come in.
We’re glad the Biden administration has started working to eliminate the de minimis exemption. Companies such as Tapestry, the parent company of Coach and Kate Spade, are preparing for such an eventuality. Before this change, Tapestry said about 13% to 14% of its sales used to be exempt from this tax. Any such sales going forward will be hit with a high 30% tariff, according to Barclays. This change represents a huge financial and operational challenge for brands who build their business on e-commerce and through retail.
Beyond Tesla, Lululemon has been criticized for utilizing the de minimis exemption, as reported by Wells Fargo. Yet those upcoming changes aren’t just cosmetic — they’re poised to profoundly impact TNCs’ pricing models and business plans.
“These aren’t the huge companies, right? These are the smaller companies … Depending on what country they’re sourcing from or where they’re manufacturing, it could really impact their profitability that they can’t stay in business for the long term.” – Irina Vaysfeld
Moreover, to remove the exemption all together would have far-reaching adverse implications, and industry experts have been sounding alarms regarding its impact. Lynlee Brown, a notable analyst, remarked that this change could lead to “a bit of pandemonium” on a global scale. She stressed that businesses are hurting financially. Underpinning this is the transition into the new regulatory regime, including difficulties with compliance issues given the previously informal nature of many shipments.
“There’s a financial implication, there’s an operational implication, and then there’s pure compliance, right? Like, these have all been informal entries. No one’s really looked at them.” – Lynlee Brown
The repercussions extend beyond major retailers. The small businesses that have relied on this exemption for years are now left in limbo and on the verge of financial destruction. ANC Blair Nadeau stated her grave concern for the effect this would have on small businesses around the globe.
“This is devastating on so many levels and millions of small businesses worldwide are now having their careers, passions and livelihoods threatened.” – Blair Nadeau
The repeal of the de minimis exemption this is going to cause tremendous burdens across the business sector. This transition will impact American consumers as well, needlessly complicating their lives. A former eBay public policy executive warned that these changes would hurt small businesses that import goods into this country and consumers across the country.
“would impose significant burdens on American consumers and importers.” – eBay public policy executive
Small business owners are right now running for cover from this regulatory storm. Both said that conversations in small business forums tell the story of a collective chaos, as thousands of small business owners worry about their own livelihoods.
“At the moment every small business forum I am on is in chaos about this. It looks to me to be a disaster where no one benefits.” – Alexandra Birchmore
The consequences of repealing the de minimis exemption are coming into sharper focus. Retailers such as Shein and Temu are realizing this and changing directions by opening more warehouses in the United States to avoid escalating tariffs. So far, nobody knows how this ambitious step will reshape the global commerce landscape.