Prices at Shein and Temu may increase as Biden targets retailers with ties to China.

• If the Biden administration closes the "de minimis loophole," prices on Shein and Temu could increase by up to 20%.
• Packages worth less than $800 are exempt from customs duties and inspection at the border due to a loophole.
• Shein and Temu have stated that their low prices are not due to the de minimis exemption but rather to their unique business models.

If the Biden administration restricts the use of a trade law loophole, the low prices that have made Chinese-linked e-tailers Shein and Temu popular with American consumers could increase.

If the de minimis provision is changed, the companies known for their affordable T-shirts and sweaters could see their prices increase by at least 20%, according to a spokesperson for the Republican majority of the House Select Committee on the Chinese Communist Party. The committee made this estimate after conducting investigations into Shein and Temu for over a year.

Neil Saunders, a retail analyst and the managing director of GlobalData, concurred that the policy shift would probably lead to a price hike, yet he couldn't quantify the extent of the increase.

"If the de minimis exemption is removed, the cost of products from marketplaces like Shein and Temu will increase, but they will still be competitive on price. This may result in a loss of market share or slow growth, prompting them to expand into higher-priced items to maintain their competitive edge."

The Biden administration declared on Friday morning that products subject to U.S.-China tariffs would no longer be eligible for the de minimis exemption in overseas shipments.

Since the 1930s, a loophole in obscure tariff law allows packages valued at less than $800 to enter the US without paying import duties and with less scrutiny than larger containers.

The announcement was made after over a year of investigation into the companies by lawmakers from both sides of the aisle, particularly the House Select Committee on the CCP.

Both Shein and Temu refused to reveal whether they will increase their prices due to the proposed changes. The companies also contested that their low prices are a result of the de minimis exemption and asserted that their business models enable them to provide their extremely affordable rates.

Shein's spokesperson stated that the company supports de minimis reform and has recently joined a pilot program with U.S. Customs and Border Protection, in which it agreed to provide additional information about packages and shipments.

A risk to their competitive edge

In recent years, two companies have captured the attention of U.S. consumers with their affordable prices and quick production of popular styles. While Shein generates over $30 billion in annual revenue, Temu's sales are unknown. Its parent company, JD.com, reported $34.9 billion in revenue in fiscal 2023, a 90% increase from the previous year.

Rival shopping destinations have lost market share to companies that have become go-to options for consumers, including H&M, Zara, Target, Walmart, and Amazon.

If Shein's prices were to increase by 20%, it would align its assortment with competitors, potentially making it more challenging for it to compete.

According to Edited, a London-based research firm, the average price of a dress on Shein was $28.51 as of June 1.

If the cost of dresses on Shein were to increase by 20%, the average dress price on Shein would become $34.21, which is closer to the average price of dresses at H&M. At the time, the price of dresses on Shein was significantly lower than the average cost for dresses at H&M and Zara.

Although there is no assurance that prices will increase by 20% if the Biden administration's plan is implemented, the company's extended shipping times and smaller discount compared to its competitors may prompt some consumers to choose retailers that are more conveniently located.

While reforming de minimis rules may result in a more equitable playing field, it will ultimately increase the cost to consumers, as with any tariff, according to Saunders.

Scrutiny of a digital darling

In 2022, the committee launched an investigation into Shein and Temu for potential slave labor in their supply chains, specifically focusing on their use of the de minimis exemption. According to a June 2023 report, both companies did not pay any import duties in 2022. Shein disputed this claim, stating that the company paid millions of import duties in 2022 and 2023. However, Shein has acknowledged that cotton from banned regions has been found in its supply chain and is working to address the issue. Temu did not respond to inquiries about slave labor in its supply chain.

The Select Committee's investigation into Shein and Temu found that most of their products fall under the de minimis exception, allowing them to avoid U.S. Customs scrutiny. A spokesperson for the committee urged CNBC to urge the U.S. to curb these shipments and force these companies to improve their compliance practices.

The spokesperson emphasized the need for Congress to enact de minimis reform legislation immediately.

The scrutiny of Shein intensified, causing its hopes of a successful U.S. public offering to dwindle.

American lawmakers were unlikely to propose an outright ban of Shein and Temu, despite their efforts to curtail the influence of Chinese-linked retailers on the U.S. economy and level the playing field for American companies.

Numerous lawmakers urged the U.S. Securities and Exchange Commission to prevent Shein from going public and recommended targeting the de minimis exemption as the most effective way to limit the company's expansion.

Despite its initial plans for a New York IPO, Shein's efforts have been unsuccessful and it is now seeking a more welcoming environment in London.

In June, CNBC reported that Shein had filed for a public listing in London amidst facing backlash in the U.S.

The potential impact of the proposed de minimis changes on Shein's IPO plans is unclear.