1. What is the de minimis exemption?
The de minimis exemption lets you import merchandise with a retail value below a certain amount duty and tax free. The Latin expression “de minimis” means trivial things—stuff too minor to merit consideration.
The rule was originally designed for people who traveled abroad and brought back souvenirs. Lawmakers gradually raised the threshold until it jumped from $200 to $800 in 2016, under the Trade Facilitation and Trade Enforcement Act. In recent years shipments under this exemption have grown exponentially, rising from 150 million in 2016 to 1 billion in 2023.
2. Why have shipments grown so much?
E-commerce companies, such as Chinese marketplaces Shein and Temu, have increasingly used the exemption to sell products at ultra-low prices. Their supply chain model of shipping products directly from the factory to end customers lets them respond quickly to consumer trends and ship many different products while keeping inventory low.
On the downside, because foreign factories can bring cheaper goods into the U.S. market without paying tariffs, the most affected players have been lower-cost U.S. manufacturers, like those in textiles.
3. How has this affected the U.S. supply chain?
- Low tariffs allow Temu and Shein to keep prices on their products low while still covering the cost of air freight. This is an essential part of their supply chain models.
- Since they rely on direct cargo flights, they are responsible for more than 30% of the daily volume from China to the U.S., boosting air freight rates from Guangzhou and Hong Kong.
- Once packages arrive in the U.S., they’re delivered by many different carriers. The bottom line is that they have also flooded the delivery networks: they make up about 5% of the national parcel market volume 🤯.
- This huge volume lets them negotiate good rates with carriers who want to keep trucks full and delivery routes busy.
4. What regulations have been announced?
Lawmakers have been concerned about China’s influence on the American economy for a couple of years now, without any significant progress. But 2024 is an election year.
The White House recently announced that they are closing the de minimis loophole, limiting the types of goods that can be shipped duty free, while increasing information collection on such shipments. An executive order should be issued in the next 60 to 120 days.
This will bring the US e-commerce market more in line with the rest of the world’s regulations… including China’s 😁.
5. Who wins and who loses from these restrictions?
Those who could lose out are mainly foreign e-commerce marketplaces and air freight companies. Amazon, Amazon sellers, and low-cost U.S. manufacturers could benefit from the decision.
And what about U.S. parcel carriers? Well, you might think that this decision could hurt them, given the huge volume that Shein and Temu provide for them. However, given that most of them are losing money today on the low rates they are paid, carriers that can afford to focus on higher-margin, regular U.S. customers will most likely benefit from this move.
6. Will Chinese low-price imports stop overnight?
Absolutely not. Even when tariffs change, these platforms will remain competitive. Take the European Union as an example: their de minimis threshold is much lower than in the U.S. (150 euros) but e-commerce is still growing.
Ultimately, consumers will determine how much supply chains adapt. But Temu and Shein need to be careful not to raise prices, or customers may go elsewhere. If your $10 pair of jeans goes up to $12, will you still wait if you can get them on Amazon the next day for $14?
A personal note in closing
Let me be clear: many people underestimate companies like Shein and Temu. They attribute their success only to their low prices, but there’s more to it than that. There’s a lot to be learned from Shein’s flexible production model and Temu’s fully-managed and semi-managed models. As I recently read, “Shein has grown to a $30 billion business not because of their clothing, but because they run the most efficient supply chain in the world.”
Speaking of such, how is your supply chain going?
When was the last time you audited your carrier invoices?
Are you aware that you may be overpaying for your shipments? Give us a call and let’s find out.