U.S. Trade Loophole Fuels Rise of China’s New E-Commerce Firms

A law that allows low-price packages to enter the U.S. duty-free and with little customs scrutiny has enabled the breakneck growth of two e-commerce companies with roots in China, Shein and Temu.

Packages valued under $800 can enter the U.S. under simplified procedures known as the de minimis exemption. Lawmakers and some U.S. businesses say it is a loophole that the Chinese companies are using at a huge scale, allowing shipments of products that are unsafe or made with forced labor, while avoiding taxes.

A record of more than one billion packages entered the U.S. in the fiscal year ended Sep. 30 under the de minimis exemption—twice the 2019 level, according to an estimate by U.S. Customs and Border Protection. A separate congressional study concluded that Shein and Temu alone account for about one in three of those packages. The two bargain apps have lured tens of millions of American consumers with $4 T-shirts, $10 hair dryers and other products.

“De minimis is the world’s greatest black market and astonishingly legalized by the U.S. government,” says Kim Glas, head of the National Council of Textile Organizations, a U.S. trade group, “It’s a wildfire out of control.”

Shein’s and Temu’s bargain shopping apps are putting pressure on U.S. companies including Gap, Amazon and Walmart. Amazon has seen traffic on its site decline, and a Gap executive acknowledged in an August earnings call that Shein was gaining market share.

Shein’s monthly active U.S. users more than doubled to 30.2 million in the third quarter of 2023 from 2021, according to Sensor Tower, a market-intelligence provider. Temu grew even faster, surpassing Shein’s total users within a year of its launch to become one of the top-downloaded shopping apps in the U.S.

The companies ship most of their products directly from China to individual American customers. Nearly all the orders fall below the $800 de minimis threshold, meaning they generally aren’t subject to tariffs or inspected at the border. The average order value on Shein was $71 in May, according to the Hong Kong-based data provider Measurable AI.

Both companies said that they comply with trade laws and that their growth isn’t dependent on the de minimis policy. And they both attributed their success to their supply-chain proficiency.

The de minimis provision dates to the Tariff Act of 1930. Congress wanted to exempt American tourists from paying taxes on small purchases when they returned from trips abroad. In 2016, just as e-commerce was taking off, lawmakers raised the threshold for exempt packages to $800, from $200, with the goal of reducing customs officials’ workload.

U.S. Customs and Border Protection hasn’t updated regulations in response to the surge, despite concluding in a report last year that the overwhelming volume of low-price packages created an “unacceptable risk” of allowing imports of unsafe products. A CBP official said that tightening regulations on such shipments is the “top priority” for the agency, adding it plans to propose a new regulation to require more data on each package within the next few months.

While Shein and Temu aren’t the only retailers that take advantage of the exemption, their rapid growth has occurred during a period of rising tensions between Washington and Beijing.

In April, the U. S-China Economic and Security Review Commission, a government agency that makes policy recommendations to Congress, criticized Shein’s business practices, citing potential health hazards stemming from harmful chemicals in its products, waste and pollution caused by its high-volume production, and dozens of claims of copyright infringements. The commission’s members include Glas, the U.S. textile-industry representative.

The companies also face allegations that forced labor has been used to produce the cheap goods they sell. Lawmakers and state attorneys general have pressed Shein to respond to allegations that it sources cotton from China’s Xinjiang region, where the U.S. has accused Chinese authorities of committing genocide and of using forced labor in its repression of mostly Muslim Uyghurs—allegations that Beijing denies. U.S. law that went into force in June 2022 largely bans the import of goods tied to that region.

Shein said the company has “zero tolerance” for forced labor.

Temu said the allegations are “completely ungrounded.” The company doesn’t have a team in the U.S. to liaise with regulators and legislators, but “our commitment to full compliance has been unwavering since our inception and underpins all of our business activities,” said a Temu spokesperson.

Rep. Earl Blumenauer, an Oregon Democrat, has proposed bipartisan legislation that would deny de minimis treatment to all goods from China, saying the exemption “has developed into a huge loophole that undercuts American competitiveness.” The Senate has similar outstanding bills.

“We should just eliminate the exemption entirely,” said Rep. Mike Gallagher, a Wisconsin Republican who chairs the House Select Committee on the Chinese Communist Party, the panel that wrote the study about the companies.

Efforts to close the de minimis provision face pushback from some Republican lawmakers with traditional pro-free-trade views as well as American businesses that are delivering the additional packages, particularly UPS and FedEx.

“De minimis is not a loophole, it is a fixture of U.S. customs law that Congress intentionally passed to lower costs for consumers and improve supply chains for American small businesses,” said John Pickel, a senior director at the National Foreign Trade Council, a business advocacy group whose members include UPS and FedEx. He said restricting the use of the de minimis threshold would end up overwhelming customs officials’ ability to process cargo, causing delays for both consumers and businesses.

Shein has ramped up its lobbying efforts, spending $600,000 on federal lobbying during the second quarter this year, more than double the amount in the first quarter. In July, a Shein executive wrote to fellow apparel makers saying it would support changing the de minimis policy, as long as the law applied equally to all retailers. Temu also said it is open to policy changes.

Write to Yuka Hayashi at Yuka.Hayashi@wsj.com, Shen Lu at shen.lu@wsj.com and Richard Vanderford at Richard.Vanderford@wsj.com