Starting in May, products priced under $800 (approximately 1.15 million won) will incur tariffs when entering the United States, shaking up the Chinese e-commerce sector that has targeted the U.S. market with low-cost items. While there are opinions suggesting that companies like Temu and Shein are at risk, analyses indicate that they have prepared in advance by securing local logistics warehouses in the U.S., minimizing the impact. The most significant blow will be to small Chinese factories and U.S. small retailers. Some have pessimistically predicted that there will be a wave of factory closures within three months.
On the 2nd (local time), Trump signed an executive order to eliminate the 'small import tax exemption system,' which previously exempted tariffs on imports worth $800 or less. Accordingly, starting from 12:01 a.m. on the 2nd of next month, all goods valued under $800 entering the U.S. from China and Hong Kong will be subject to tariffs. The tariff is either 30% of the product's value or $25 (approximately 36,000 won) per item, which will increase to $50 (approximately 72,000 won) per item starting June 1.
The U.S. small import tax exemption system was introduced in 1938 to avoid the administrative burden arising from collecting taxes that exceed the cost of taxation. In 2015, the Obama administration raised the tax exemption limit from $200 to $800, benefiting Chinese e-commerce corporations significantly. The China Interface News noted, "Over the past few years, companies like Temu and Shein have exploited the low-cost advantages of the Chinese supply chain, rapidly expanding in the U.S. market through parcel models," adding that "this tariff adjustment storm will be the first event challenging such growth models." In fact, U.S. customs processed more than 1.4 billion exempt parcels last year, with 60% originating from China.
Thus, Temu and Shein are often mentioned as primary targets of these changes; however, analysis suggests that they are somewhat prepared. Awareness within the industry has grown that the abolition of the small import tax exemption is merely a matter of time. The parcels exempt from tariffs are delivered directly to consumers without customs clearance. This could potentially be a distribution route for the synthetic drug fentanyl, which Trump has consistently criticized. In fact, the U.S. blocked international parcel imports from China and Hong Kong in February. However, faced with skyrocketing customs costs and logistical chaos, they retreated shortly after. They decided to postpone this measure until a system capable of collecting tariffs is established.
Since last year, Temu and Shein have been focusing on localization strategies. In the case of Temu, it has encouraged its merchants to stock inventory in local warehouses since last year. Starting last month, Temu has attempted to shift from a model where it manages the entire process of storage, distribution, and sales to a model allowing sellers to independently use local warehouses for shipping. This is expected to reduce expenses by 20-30% and increase delivery speeds, according to Temu's calculations. Shein also established logistics centers in Illinois and California in 2022, and in Seattle last year.
The New York Times (NYT) reported, "Temu and Shein have diversified their business by collaborating with more U.S. sellers and opening warehouses in the U.S.," suggesting that this could limit the impact of Trump's orders on them. Aaron Rubin, CEO of the warehouse management software company ShipHero, stated, "This measure does not kill them in any sense; it merely changes the business model." Reducing the proportion of U.S. business and expanding markets in Europe, South America, and Asia, including South Korea, is also mentioned as another card for Chinese e-commerce corporations.
The problem lies with the numerous small factories in China. During the COVID-19 pandemic, small Chinese exporters shifted their focus overseas due to a significant drop in domestic consumption. They have been barely surviving by pushing out low-margin products in bulk, but the imposition of tariffs would decrease their price competitiveness, making sales difficult. This is why organizations like the China Textile Industry Association and the China Light Industry Federation issued a statement on the 4th strongly condemning the abolition of the U.S. small import tax exemption system. Andy Guo, founder of the online electronics retailer and e-commerce media platform Waimaoza, commented to Bloomberg, "Without the small import tax exemption, there could be severe delivery delays along with a wave of factory closures within three months."
In the same context, the small retailers in the U.S. will inevitably also feel the impact. Those supplying them are the small factories in China. Professor Lu Sheng of the University of Delaware stated, "If customers do not want to pay higher prices or endure delivery delays, the additional expenses must be borne by the small retailers, which could threaten their survival."