The government wants China to start paying its taxes

Last week, five US senators released the bipartisan “Fighting Illicit Goods, Helping Trustworthy Importers, and Netting Gains (FIGHTING) for America Act” to “halt the flood of illicit packages into the United States” due to a quirky import policy known as “de minimis” (which basically means it’s too trifling an amount to bother considering). Originally included in the Tariff Act of 1930, the de minimis threshold allows low-cost imports to enter the country duty-free and tariff-free to expedite transit through customs. The original de minimis limit was $1 in the 1930s, and, in 2016, it was increased from $200 to $800. However, the increased de minimis limit coincided with massive growth in the direct-to-consumer e-commerce industry, causing an explosion in the value and total shipping volume of de minimis packages:

The biggest driver of this growth has been low-cost, direct-to-consumer shipping from China, specifically from Chinese “fast fashion” retailers: Temu and Shein. The senators claim that the billions of packages now entering the country duty-free have strained America’s Customs and Border Protection (CBP), making it easier for bad actors to smuggle illicit drugs like fentanyl into the country (in the press release regarding this bill, the senators quoted used the word “fentanyl” 16 times). You can read the full bill here, but the key points are:

• Designate the smuggling of fentanyl and other illicit substances as a priority trade issue

• Enhance transparency and require additional data for each de minimis shipment

• Exclusion on certain goods from de minimis status, notably textiles and apparel

For Shein and Temu, the last point is especially important, as it affects their entire business model. A congressional investigation from last year showed that, in 2022, 30% of total US de minimis imports came from Shein and Temu, and 62% came from China as a whole. That’s hundreds of millions of imports worth billions of dollars that may soon be subject to different import standards.

Interestingly, this isn’t the first bill introduced by the senate to curb the de minimis loophole. Last year’s congressional investigation addressed the relationship between Uyghur forced labor and Chinese fast fashion products, with the report using the phrase “forced labor” 26 times. The Committee Report showed that Temu “does not have any system to ensure compliance with the Uyghur Forced Labor Prevention Act (UFLPA). This all but guarantees that shipments from Temu containing products made with forced labor are entering the United States on a regular basis, in violation of the UFLPA.” Meanwhile, a 2022 Bloomberg report tied cotton in Shein products to China’s Xinjiang region, and the US banned cotton imports from Xinjiang in 2021 as part of the UFLPA.

In light of the forced labor concerns, senators Marco Rubio and Sherrod Brown introduced the “Import Security and Fairness Act” in June 2023, the same month the above-mentioned Committee Report was published, while representatives Neal Dunn and Earl Blumenauer introduced companion legislation in the House. The key point of the Import Security and Fairness Act: prevent non-market economies, such as China, from benefiting from the de minimis treatment.

Basically, in two years, Congress has introduced two bills, one to crack down on forced labor and one to crack down on fentanyl trafficking, that have the same solution: closing the de minimus loophole to Chinese direct-to-consumer retailers. While these are both valid, important concerns, there’s a throughline between both policies: they weaken Chinese competition and increase US tariff revenue.

It’s impossible to know exactly how much tariff revenue the US has missed out on while goods from Shein and Temu were imported for free, as the Harmonized Tariff Schedule (HTF), which lays out the tariff rates for different goods, is more than 3,000 pages long, but a couple of retailer comparisons, Gap and H&M, paid $700 million and $205 million respectively in import duties. That was equal to 6.4% and 5.3% of their total US revenues from 2022.

Temu’s US revenue is difficult to estimate, as it’s a subsidiary of PDD (the owner of Pinduoduo), but according to Statista, Shein did $8.1 billion in US revenue in 2023, making it the third-largest fashion retailer in the country by sales after Amazon and Walmart. Assuming a 5% conservative import duty tax (lower than Gap’s or H&M’s), the de minimis loophole saved the fast fashion company more than $400 million in duty fees.

Policy changes that prevent Temu, Shein, and other direct-to-consumer retailers from taking advantage of zero-fee imports would generate hundreds of millions of dollars in tariff fees for the US, and it would help other retailers, which ship materials in bulk and pay duty fees on entry, better compete on price with their Chinese counterparts.

While the moral arguments for closing the de minimis loophole are convincing enough on their own merit, the government also has a nine-figure reason to make policy adjustments, too.