Shein and Temu prices set to rise after Biden's de minimis proposal

The rock-bottom prices that have made China-linked e-tailers Shein and Temu so popular with American consumers could soon rise if the Biden administration limits their use of a loophole in trade law.

The companies, known for their $5 T-shirts and $10 sweaters, could see their prices rise by at least 20% if the so-called de minimis clause is changed, a spokesman for the Republican-majority House Select Committee on the Chinese Communist Party told CNBC. The committee made the estimate after launching investigations into Shein and Temu more than a year ago.

Neil Saunders, retail analyst and managing director of GlobalData, agreed that the policy change would likely increase prices, but could not say by how much.

“If the de minimis exemption is removed, the cost of products on marketplaces like Shein and Temu will increase. They will still be cheap marketplaces, but they won’t have the competitive advantage in terms of pricing that they have now,” Saunders told CNBC in an email. “That may cause them to lose some market share or slow their growth, but they will likely respond by pushing some higher-priced items to balance out their offerings.”

On Friday morning, the Biden administration announced plans to ban overseas shipments of products that are subject to tariffs between the United States and China from being eligible for the de minimis waiver.

An obscure loophole in tariff law that has existed since the 1930s, the exemption allows packages worth less than $800 to enter the United States without shippers paying import duties and with less scrutiny than larger containers.

The announcement comes after more than a year of scrutiny of the companies by lawmakers from both parties and, in particular, the House Select Committee on the CCP.

Both Shein and Temu declined to tell CNBC whether they will raise prices because of the proposed changes. The companies also denied that their low prices are due to the de minimis exemption and said their business models allow them to offer ultra-affordable fares.

A Shein spokesperson said the company supports de minimis reform and was recently accepted into a voluntary pilot program with U.S. Customs and Border Protection, where it agreed to provide additional data on packages and shipments.

In recent years, the two companies have won over American consumers with their ultra-low prices and ability to quickly create on-trend styles much faster than their competitors. Shein is estimated to make more than $30 billion in annual revenue, but it's unclear what Temu's sales are. Its parent company, PDD Participationsposted $34.9 billion in revenue in fiscal year 2023, an increase of 90% from the same period last year.

As the companies have become mainstream shopping destinations, they have gained market share from rivals that serve similar consumer segments, such as H&M, Zara, Target, Walmart and Amazon.

If Shein's prices were to increase by 20%, its assortment would become closer to that of its competitors, which could make it harder for it to compete.

For example, the average price of a dress at Shein was $28.51 on June 1, according to data from Edited, a London-based research firm that analyzed the company's pricing strategy and shared metrics with Reuters.

At the time, that price was well below the average cost of dresses at H&M and Zara, which were $40.97 and $79.69, respectively, according to Edited's data. However, if costs were to increase by 20%, that would make the average price of dresses at Shein $34.21 — much closer to H&M's average price.

There’s no guarantee that prices will rise by 20% if the Biden administration’s proposal goes into effect. Still, given the company’s long shipping times, a smaller discount relative to Shein’s rivals may lead some consumers to opt for retailers closer to home.

“Ultimately, while de minimis rule reform creates a more fair and equal playing field, like any tariff, it will end up costing consumers more,” Saunders said.

Last year, the committee began investigating Shein and Temu for slave labor in their supply chains and focused on their use of the de minimis exemption, stating in a June 2023 report that both companies paid no import duties in 2022. Shein refuted that claim, saying the company paid millions in import duties in 2022 and 2023. However, it has acknowledged that cotton from banned regions has been found in its supply chain and has said it is working to rectify the issue. Temu did not respond to queries about slave labor in its supply chain.

“As the Select Committee's investigation into Shein and Temu revealed, the majority of Shein and Temu's products fall under the de minimis exception. This allows them to bypass U.S. customs and avoid the scrutiny that other retailers face. The United States must urgently stop these shipments and force these companies to correct their poor compliance practices,” a spokesperson for the committee told CNBC.

The spokesman added that “Congress must urgently pass a de minimis reform bill.”

As scrutiny of Shein intensified, its hopes of a long-awaited U.S. public offering dimmed.

Lawmakers, eager to reduce the influence that China-linked retailers were having on the U.S. economy and take steps they say would level the playing field for American companies, are unlikely to propose an outright ban on Shein and Temu, similar to what was done with social media company TikTok.

Instead, numerous lawmakers called on the U.S. Securities and Exchange Commission to block Shein’s IPO, pointing to the de minimis exemption as the best way to limit the company’s growth.

Now, more than a year after those efforts and Shein's own charm offensive, its plans to go public in New York are all but dead and the company has turned to London in hopes of finding a friendlier reception.

In June, CNBC reported that Shein had confidentially filed for a public listing in London as it faced a backlash in the United States.

It is unclear what impact the proposed de minimis changes will have on Shein's IPO plans.