Chinese fast fashion: Shein and Temu sunk by Trump?

On April 25, Shein and Temu, two popular Chinese e-commerce giants, announced that they would change their selling prices in the United States. The cost of some of Shein's products subsequently increased by more than 150 percent. Temu, on the other hand, added “import charges” that in some cases exceeded the price of the item purchased.

The steps were taken as the U.S. administration introduced new tariffs to try to force Beijing to come up with a trade deal that would drastically reduce the bilateral trade deficit, so that China-as President Donald Trump put it-“takes on” the duties.

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As well as new ones Import taxes, therefore, the United States also have abolished, starting from May 2nd, the tariff exemption de minimis for small parcels. If shipped via the Postal Service, these packages will now be subject to a 120% duty or a flat fee of $100, which will increase to $200 in June. If sent by other means, however, most Chinese products will be subject to the higher rate of 145%.

Until now, the tariff exemption allowed international packages with a retail value of no more than US$800, shipped directly to US consumers, to bypass duty-free customs declarations, without being subject to any entry duties. 

For this, a considerable majority of parcels de minimis, increased from $410.5 million in 2018 to $685.1 million in 2022, came from China.

In 2021 the Federal Reserve Bank of New York estimated that the U.S. Treasury Department was losing up to $10 billion a year in tariffs through strategies such as de minimis..

Chinese companies sold about $50 billion worth of goods to America last year, or about 11% of all Chinese exports to the country. 

Shein and Temu had also benefited from policies adopted by the Chinese government in 2018 when, as US-China trade tensions increased, export tariffs were reduced for most businesses targeting the consumer market. 

In 2022, surpassing H&M and Zara, Shein became the largest fast fashion retailer in the world, valued at $100 billion.

Around the same time, Temu, which sells low-cost clothing and other goods, launched in America to discover that in 2023 more than 80% of its revenue came not from sales to customers, but from selling advertising services to its network of third-party resellers. 

Now both of these giants find themselves embroiled in a terrible geopolitical war between the United States and China. 

Shein, which initially hoped to list in New York, has won approval for an initial public offering (IPO) in London but it is unclear if and when it will go ahead with the listing.

It should also be said that these Asian giants have been preparing for a "tariff shock" for some time, securing their business model by moving supply chains.

Shein and Temu, based in Singapore and China respectively, have become very popular in the United States due to their low prices and wide range of products. Shein sells affordable clothing, cosmetics and accessories, primarily targeting young women through partnerships with social media influencers. Temu, which has promoted its products through online ads, offers a broader range of products, including household items, fun gifts and small electronics.

However, in 2023 a document of the U.S.-China Economic and Security Review Commission has raised the alarm: Chinese "fast fashion" platforms, in particular Shein, present serious risks for the exploitation of domestic trade loopholes, product safety, the use of forced labor, significant unfair competition, and also raise concerns about manufacturing processes and sourcing relationships.

The following year, in one open letter, commissioners of the Consumer Product Safety Commission (CPSC) have called for an investigation into foreign-owned e-commerce platforms, such as Shein and Temu, to determine how these companies comply with obligations imposed by the Consumer Product Safety Act, the US regulation on the safety of consumer products.

The fact remains that America has been the most important market for the products of these two fast fashion giants, estimated at around 30% of Shein's sales and 40% of Temu's.

Now the question is whether their business model will survive the breakdown in trade relations between the world's two largest economies. And in addition to rising U.S. tariffs on imports, both platforms are also dealing with increased regulatory scrutiny over user data practices and growing competition from established retailers entering the ultra-discount sector.

Fromdiversify into new markets

Temu and Shein are trying to open up to new markets. Both companies are focusing in Europe, particularly Great Britain, France, Germany, Italy and Spain. However, the European Union is taking measures to regulate e-commerce platforms such as Temu and Shein, especially regarding shipments under 150 euros. The European Commission, in fact, is evaluating the introduction of duties and taxes to guarantee product safety and protect local companies. The EU is highly concerned about the exponential growth of these platforms and the possible non-compliance of goods with its regulations. 

Meanwhile, expansion into Asia has been difficult for the two fast fashion giants. In December, regulators in Vietnam forced both companies to stop sales in the country over concerns they were selling counterfeit products. Temu's app was blocked in Indonesia to protect local merchants from Chinese competition.

Diversification the chains of supply

While both rely heavily on Chinese manufacturing, Shein is primarily a direct-to-consumer retailer with own-brand products, while Temu operates more as a marketplace for various sellers.

Both have complex supply chains and source most of their products from China.

Historically Shein relied on an extensive network of suppliers, mostly located in China, particularly in Guangdong province. This proximity allows for rapid production and adaptation to rapidly changing trends. Its supply chain features a large number of relatively small suppliers, which provides flexibility but can also make oversight difficult.  Shein uses a unique "on-demand" business model. They start with small productions based on trend analysis and only increase production if an item proves popular. This minimizes unsold inventory and waste.  

In response to growing scrutiny over labor practices and environmental concerns, as well as new U.S. tariffs, Shein is starting to transfer part of its production in other regions, particularly in Vietnam but also in India. This move aims to diversify the supply chain and potentially mitigate costs associated with tariffs.  

Temu also sources most of its products from a wide range of manufacturers and suppliers based in China. Its platform works more like a marketplace, directly connecting consumers with a wide range of sellers and manufacturers. This model allows for greater product variety and competitive pricing. 

Temu is described as a company that uses a "full hosting" model combined with a bidding mechanism. Merchants bid on product listings, and the company reviews these bids, giving priority to the lowest prices.

Compared to Shein, Temu has moved more quickly to expand its sourcing in Southeast Asia and Mexico, although Morningstar, a financial services firm, estimates that by the end of the year only about 15% of its products will come from outside China. 

Like Shein, Temu also aims to expand its supplier base beyond China. For example, a strategic memorandum signed with DHL-which includes a “local-to-local” strategy-aims to have a significant share of European sales come from local suppliers.

In all this, the Chinese government could also prove to be a risk factor, hindering the movement of their supply chains. The Chinese Ministry of Commerce, for example, reportedly advised Shein against diversifying its supply chain. This “advice” reportedly came as the company was considering moving some of its production outside of China, and the intervention is seen as an attempt to maintain production locally. 

Will it also change the way of doing business?

As noted above, Temu has chosen what she calls a “local-to-local” business, in which customers purchase goods from companies based in America. Yet most of these merchants are Chinese companies that have set up overseas operations and use traditional shipping to import their products. The risk is that they too will be affected by Trump's tariffs. 

Lower advertising investments in the USA

In the first half of last year, Temu began to invest more in overseas advertising, and at the beginning of this year, Shein followed suit.

Both, however, are reducing advertising spending for the American market.

Sensor Tower, which monitors this type of spending, esteem that Temu's average daily ad spend across Facebook, Instagram, TikTok, Snap, It added that Shein's average daily ad spend across Facebook, Instagram, TikTok, YouTube and Pinterest fell by an average of 19% over the same period.

Temu has dramatically reduced ads on Google Shopping since April 12, after a large increase during the first quarter, said Mark Ballard, director of digital marketing research at Tinuiti.

The risks of Chinese fast fashion

Despite its success, Shein's practices have sparked controversy. Many of these issues, however, are not specific to the Chinese giant, but exemplify border disputes over the fast fashion industry, control over Chinese supply chains and concerns about the theft of US intellectual property by Beijing companies. 

Below is what emerged in the aforementioned report from the U.S.-China Economic and Security Review Commission..

Forced labor. The cotton clothing sourcing practices appear to be in violation of the Uyghur Law on the Prevention of Forced Labor. This law was signed by President Biden on December 23, 2021 and effectively bans the importation of goods “extracted, produced or manufactured in whole or in part” from Xinjiang.

Other exploitative labor practices and violations of workers' rights. A 2022 investigation by Channel 4 reportedly found violations of labor practices at Shein-affiliated factories in Guangzhou.. In one factory, workers were paid the equivalent of $556 a month to produce 500 garments a day. In another factory, workers had no base pay and were paid 4 cents per head. Furthermore, these workers were heavily fined for sewing errors. The report also found that workers in Shein factories worked 18 hours a day with one day off per month. While such working conditions for Chinese garment workers are not unique to Shein, they violate Chinese labor law and the company's supplier code of conduct which requires them to "arrange working hours reasonably." 

Health risks. The environmental and health impacts of Shein products have also come under scrutiny. An investigation by CBC Marketplace has found that the Chinese giant's clothing materials contain high levels of potentially dangerous chemicals, including lead, perfluoroalkyl (PFA) and phthalates. Health Canada tested a children's Shein jacket and found it contained 20 times the amount of lead considered safe for children, while a bag contained more than five times the accepted level for children. The environmental group Greenpeace also published a study saying that various chemicals used in Shein products exceed the level allowed by EU regulations. 

Climate and environmental impact. The United Nations Environment Program estimates that, due to its high-volume production, the fashion industry is responsible for 10% of annual global CO2 emissions, more than all international flights and shipping combined. At the current growth rate, the fashion industry's greenhouse gas emissions will increase by more than 50% by 2030. Shein and other fast fashion platforms are reportedly exacerbating this trend by providing higher volumes of cheaply produced clothing. 

Copyright infringement. Shein and other Chinese e-commerce platforms and their suppliers have received numerous criticisms for violating US intellectual property law, with the Wall Street Journal reporting in 2022 that Shein in particular had over 50 outstanding federal cases pending. 

Avoid tariffs and customs checks. Shein clothing and accessories have an average price of around $11 per item. This below-market price resulted in exemption from the standard 16.5% import duty and the China-specific 7.5% tariff. As mentioned, de minimis packages were also exempt from customs inspection, allowing Shein to ship directly to consumers and helping the company avoid checks on its cotton sourcing.

Like Shein, Temu's success raises questions about its business practices. The company's lack of affiliation with established brands has led to concerns about product quality and allegations of copyright infringement. As of April 2023, Temu has received 235 complaints in the past year with the Better Business Bureau, earning a customer rating of 2.1 stars out of 5. PDD Holdings, Temu's parent company that operates its Pinduoduo e-commerce platform in China, requires employees to work 380 hours per month and has been accused of "extreme overtime" by China Labor Watch for this. The company also faced online protests after the deaths of several workers in 2021. Then in April 2023, CNN reported that multiple cybersecurity teams found sophisticated malware on Pinduoduo's mobile app for Google Android devices. The malware allegedly allowed the app to bypass security permissions and users' access to private messages, change settings, view data from other apps and prevent uninstallation. The investigation was followed by the suspension of the app from the Google Play Store in March 2023.

The risks to national security

According to CSIS, an American think tank, it would be a stretch to say that Beijing could exert influence over PDD Holdings and Temu through the large presence that PDD Holdings maintains in China. PDD also owns Pinduoduo, a hugely popular Chinese e-commerce giant that, according to a CNN investigation, would be able to spy on its users. According to cybersecurity researchers, Pinduoduo could bypass users' mobile security to see what they do on other apps, read their messages, and even change settings.

While Temu was not implicated, the allegations against its subsidiary prompted further scrutiny and were cited in the 2023 congressional report.

These concerns are similar to those surrounding TikTok, which have been a key factor in calls for the law to sell TikTok's American operations or completely cease operations in the United States. 

“In the two worst-case scenarios, the CCP could force Temu, via PDD Holdings, to provide user data and information, along with other hacked datasets – such as the 2015 Office of Personnel Management breach – to develop targeting matrices for human intelligence or influence operations,” added CSIS analyst Diane Ronaldo.