Tariffs Pressure Budget Retailers, Closed Duty Loophole Threatens Temu's Growth

The retail landscape is shifting once again as President Donald Trump's new tariffs close a long-standing duty loophole, threatening the growth of budget retailers like Temu. The de minimis exemption, which allowed packages worth less than $800 to enter the U.S. duty-free, has been a critical tool for companies like Temu and Shein to offer rock-bottom prices and fuel their explosive growth in the U.S. market. However, Trump's executive orders, signed on Saturday, suspend this exemption for goods imported from China, Canada, and Mexico, effective Tuesday.

The de minimis exemption has been under scrutiny for years, with lawmakers and officials arguing that it helps Chinese e-commerce companies undercut competitors with lower prices and raises product safety concerns due to minimal documentation and inspection. The Biden administration took steps last September to curb the "overuse and abuse" of de minimis, but Trump's new tariffs go a step further by eliminating the exemption entirely for the targeted countries.

Temu, owned by PDD Holdings, has been a significant beneficiary of the de minimis exemption, using it to offer steep discounts on a variety of products, from clothes and furniture to electronics and home decor. The company's rapid growth in the U.S. market has been fueled by its ability to offer these low prices, with Temu vaulting to the top of Apple's list of the most downloaded free apps in the U.S. for the second year in a row. However, the closure of the de minimis loophole threatens to disrupt Temu's pricing strategy and customer base.

Shares of PDD Holdings, Temu's parent company, plummeted after Trump's tariffs announcement, closing down 5.9% on Monday. The new tariffs are expected to have a negative read-through to Temu's growth in 2025 and beyond, as the company struggles to maintain its low prices and compete with other budget retailers like Amazon, eBay, and Etsy, which operate online marketplaces that let third-party sellers market wares directly to consumers.

Temu has previously denied that its growth is dependent upon de minimis, and Shein has stated that import compliance is a top priority. However, the closure of the de minimis loophole will likely force these companies to reevaluate their sourcing strategies and pricing models. By diversifying their supply chains and expanding their local warehouse networks, Temu and Shein can mitigate the impact of tariffs and maintain their competitiveness in the U.S. market.

The end of the de minimis exemption also raises concerns about the flow of illicit goods, such as fentanyl precursors, into the U.S. The reduced scrutiny of de minimis shipments has been linked to the smuggling of fentanyl, a synthetic opioid that killed nearly 75,000 people in 2023. An investigation by Reuters reporters last year found that they were able to use the de minimis loophole to import the main precursor chemicals for at least 3 million fentanyl tablets due to overseas shippers intentionally mislabeling the packages as electronics. The increased scrutiny of de minimis shipments is expected to lead to a reduction in the flow of illicit goods into the U.S. by making it more difficult for these goods to enter the country undetected.

In conclusion, President Trump's new tariffs and the closure of the de minimis duty loophole threaten the growth of budget retailers like Temu, forcing them to reevaluate their sourcing strategies and pricing models. While the end of the exemption may lead to increased prices and a reduction in customer base for these companies, it also raises concerns about the flow of illicit goods into the U.S. As the retail industry navigates this new landscape, companies like Temu will need to adapt and innovate to maintain their competitiveness and ensure the safety of their products.