How Policy Shifts Can Protect US Retailers from Temu, Shein | Gavin Marks

2024.10.08

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American retailers have long stood as pillars of resilience and innovation, embodying the entrepreneurial spirit that defines our nation’s business landscape. Challenged by consumers’ growing need for convenience, COVID-19 lockdowns and the looming shadow of e-commerce giants like Amazon and Walmart, retailers have persevered, adapting to challenges with tenacity and a determination to thrive.

 

Amidst these trials, a new threat looms in the form of Temu – a Chinese e-commerce disruptor backed by behemoth parent company, PDD Holdings. Temu, Shein, and other similar online mega-centers have dramatically reshaped the American shopping landscape through their infiltration and abuse of current U.S. market regulations. These companies use a factory-to-consumer model, linking shoppers directly with manufacturers, and offer a vast array of products at incredibly low prices. American consumers are seemingly benefitting from highly affordable goods, but the reality is much more sinister.

 

Leveling the Playing Field

 

As the CEO of a company deeply entwined in the retail industry and servicing over 100,000 doors, I’ve engaged firsthand in the intricate dance of market competition and survival. While there’s merit to the idea that American direct-to-consumer companies, like Amazon, have spurred innovation and adaptation among traditional retailers, the story is starkly different with Chinese direct-to-consumer models like Temu and Shein. These companies enjoy unique advantages, largely stemming from regulatory gaps and fiscal benefits not available to their American counterparts, placing impossible pressure on our domestic businesses.

 

The impact I witness daily transcends mere numbers; I see the genuine concern in the faces and eyes of American wholesalers and retailers—hardworking individuals whose businesses are threatened not by fair competition, but by the uneven playing field facilitated by insufficient government policy. That’s not to say we need more regulation across the board. In almost every instance, less regulation is good regulation. But this isn’t merely about the disruption of markets. It’s about the essential fairness and support that should define the landscape for American business. It’s imperative that we rally behind the hardworking individuals who form the backbone of our economy, which in this particular case, calls for more regulation in the form of inspection, taxes and tariffs.

 

To make this a reality, we must first understand the stark differences between a traditional supply chain and the factory-to-consumer model employed by Temu and Shein.

 

The Missing Link: Added Value

 

In a traditional supply chain, each intermediary adds value to the product and to the economy. We call this the multiplier effect, and it’s terrifyingly absent in both Temu’s and Shein’s business models. Traditional supply chains start with wholesalers buying in bulk, achieving best-cost, and maintaining a reliable supply of goods for customer inventory. They then distribute these goods to retailers, who create jobs, purchase or rent business spaces, and contribute to local economies through taxes and community involvement. Drivers, warehouse workers, and logistics companies all play crucial roles in moving goods efficiently and reliably. This is the multiplier effect in action. Money spent on one end of the chain is taxed at every stage and continuously spent, multiplied and redistributed.

 

By contrast, the factory-to-consumer model employed by Temu and Shein eliminates many of these stages, contributing minimally to the American economy. A product moves from a factory in China, skips the wholesaler and retailer, and is shipped for next to nothing direct to your door. This streamlined process, while efficient, cuts out the economic benefits that wholesalers and retailers provide. The jobs, taxes and community revenue that come from traditional operations are significantly reduced or entirely lost. The multiplier effect of the factory-to-consumer model is rendered largely insignificant.

 

 

The De Minimis Dilemma

 

You’re probably starting to wonder, how and why? How are foreign businesses easily capturing U.S. spending dollars without enriching our economy? Why is America shooting itself in the foot? As is often the case, the answer lies with policy and regulation. Specifically, the de minimis rule.

 

De minimis is a U.S. trade policy that exempts imported shipments valued under $800 from taxes, tariffs, and most customs inspections. This exemption is intended to streamline procedures for low-value shipments and reduce administrative burdens on both importers and U.S. customs authorities. While it has certainly achieved those effects, de minimis offers an incredibly unfair advantage to foreign retailers and is largely detrimental to U.S. businesses, and ultimately, U.S. consumers. Wholesale imported goods, which are subject to rigorous inspection, taxes and tariffs, and supply the majority of inventory for U.S. retailers, are understandably more expensive than their foreign alternatives and take longer to arrive in the U.S. market. So how does the lure of quick, inexpensive goods play out for American businesses?

 

Take, for example, a small-town gift shop owner. Let’s call her store Main Street Gifts. This store has been a beacon of the community, offering unique products and personal service you can’t find just anywhere. However, as more townspeople turn to sites like Temu for convenient, unbeatable bargains, stores like Main Street Gifts face an existential threat. Every sale lost to overseas giants is a hit to her business and her community’s economy—a double whammy of reduced local employment and dwindling town revenues.

 

On the corporate side of town, consider an employee at a big box retailer. He has worked there for over a decade, securing benefits and a steady paycheck that supports his family. However, the relentless competition from foreign direct-to-consumer operations puts his job on shaky ground. As his employer cuts costs to stay competitive, his benefits, and perhaps his job, are in jeopardy.

 

Understanding the intricacies of global trade goes beyond figures on a balance sheet or parcels crossing borders; it’s about the interconnected tapestry of lives and livelihoods that shape our communities. The narratives of the store owner and retail employee serve as poignant reminders that the decisions we make today have ripple effects that span far beyond mere transactions. As responsible stewards of our collective future, we, as Americans, have a responsibility to address overseas advantages and uplift our collective success.

 

American Consumers are Footing the Bill

 

Unfortunately, it’s not just the de minimis rule that’s sinking American small businesses. Another critical aspect of the factory-to-consumer strategy involves leveraging the U.S. Postal Service (USPS) for shipping. The USPS offers a highly favorable shipping rate to companies like Temu and Shein as a part of broader international trade practices. These discounted rates allow Chinese sellers, among other foreign entities, to ship products to the U.S. at a lower cost than American businesses face when shipping domestically. Ironically, it’s the American consumer, yes, folks like you and me, who end up footing the bill. The USPS, a government entity, operates at a loss and relies on federal support to sustain its operations. This means that the very infrastructure facilitating these favorable shipping rates for Chinese factory-to-consumer companies is underwritten by the American public. Not only are we sinking our local economies, but we’re giving our tax dollars as a reward.

 

 

A Multi-Billion Budget

 

To understand the full impact of Temu and Shein, it’s essential to recognize the sheer scale of their operations. Temu is not a small startup, but a powerhouse in the global e-commerce market. Its parent company, PDD Holdings (Pinduoduo Inc.), is one of the top three e-commerce companies in the world, alongside Amazon and Alibaba. This enormity gives Temu unprecedented resources and capabilities, enabling it to dominate markets and outcompete many established players.

 

Temu serves as the direct-to-consumer division of this colossal company, with a strategic focus on penetrating the American market. This focus allows Temu to leverage PDD Holdings’ vast infrastructure, technology and logistical capabilities to offer American consumers a seamless and highly competitive shopping experience. By doing so, Temu can introduce a wide array of products at prices that are difficult for American businesses to match, thanks to its significant economies of scale and mounting list of other advantages.

 

Temu Takes Deliberate Losses

 

Despite its market prowess, Temu has been operating at significant losses. The company employs a “loss leader” strategy, where products are sold at extremely low prices to attract customers, even if it means incurring losses on those sales. In 2023, Bloomberg reported that Temu’s aggressive pricing and marketing strategies were projected to result in a $3.65 billion annual loss. This intense approach helps Temu, and similarly operating companies like Shein, gain market share quickly, hooking American consumers with unbeatable prices and free delivery offers.

 

Temu’s financial reports indicate that these losses are part of a deliberate strategy supported by PDD Holdings, which absorbs the financial impact to facilitate Temu’s rapid expansion. The company’s massive advertising budget, including high-profile campaigns such as a Super Bowl ad, further boosts its visibility and attracts a large customer base.

 

Unpacking the Impact

 

So, what can we do to protect Americans – both entrepreneurs and consumers? Consider what would happen if we eliminated de minimis. This would require all imported goods, no matter how low the price, be subject to taxes, tariffs and legitimate customs inspection. Eliminating the de minimis rule on imported goods would trigger a series of effects, some beneficial, others more challenging.

 

Consumers could bear the brunt of higher costs as the removal of the de minimis rule could drive up prices on previously duty-free, low-value items, impacting their purchasing power. While this would place financial strain on the everyday shopper, it would also make shopping domestically much more attractive, providing long-term benefits for the U.S. economy. An uptick in the administrative workload for customs could ensue, leading to potential bottlenecks, delays, and escalated processing costs for imports. Job creation is ever a viable solution to higher labor demands. Why not hire more customs officers to handle added processing? Even the negatives of eliminating de minimis appear to have a silver lining.

 

As for positives, the U.S. government stands to bolster its revenue streams by capturing additional taxes and duties from a wider spectrum of imported goods, thereby strengthening the federal coffers. Moreover, this move would foster a landscape of fair competition, better aligning domestic products with overseas e-commerce in terms of taxes and duties, cultivating a more level playing field for American businesses to thrive and innovate. All foreign products would be thoroughly inspected by customs, ensuring American households are closer to living safe and toxin-free. Job protection measures could be fortified, shielding domestic industries from cutthroat competition posed by inexpensive foreign goods, thereby safeguarding American livelihoods. While this is no simple issue, the benefits of eliminating the de minimis rule appear to be stacking up.

 

What Can We Do?

 

As advocates for fair competition and economic success, we must urge stakeholders to carefully weigh the pros and cons of such a policy shift to secure a balanced and sustainable trade environment for American business.

 

Call your representatives. Create petitions. Let Congress hear your voice. Our policies must prioritize the support and growth of the American Dream, recognizing domestic business as the foundation upon which our economy thrives. The time has come for lawmakers to acknowledge and act upon this critical truth, rather than turning a blind eye or worse, being swayed by other interests. The future of American businesses, particularly small enterprises, hinges on our collective resolve to uphold fair competition and protect the entrepreneurial spirit that defines us.

 

Editor’s note: This column was written by Gavin Marks, CEO of the award-winning retail manufacturer, DM Merchandising. DM has been in the wholesale business for over 35 years, specializing in gift industry products for American retailers of all sizes.