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

The low prices that have made China-linked e-commerce retailers Shein and Temu so popular with American consumers could soon be on the rise if the Biden administration restricts their use of a trade law loophole.

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

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

“If the de minimis exemption is lifted, the cost of products from marketplaces like Shein and Timo will increase,” Saunders told CNBC in an email. “They will still be cheap but they will not have the competitive advantage on price that they have now. This may cause them to lose some market share or slow their growth, but they will likely respond by squeezing out some higher-priced products to balance their offerings.”

The Biden administration announced plans Friday morning to prevent overseas shipments of tariff-hit products between the United States and China from being eligible for the meager exemption.

The exemption, an obscure loophole in the tariff code that has existed since the 1930s, allows packages valued at 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 on both sides of the aisle, most notably the House Select Committee on the Chinese Communist Party.

Both Shen and Timo declined to tell CNBC whether they would raise prices because of the proposed changes. The companies have also disputed that their low prices are driven by tax exemptions, saying their business models allow them to offer their very reasonable prices.

A Shein spokesperson said the company supports simple fixes 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.

Over the past two years, both companies have surprised American consumers with their ultra-low prices and ability to produce trending styles much faster than competitors. Shein is estimated to generate more than $30 billion in annual revenue, but it’s unclear what Timo’s sales are. BDD Holding CompanyAmazon Web Services generated $34.9 billion in revenue in fiscal 2023 — a 90% increase from the same period last year.

As the companies have become preferred shopping destinations, they have taken market share from competitors serving similar consumer segments, such as H&M, Zara, Target, Walmart, and Amazon.

If Shein's prices rise by 20%, it will bring its product lineup closer to that of its competitors, which could make it harder for it to compete.

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

At the time, that price was significantly lower than the average cost of dresses at H&M and Zara, which were $40.97 and $79.69, respectively, according to Edited data. However, if costs had risen by 20%, that would have put the average price of a dress on Shein at $34.21 — much closer to H&M’s average.

There’s no guarantee that prices will rise by 20% if the Biden administration’s proposal is implemented. However, given the company’s long shipping times, the relatively smaller discount compared to Shein’s competitors could prompt some consumers to choose retailers closer to their homes.

“Ultimately, while reforming the minimum tariff rules provides a fairer and more level playing field, like any tariff, it will end up costing consumers more,” Saunders said.

Last year, the commission began investigating Shein and Timo over the use of bonded labor in their supply chains, focusing on their use of the meager exemption, alleging in a June 2023 report that the companies paid no import duties in 2022. Shein denied the allegation and said the company paid millions in customs duties in 2022 and 2023. However, it acknowledged that cotton from restricted areas had been found in its supply chain and said it was working to correct the problem. Timo did not respond to inquiries about bonded labor in its supply chain.

“As the Committee’s special investigation into Shein and Timo revealed, the majority of Shein and Timo’s products fall under the de minimis exception. This allows them to evade U.S. Customs and evade the scrutiny that other retailers face,” a committee spokesperson told CNBC. “The United States must urgently curtail these shipments and force these companies to correct their poor compliance practices.”

“Congress must urgently pass a simple reform bill,” the spokesman added.

As scrutiny of Shen's company intensifies, its hopes of executing a long-awaited initial public offering in the United States have dimmed.

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

Instead, a slew of lawmakers have called on the SEC to block Shen’s IPO, targeting the slim exemption as the best way to limit the company’s growth.

Now, more than a year after those efforts and Shen's charm offensive, its plans for an IPO 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 Shen had secretly filed for a public listing in London after facing backlash in the United States.

It is unclear what impact the proposed minor changes will have on Shen's IPO plans.