Can the Government Rescue US Ecommerce from Temu and Shein?

The U.S. government is facing a significant challenge in the realm of e-commerce due to the increasing impact of Chinese retail giants Temu and Shein. These platforms have disrupted the U.S. market by offering ultra-low-cost products and innovative consumer-to-manufacturer business models, which provide substantial price advantages over domestic competitors.

In light of recent proposals from the Biden administration aimed at tightening trade regulations—particularly concerning the de minimis rule that permits goods under $800 to enter the U.S. without tariffs—the question arises: Can the government effectively shield U.S. e-commerce from these powerful players?

Analysts from MoffettNathanson caution against the overly optimistic notion that regulatory changes could cripple the operations of Temu and Shein. The de minimis rule, which has been leveraged over a billion times each year by Chinese sellers, represents a crucial lifeline for these companies. If the government succeeds in closing this loophole, MoffettNathanson suggests that these companies are unlikely to exit the market. Instead, they have been adapting by increasing their stock of goods in U.S. warehouses to maintain quick delivery times, even amid stricter trade regulations.

For example, Temu has proactively ensured that many of its best-selling products are now stored in U.S. warehouses, which lessens the potential impact of any rule changes. Currently, more than two-thirds of Temu’s most popular items are held in U.S. locations, facilitating delivery times of two to four days. This strategic maneuver illustrates their long-term commitment to strengthening their presence in the U.S. market. Similarly, Shein has been establishing warehouses and fulfillment centers in the U.S., effectively safeguarding itself from immediate regulatory challenges.

This trend is underscored by the backdrop of China’s slowing domestic consumption and retail growth, which has pushed its manufacturing sector to focus more on Western markets. Retail sales growth in China has sharply decreased from 12% in 2014 to stagnation in 2022, compelling the country to look toward the West as a crucial outlet for its inventory of discounted goods. Consequently, even with regulatory pressures, Chinese platforms like Temu and Shein are likely to discover ways to continue penetrating Western markets.

Should the proposed regulatory changes come to fruition, the U.S. e-commerce landscape could be significantly altered. If competition from Chinese firms like Temu and Shein is curtailed, U.S.-based platforms like Etsy could stand to benefit. Etsy has faced heightened customer acquisition costs due to fierce competition from these Chinese rivals. A reduction in pressure from Temu and Shein might allow Etsy to regain some of its competitive marketing edge, although MoffettNathanson warns that any advantage would be limited due to ongoing competition from other global players.

On the other hand, Amazon seems to be well-positioned against the challenges posed by Temu and Shein. The retail giant has shown resilience by improving its advertising effectiveness and lowering referral fees for low-cost items, allowing it to remain competitive in categories where its Chinese competitors have made inroads. Amazon’s Prime membership, along with its superior fulfillment capabilities, offers a buffer against the pricing pressures from Chinese platforms.

In contrast, eBay faces more uncertainty despite having benefited from the influx of Chinese goods. Its lower fees have made it an appealing venue for Chinese sellers looking to reduce costs while accessing U.S. consumers. Nevertheless, MoffettNathanson’s research indicates that eBay’s exposure to regulatory changes may be less significant than initially thought. Many of the goods sourced from China, especially in the parts and accessories sector, are already stored in U.S. warehouses, which would shield them from alterations to the de minimis rule.

Ultimately, while the U.S. government can try to restrict the influence of Temu and Shein through regulatory measures, MoffettNathanson’s analysis suggests that these efforts are unlikely to significantly halt the influx of Chinese goods into the market. Both companies have demonstrated remarkable adaptability, and their deep integration into the U.S. retail environment makes it improbable for them to withdraw simply due to regulatory changes. Moreover, China’s ongoing economic drivers ensure that Western markets will remain vital for its surplus of discounted products.