The Journal. - A Tariff Loophole Just Closed. What That Means for Online Shopping.

Episode Date: May 2, 2025

A little-known trade provision is ending, and it will likely upend business for e-commerce companies and raise prices for consumers. De minimis has allowed companies to avoid duties on shipments to the U.S. that are worth $800 or less. It’s a program that many companies, especially e-commerce giants, Shein and Temu, have taken advantage of to keep prices low. WSJ’s Shen Lu explains how President Donald Trump has now ended that program for products from China and Hong Kong. We also speak with the CFO of shoe company Kuru about how the new rules could change their business. Jessica Mendoza hosts.    Further Listening: -Shein: Fast Fashion, Slow IPO  -The Billionaire Caught Between Trump and China  -China Unleashes a Trade War Arsenal  Sign up for WSJ’s free What’s News newsletter.  Learn more about your ad choices. Visit megaphone.fm/adchoices

President Trump's trade war with China has made its way into your online shopping cart. Some of the most popular websites where you might find yourself paying more are Xi'an and Taimu. Has anyone looked at their Xi'an cart this morning? My $18 free shipping Taimu order that I tried to place last night had a $27 import charge. Import charge is $55.11. So I just watched the prices in my Xi'an Cart triple.

These added charges are largely a reaction to the Trump administration's high tariffs on goods from China. Right now, those tariffs are hitting an average of 165%. But there's a second reason the price tags on these products are going up. And it has to do with something called de minimis. De minimis. It's called the de minimis threshold.

The Trump administration is ending today something called the de minimis exemption. It kind of sounds like a Harry Potter spell, but it's actually a trade provision. Basically, it means companies don't have to pay taxes on goods they're bringing into the U.S. as long as those goods are worth $800 or less. But as of today, the Trump administration has taken away this tax exemption for goods

from China and Hong Kong. Now for these companies, the elimination of de minimis is basically a double whammy. They didn't have to pay taxes when they sell to U.S. consumers. Now they have to, and the amount of tax is exorbitant. Welcome to The Journal, our show about money, business, and power. I'm Jessica Mendoza. It's Friday, May 2nd. Coming up on the show, what a world without DeMinimus means for e-commerce. Did you realize that you were going to have to be an expert on DeMinimus?

Yeah, no. That's our colleague Shen Liu. Lately, she's been covering the administration's efforts to roll back the de minimis exemption. De minimis, by the way, is a Latin phrase, and it refers to things that are small or trifles. What is the purpose of the exemption originally? Like, who was supposed to benefit from it? The purpose originally was to allow Americans to bring back souvenirs from overseas trips

without having to pay tariffs on them. De Minimis was designed to make things simpler, so that customs wouldn't have to inspect and tax every small item that American travelers brought back. For a long time, de minimis applied to goods under $200. Then, in 2016, Congress raised the limit to $800. And that new limit caught the attention of businesses because it gave them a way to avoid

paying taxes on low-cost imports. And the use of de minimis exemption has ballooned over the years. About 1.4 billion shipments using the de minimis provision entered the US in 2024. That was up from 637 million four years earlier. The exemption's popularity attracted government scrutiny. Since 2022, Congress has tried to get rid of the de minimis exemption,

but those efforts didn't get far. When Trump announced new tariffs on goods from Mexico, Canada, and China back in February, he also said he would take away the de minimis exemption for all three countries. He called de minimis a loophole that gave other countries an advantage over the U.S. and allowed illegal drugs to be smuggled in.

They're sending massive amounts of fentanyl, killing hundreds of thousands of people a year with the fentanyl. So the stated rationale is to stem the illegal flow of synthetic opioids, which is fentanyl, into the U.S. And Trump has declared that as a national emergency. Mexico is the main source of the drug, but Trump also blamed Beijing for not doing enough to stop the chemical ingredients from flowing out of China.

China denies that it's at fault for the widespread use of fentanyl. It says that the failure is with the U.S., which China says hasn't been able to curb domestic addiction. Trump's order to suspend de minimis in February led to a lot of confusion. In the days that followed, something like a million packages piled up at JFK Airport in New York. A week later, Trump delayed the suspension to May 2nd, but limited it to goods from Hong Kong and China only.

Already, companies are feeling the pain, especially those that have built business models around the de minimis exemption. Many e-commerce companies have used this exemption over the past years. And two big beneficiaries of DeMinimus have been Shien and Taimu. Shien is a fast fashion retailer that sells extremely cheap clothing. Taimu is more like Amazon, where third-party businesses sell all kinds of stuff.

So how does DeMinimis help these two companies? Xinyi and Taimu use what's called a direct consumer business model. When a U.S. consumer places an order on their website, Taimu or Xinyi will just ship the individual order directly to the U.S. consumer. And since their prices are cheap, most of the orders are under $800. Last I checked, the average order value was below $50 for both companies. So most shipments will fall under the de minimis exemption,

so the company does not have to pay taxes on the orders. Compare this to retailers like H&M or Zara. Those companies order big bulk shipments that are worth a lot more than $800. And these bulk shipments don't qualify for de minimis, and so the companies end up paying taxes on these shipments when they enter the U.S. Avoiding these taxes has helped Shien and Temu keep prices ultra low, which is one of the reasons the companies are so popular in the US. Xi and Temu are the biggest beneficiaries of the tax provision,

accounting for 30% of de minimis packages from China. But now, with de minimis going away, it's going to hit their business model. One analyst told Shen Liu that he expects Xi and Temu's sales to slide into negative territory this week. It's just the U.S. has been such a crucial market. It's at both companies, one of their top markets and wealthier consumers and who buy more frequently from them. So it would be a huge market to lose. And so it's probably going to be a struggle for them to maintain the market, to serve the consumers here in the US. In anticipation of de minimis going away,

Xi'an and Taimu started making changes. They've pulled back on ad dollars spent in the US, redirecting instead to other markets. Xi'an has raised its prices. And Taimu, for a while, added an import charge to other markets. Xi'an has raised its prices. And Taimu for a while added an import charge to its products. Now the company is focused on sourcing from US sellers instead of from China.

Taimu from a year ago started recruiting sellers with inventory in the US exactly to mitigate the risk of de minimis going away. So more than a third of TaAMU's products sold in the US now are in local warehouses instead of coming in through de minimis. And both companies have ramped up efforts to move manufacturing out of China.

Starting in February, Shan has talked to some major suppliers and encouraged them to set up production in Vietnam. They've also considered the option of manufacturing in the U.S. But we all know that it's very difficult to shift manufacturing back to the U.S. It could take months and months and months. It's a lot more expensive to do that. and month and month. And it's a lot more expensive to do that.

But while Shian and Temu are some of the most well-known users of DeMinimis, small online retailers are also bracing themselves. Many of those companies won't be able to adapt in the same way as the e-commerce giants. After the break, one U.S. business says this could be an existential crisis. remote control. You could pause or rewind. Well, life doesn't always give you time to change the outcome, but pre-diabetes does. Take the one-minute risk test today at DoIHavePrediabetes.org, brought to you by the Ad Council and its pre-diabetes awareness partners. One company that's bracing for the impact of losing de minimis is called Kuru Footwear. It's based in Salt Lake City, Utah, and it sells comfortable orthopedic shoes.

We really try to be a brand that does not identify as what you would call the traditional grandpa shoes. That's Matt Barnes, Kuru's chief financial officer. We really try to be a brand that can be attractive to just about anybody and to relieve the pain that a lot of people feel on a daily basis. I wear Kuru's every day. I've got them on right now. Which shoes do you have on right now? I'm wearing Adam 2 at the moment.

Over 60% of Kuru's shoes are made in China, and the company sells them entirely online. Like Shian and Taimu, it uses a direct-to-consumer business model. How does the de minimis exemption fit into your business model? Yeah, de minimis is a great advantage for us. For example, during 2024, we shipped 100% of our products to customers in.S. and we're able to avoid the duties and tariffs through that method. And how much money has DeMinimus saved you in that time? During the calendar fiscal year of 2024 we saved over 2 million dollars in tariffs. Wow. With DeMinimus now gone, Kuru is on the hook for those tariffs. With De Minimis now gone, Kuru is on the hook for those tariffs. Can you give an example of how much you have to pay in tariffs on a pair of shoes retail?

Yeah, for our Chinese product right now, for our sneakers, for example, the Atom 2 that I'm currently wearing, the tariff rate is 172.5% as of today. Can you put that in sort of dollar terms? Yeah, for sure. So if you assume an example of a pair of shoes at $175, it would be $302 in tariffs. Again, that's more than $300 in tariffs for a shoe that sells for $175.

Kuru has done a number of things to try and mitigate all the costly effects. Last week, the company ran a sale to get rid of inventory, and it started to change its pricing. Without the de minimis limits and with the current tariff situation, we have had to raise prices, we have had to start charging for shipping,

and it's painful. We've already seen an impact as a result of raising prices, and we just don't have the margin to recover all of the tariff costs. Kuru already manufactures some of its products outside of China, but I asked Matt if they were considering moving even more of their operations to other countries,

including to the US. He said, that's not a realistic option for the company. It would just be too expensive and take too much time to build the factories they'd need. Now, the Nikes of the world or the Adidases probably could work something out like that, right? But we just unfortunately don't have that kind of mass market volume. At what point do you think these problems will become existential for Kuru? For the moment, we've been able to mitigate the financial impacts through much of this

year. But if the tariffs remain in place as they are today through, I would say, probably late Q3, early Q4, it's going to become existential. It is very, very troubling, and it's going to get very, very expensive very, very quickly. While the de minimis suspension only applies to China and Hong Kong right now, there is a chance the administration could expand it. We're trying to look for other places to source and we do know and

expect as has been indicated by the administration that the de minimis limits will go away for all countries at some point. Matt, what are you hoping for right now? Well, the ideal state would be no tariffs, right? But of course, you know, we know that there's an intent behind what the Trump administration is trying to do. But right now we just don't know what's gonna happen and when it's gonna happen. Businesses need predictable opportunities to make money.

When the economy or the environment is not predictable, it's really hard for a business like ours to provide a product or service at a reasonable price to the consumer. If we can predict it, we can build it into our cost model. It may be painful. It may not be what we want, but at least it's predictable. With the elimination of the de minimis, it's been really, really tough for us

to determine what the next step should be. That's all for today, Friday, May 2nd. The Journal is a co-production of Spotify and The Wall Street Journal. Additional reporting in this episode by Esther Fung, Raphael Wong, and Liz Young. The show is made by Catherine Brewer, Piyad Gidkari, Carlos Garcia, Rachel Humphreys, Sophie Cotner, Ryan Knutson, Matt Kwong, Kate Linebaugh, Colin McNulty, Annie Menoff, Laura Morris, Enrique Perez de la Rosa, Sarah Platt, Alan Rodriguez Espinosa,

Heather Rogers, Pierre Singhy, Jeevika Verma, Lisa Wang, Katherine Whalen, Tatiana Zemmese, and me, Jessica Mendoza. With help from Trina Menino. Our engineers are Griffin Tanner, Nathan Singapok, and Peter Leonard. Our theme music is by So Wiley. Additional music this week from Katherine Anderson, Peter Leonard, Emma Munger, Nathan Singapok, and Blue Dot Sessions. Fact Checking by Kate Gallagher and Mary Mathis. Thanks for listening.

See you on Monday.