Shopping like a billionaire has its price.
This week, the House Select Committee on the Chinese Communist Party released their interim report on allegations of false labor along the apparel supply chain of two Chinese fast-fashion companies – Shein and Temu, owned by Pinduoduo, which is owned by PDD Holdings, a Nasdaq company.
It has long been alleged that Chinese apparel makers source cotton from Xinjiang, the East China province subject to import bans under the Uyghur Forced Labor Law. The reasoning behind the law was that no American consumer should be buying goods made by people forced to work, or not paid to work. And no American companies should be sourcing from there.
But Shein and Temu are Chinese. They’re not like The Gap, which has been switching its clothing suppliers to Central America to avoid issues of forced labor.
In the House report – titled “Fast Fashion and the Uyghur Genocide”, the House Select Committee on the CCP said that both companies do not have “any system to ensure compliance with the Uyghur Forced Labor Prevention Act (UFLPA). This all but guarantees that shipments from Temu containing products made with forced labor are entering the United States on a regular basis, in violation of the UFLPA.”
The Committee will likely struggle to find anything damning on these two as Chinese companies are a veritable black box for foreigners.
Moreover, Shein relies heavily on mom-and-pop stitch and sew factories which, while may not be using forced labor, is likely using fabrics made from banned Xinjiang cotton or employing underage children, probably family members, to make everything from $50 prom dresses to $5 baby outfits for Americans.
Shein rival Temu burst into the American market this winter. Temu advertised on the Super Bowl with its “shopping like a billionaire” campaign, leading Pinduoduo to have one of the most downloaded apps in the country this year.
Shein and Temu: Beneficiaries of the “China Free Trade” Deal
Shein and Temu are part of the China-direct-to-U.S model, whereas American consumers order directly from China-based companies and the products are shipped duty-free under the de minimis tariff loophole.
Temu and Shein ship millions of packages every year duty free to the United States, without providing Customs and Border Protection with sufficient data regarding the contents of the packages. This stands in stark contrast to the millions of dollars in import duties paid by retail companies. For instance, in 2022, Gap, H&M, and David’s Bridal respectively paid $700 million, $205 million, and $19.5 million in import duties to send clothing to their stores in warehouses and shopping malls. David’s Bridal is now bankrupt.
The House Select findings so far include:
- Temu and Shein alone are likely responsible for more than 30% of all packages shipped to the United States daily under the de minimis provision, and likely nearly half of all de minimis shipments to the U.S. originate from China.
- Temu’s business model, which relies on the de minimis provision, is to avoid bearing responsibility for compliance with the UFLPA and other prohibitions on forced labor while relying on tens of thousands of Chinese suppliers to ship goods direct to U.S. consumers on its e-commerce platform.
- Temu conducts no audits and reports no compliance system to affirmatively examine and ensure compliance with the UFLPA. The only measure Temu reported that it takes to ensure that it is not shipping goods produced with forced labor was that its suppliers agree to boilerplate terms and conditions that prohibit the use of forced labor.
- Temu admitted that it does not prohibit its sellers from selling products sourced in any way from Xinjiang.
In February, Senators Bill Cassidy, M.D. (R-LA), Elizabeth Warren (D-MA), and Sheldon Whitehouse (D-RI) sent a letter to Shein asking for details about its Xinjiang-connected supply chains. There has been no word yet about whether Shein responded.
The House Select Committee did the same in May, adding Temu to the list along with Nike and Adidas. Temu did respond, saying that “because Temu is not the importer of record with respect to goods shipped to the United States, [the UFLPA] and the prohibitions set out in [Section 307 of the Tariff Act of 1930] do not apply directly to Temu’s activities as an online platform operator.” Temu also said in its response to the inquiry, according to the interim report, that it does not have a policy in place to prohibit the sale of goods from Xinjiang on its platform.
American Investors Own It
PDD Holdings is currently facing a class action lawsuit.
The investigation concerns whether PDD and certain of its officers and/or directors have engaged in securities fraud or other unlawful business practices.
The stock is not part of any capital market sanctions, including trade bans against the company under the Uyghur Forced Labor Prevention Act. Temu and Shein are not mentioned on the Department of Homeland Security’s UFLPA Entity List and are free to operate normally. PDD is not off limits from American capital markets like Chinese defense contractors are. As a result, Americans pump big money into Temu stocks every day via PDD.
American investors who own the Invesco Nasdaq ETF (QQQ) are invested in Temu. BlackRock, Vanguard, Fidelity, JP Morgan emerging market mutual funds and ETFs are all Temu investors.
PDD has no restrictions. It only faces scrutiny today, and is seen as a beneficiary of de minimis, what some have called the “China Free Trade Deal”. Wall Street sees this as noise. So Wall Street is still investing.
If the House Select Committee’s report is correct, and if the Uyghur Forced Labor Prevention law is right to presume products made from cotton sourced in Xinjiang relied on prison labor or forced labor programs where people are put to work against their will, then Temu’s response was to neither confirm nor deny the use of those products. And if the House Select Committee is right to assume apparel makers sourcing from Xinjiang have a tainted, suspicious supply chain on their hands, then it is also right to assume that American capital is invested in that supply chain.
Pinduoduo shares are up 222% over the last five years.
Shein will raise at least $2 billion in an initial public offering in the U.S. Sequoia Capital China, which recently split from the Silicon Valley-based Sequoia Capital, is a big funder of Shein. Sequoia Capital China was founded by Neil Shen, the sole delegate representing the venture capital industry in the Chinese People’s Political Consultative Conference, a key CCP advisory body. Shen is often called China’s Midas investor because everything he invests in turns into gold. Sequioa Capital China linked with New York global investment firm KKR & Co. to be the initial funders behind ByteDance, owners of TikTok. It is unlikely Shen’s never-fail investment picks could happen without the support of the Chinese government, and insider favors on the policy side – both in China and in the U.S. Sequoia investors are known to be major political donors to both parties.
Either Shein and Temu use banned goods from Xinjiang or they do not. Either they use forced labor or they do not. If Congress believes they do, will they slap capital market restrictions on them? Will they remove de minimis provisions just for China? If they do not, then the UFLPA makes it harder for American companies to source from Xinjiang but gives their Chinese rivals no barriers to that supply. All the while allowing them to ship duty-free to a coveted U.S. consumer.
“Companies on any Entity List should be off limits to Wall Street,” said Michael Stumo, CEO of CPA. “Temu already benefits greatly because of the de minimis loophole and pays zero duties compared to American brands that import by the container load. And Temu says it sources from Xinjiang and does not comply with the forced labor law. So they benefit from de minimis, and they capture tens of millions of dollars a day from American investors. Why would they change? We are funding the very behaviors we claim to despise in these laws.”