Katy Perry Shills for Shein as China’s Direct-to-US Consumer Model Takes Hold

Popstar influencer Katy Perry got a nice payday from Chinese e-retail firm Shein. Now she is helping with the managed decline of fast fashion and the teen retail market in the U.S.  To all those high-end $600 LoveShackFancy retailers, just wait until Shein gets a hold of them for $5.

Okay, make that $20.

Perry is the official face of the merger between American consumers and China businesses in a virtual retail market that has Americans of all ages, especially teens, increasingly shopping online. Their demand has largely gone to China anyway. Now, from sites like Shein, it’s all going to China.

Worth noting, whether they’re hanging a shingle on a Facebook page or their Instagram account, teens aren’t just buying directly from China via Shein. They are also buying from Chinese manufacturers and selling those goods to friends. Many of these goods are counterfeit – fake Nikes. Fake Tommy Bahamas.  An untold number of these ‘sole proprietor’ e-commerce operations exist, with links directly to China.

American retail is already pretty much all Made in China. But companies like Walmart also have their own Made in America options, too. Shein has none. It’s 100% direct from China retail.

As this model progresses, whereas American shoppers are directly linked to China, it makes it that much harder for traditional retail to survive. Those who have commercial real estate will start to shed it, also laying off millions of people who work in retail. Those who want to only maintain an online presence, like Amazon, will increasingly allow for direct-to-consumer China retail on their platforms.

Shein is the epitome of this model.

Pronounced “she-in” (though no teenager calls it that), the Guangzhou-based retailer is approaching H&M and Zara size. It will be bigger than both in a matter of time as it has no commercial real estate overhead, nor does it require a bunch of people to stack its clothing racks and ring out customers.

In a story on June 14, Bloomberg used Shein’s rise as a means to punch at its favorite punching bag: Trump’s trade war. It mentioned the long-standing Section 321 de-minimis trade rule that allows for companies like Shein to thrive, though not by name.

De minimis is the “minimum” value of goods allowed into the country without paying port duties. For the U.S., orders priced under $800 come in duty-free. For China, it’s about 50 RMB, or $8, 100-times less than ours.

This isn’t a Trump rule. Congress made drastic changes to de minimis values in 2015, with the Republican Congress cranking it up from a $250 threshold. Worth noting, until the North American Free Trade Agreement was signed in the Clinton years, de minimis exemptions were capped at $5.

President Trump actually started a rule-making in August of last year to ensure that Chinese goods subject to our tariffs couldn’t enter through the de minimis lane, but the Office of Management and Budget dragged their feet and then the rule died out in President Biden’s regulatory freeze. Bloomberg forgot to mention that part.

“We should make de minimis reciprocal. If China’s is $8 per foreign import, then we should make ours $8,” says Jeff Ferry, chief economist with CPA. “That would be a revolution. Millions of packages would have to stop. That would be a great solution.”

Shein would probably go out of business, in fact. But their counterparts (and rivals) in the U.S., led by Amazon and Walmart, would also lose tons of Asian-based sellers who increasingly populate the site. Prices of goods sold would have to rise, or sellers would have to reduce their margins.

Cheaper consumer prices are a good thing, but you have to look at the overall cost. Is it also deindustrializing America? In the not-so-distant future, will it wipe out commercial retail real estate in most places in the country as more and more people shop online, ordering direct from China.

The other cost is excessive dependence on China for consumer goods, let alone clothing. They grow the cotton in Xinjiang, known for forced labor violations; and they have the textile mills at scale, which makes China a key part of the global supply chain for apparel already.

Shein creates the platform for it all, going beyond Amazon, which actually still sells things made in the U.S. (and other parts of the world).

The online retail world is a lopsided one. The Section 321 trade rule of de minimis import duty exemptions help China businesses and hurt American manufacturers.

For years, the U.S. had a China-centric manufacturing model whereas physical companies outsourced production of widgets to China. But now we are witnessing that individuals can do this directly, without any corporate middle man, and Chinese entrepreneurs are selling themselves as the solution: we can link your customers directly to our factories, they say. You don’t need a store. You can rent warehouse space if needed. All sales are processed through China.

Which creates a whole laundry list of problems.

As CPA has highlighted before, numerous companies are sprouting up and using YouTube as their prime advertiser to market direct-to-China retail. Want an “Arctic Air Blasting” mini-air conditioner? You can buy it from Breeze-Maxx, a company with a warehouse address in New Jersey, but a product line that is manufactured and shipped from China. Good luck returning it.

“At least the fast-fashion firms Shein is competing against now have a physical presence in the U.S., paying rent and paying workers. But this really upsets the apple cart because it shifts the business entirely to China,” says Ferry.  “And there is no way to enforce any standards at all on these China importers.”

The recent passing in the Senate of the COOL Online Act, as part of the wider U.S. Innovation and Competition Act (aka “the China bill”), really doesn’t solve the problem of the booming American consumer direct-to-China retail model. People will still find a lower-priced product compelling, and won’t care that it was made in China.

Teenage shoppers in particular will not mind paying $20 for a summer dress rather than the $500 one sold to those living on the Upper West Side. So COOL Online, while a positive for highlighting American-made business, will not change the fact that we have trade policies in place that allow for the easy importing of $400 billion worth of goods from China each year.

The H&Ms of the World are in Trouble Now

According to SEKO Logistics, Asian-sourced e-commerce imports here rose over 200% in the first quarter as people shopped online due to lockdown orders. This was another boon for online retailers like Amazon, but it was a nice jobs program for Asian manufacturers, led by China.

This new flood of direct shipments from China threatens millions of U.S. retail, warehousing, and manufacturing jobs, as well, all with impacts to be felt more heavily by the minorities and women who dominate this sector’s labor force.

Clothing retail’s workforce is around 72% women, 15% Black, and 24% Hispanic, according to the Bureau of Labor Statistics. Blacks constitute over 20% of the workforce in warehouse clubs, like Walmart’s Sam’s Club.  Shoe stores are comprised of 64% women, 14% Black, and a 26% Hispanic labor force.

Given the interest of the House Ways and Means staff in social justice and economic inequality, CPA believes the Section 321 de minimis issue should be taken up as part of their version of the China bill.  There needs to be serious support for closing this giant loophole and calling for reciprocity with China, rather than have our consumer market linked to Guangzhou as if it were a city in Ohio.

E-commerce sales are on the rise. It’s not just the big platforms like Amazon. Now entrepreneurs and startups are creating China direct-to-consumer manufacturing for everything from new brands like Xero Shoes, to vitamins and supplements.

Textile Manufacturers Hate This

Customs and Border Protection now estimates that over two million Section 321 entries cross our borders each day. The majority of purchases valued at less than $800 are textiles and apparel, Customs says.

This rule, coupled with the growth of e-commerce, effectively allows for mass distributors, foreign manufacturers, and importers to avoid payment of U.S. customs duties.

In April, Kim Glas, president of the National Council of Textile Organizations, sent a letter to Acting Director of Management and Budget, Robert Fairweather, calling for a massive reduction in this free gift to China.

For Glas, the negative ramifications of de minimis include:

• Increased import price pressure on domestic manufacturers of various types of consumer items that routinely sell for less than $800 such as –apparel, footwear, home furnishings, toys, consumer electronics, flatware, auto parts, etc. Why make it here?
• Nearly impossible to block the importation of adulterated products posing a health and safety risk to consumers, and falsified goods like Air Jordans from China.
• Makes it easier for China businesses to access the U.S. market; enmeshing the two economies even more than they already are.
• Undermines existing U.S. free trade agreements with apparel-making countries in Central America that cannot compete with China’s target of individual, low volume buyers.
• Weakens the U.S. government’s leverage in negotiating new fair and reciprocal trade deals as Section 321 grants unilateral duty-free access to the U.S. market for small purchases of the type most Americans would be making in a shopping mall or any ‘Big Box’ store.

Get Ready for the Inflation Excuse

Tackling de minimis won’t just hurt Shein and a host of direct U.S.-to-China businesses that have sprouted up over the last several years. Big retail will also hate it. They benefit from this high tax-free threshold. This is especially true for e-commerce. Amazon would make more in fees from third-party sellers than the U.S. government makes in tax collection from duties of Amazon-purchased goods exempted by the $800 rule.

With recent talks on Wall Street about inflation, CPA suspects the retail lobby will use the specter of rising prices as a means to argue against lowering de minimis levels.

Shein is mostly selling halter tops for girls priced under $50. But people on Amazon are selling everything from medical masks to barbecue grills, with nearly half of their sellers now based in China. If Washington is remotely serious about domestic supply chains, then allowing for repeated imports of $800 and less to come in duty-free is a meaty bone to many, not just Shein.

Congress should be ready for the inflation excuse to kill any chance for de minimis reciprocity with China. Inflation won’t last forever. But if this trade rule does, the ramifications for it are already known – further acceleration of the destruction of retail stores, deterioration of retail commercial real estate nationwide, and a bloodletting of jobs dominated by women and minorities.