Will tariffs and cancellation of de minimus hurt Temu?

The text below is taken from our Temu Watch #6 report at Tech Buzz China . The full report is available here for paid subscribers. The information originates from an expert interview in early December 2024.

After Trump takes office, new tariffs and compliance measures are expected to be introduced, which may significantly impact cross-border e-commerce. The new policy is mainly divided into two aspects: first, the preferential country status of small parcel businesses and related enterprises is expected to be cancelled, and the tax exemption policy below $800 is revoked or lowered; second, tariffs on large-scale seaborne export businesses are expected to increase by 10%.

Tariffs on goods

Between July and August 2024, the potential impact of Trump's policies began to emerge, especially in the home and electronic product categories with a price of more than $60 and a delivery time of more than 40 days. During the Sino-US trade dispute in 2018, tariffs on some 3C products were as high as 50% to 60%. The US government has proposed that tariffs may be increased, but this needs to be achieved through legislative procedures. The volatility of US policies has increased uncertainty and may mainly affect the clothing and textile industries.

Tariffs on certain specific categories of goods may increase by between 50% and 60%. Although the increase mentioned in media reports is 50%, the actual increase may be higher. These new policies greatly impact small parcel business platforms and may significantly increase their operating costs.

The specific situation will not be clear until January 2025. If tariffs increase to 30%-50%, Temu's business will face serious challenges. The new tariff policy is expected to affect about 40% of the goods on the Temu platform, mainly textiles, clothing and some electronic products. It is not yet certain whether additional tariffs will be imposed for the remaining 60% of products, such as household goods. Although the Trump administration has proposed a 25% tariff, it expects that the actual tariff may drop to between 2% and 10%, and most are not expected to exceed 10%.

In the current cross-border e-commerce environment, even if overseas goods are marked up by 30%, they still have a clear price advantage over local goods because their basic cost is only one-third of that of local goods. Since most of the goods come from China, the goods on Amazon are also facing pressure from rising tariffs, which may challenge its pricing system.

De minimus

In addition, the cancellation or reduction of the duty-free quota (de minimus), could mean that more goods will be subject to tariffs of 3% to 5%.

If the threshold is lowered to an amount higher than $50, the impact will not be too significant because Temu expects the average order value to be close to $50 next year.?As such, most small packages are not subject to tax, and Temu usually keeps the order amount below US$800 to simplify logistics processing.

There is another point of view on the situation, though. If the tax-free amount is reduced from $800 to $300 or $200, logistics costs will rise, and the speed of order consolidation will slow down. More seriously, if the price drops to $150, logistics costs may increase by 40% to 50%, and the cost of each package will increase by about $0.5. It should be emphasised that?these additional costs mainly come from domestic order consolidation and package splitting rather than an increase in overall logistics fulfilment costs.

Declared value versus actual value

It is important to note that tariffs are levied based on the declared export value, not the retail price. The main challenge facing cross-border e-commerce platforms is that?the actual sales price is usually higher than the declared price, which increases the risk of tax inspection. The supervision of ‘de minimus’ is relatively strict.

Whether Amazon AGL or other logistics services are selected in the current customs clearance process, the declared value is usually 30%-50% of the actual price.?A nominal 25% tariff may only increase the value by 10%-15%. If the tariff increases by 10 percentage points, for example, the original $50 tax becomes $55, the overall cost's impact is insignificant. Since most companies do not declare the full amount, the change in tariff policy has less of a direct effect on them. However, some companies that strictly declare according to the actual value may face a more significant impact.

In April of this year, Temu was investigated for declaring a price that was too low, and now their declared price is usually kept between 50% and 80% of the actual price.?Specifically, in the third quarter, Temu's average declared price was about 67% of the actual price.

Temu’s measures

Temu has taken a series of measures in response to these potential changes. As mentioned, it implemented the semi-managed model and a forward warehousing strategy to store goods in overseas warehouses in advance to reduce customs clearance time and related costs. At the same time, it is also strengthening compliance management in the European and American markets to ensure that products strictly comply with local regulations.

Temu also took precautionary measures before Trump took office, raising prices of all categories of goods by 5% to 15%. This range may exceed the actual tax cost increase caused by the cancellation of the $800 tax-free policy because the tax is calculated based on the declared value of the goods. This price change is an early response to possible policy changes.

The impact of tariffs on fully managed and semi-managed merchants is different. Fully managed goods are still competitive in price, while semi-managed goods are more susceptible to audits and tax increases. However, if high tariffs are implemented, merchants in the fully managed model will face higher cost pressure, and Chinese sellers will also have to deal with the pressure of rising prices.

In response, Temu is actively attracting local merchants in the United States to enhance its market competitiveness. However, no matter what strategy is adopted, the increased costs may eventually be borne by consumers.

Temu expects that some goods may enjoy preferential treatment through third countries.?Setting up a factory in Vietnam or using Vietnam as a place of shipment can circumvent high tariffs to a certain extent. Still, this approach will also increase logistics costs and complicate Temu's process. Currently, Vietnam accounts for less than 5% of the existing supply chain. Temu has two ways to use Vietnam's supply chain: one is for Chinese companies to set up factories there and then transport products to Vietnam through Guangxi and then to the United States by air; the other is to cooperate with local Vietnamese brands for shipment.

In general, Temu faces multiple challenges and needs to balance maintaining competitiveness and achieving business growth. Considering that it is difficult for the US manufacturing industry to return in the short term, the impact on the platform's business might not be too significant in the next two years. This gives Temu a buffer time to adjust its strategy to cope with potential tariff changes.

Industry experts think that changes in tariffs will not directly affect the transaction volume of enterprises with e-commerce platforms, nor will they significantly reduce profits. In the long run, enterprises can adapt to policy changes by improving operations.