Temu Watch #7: Will tariffs kill Temu?
Some claim ‘the e-commerce landscape changed overnight’. Did it?
Content
Things that caught our attention
For those who haven’t noticed, we have been publishing several shorter pieces on our Substack Notes- things that are noteworthy (no pun intended) but don’t necessarily need a full report. Here are our recent posts:
For Alibaba’s Hema (Freshippo), X does not mark the spot (on Alibaba closing 3 Hema X stores)
The Alibaba-fication of Globalisation (on the launch of 1688 Global)
What do these two videos have in common? (on the agency hype around ‘social commerce’)
What’s brewing in China’s coffee war? (the lastest on Luckin and Cotti)
The long-awaited entry of its Full Self-Driving (FSD) system into the Chinese market.
From online back to offline – when live commerce reaches ‘involution’ (on the trend of merchants leaving livestream platforms to open physical stores)
Alibaba remembers who its primary customers are (on merchant support in 2025)
Introduction
When the Trump administration announced the cancellation of de minimis and an additional 10% tariffs on goods from China, some online and offline retailers were jubilant. I have seen more than one person on LinkedIn claim that ‘the e-commerce landscape changed overnight’.
But did it?
I’ve been following Temu from the day it launched in 2022. I have made it my (temporary) calling to follow the platform’s every move, which has resulted in 10 deep-dive reports for Tech Buzz China, which we have turned into our recurring Temu Watch series.
This research taught me about the company’s amazing agility and how it quickly adapts and anticipates risks. Potential tariffs and cancellations of the de minimis import tax-free threshold of $800 were among the reasons why Temu implemented the semi-managed model, which it has been pushing hard since March 2023. Judging from close to one hundred expert interviews I have used as source material over the past 2.5 years, I doubted if the changed US policies were really such a major blow for Temu.
In this new Temu Watch - an additional report on top of our bi-weekly schedule - we analysed several expert interviews that discussed the impact of the tariffs on cross-border e-commerce from China and Temu specifically. The section on the implications for the industry is free for all subscribers. The rest of the report, which discussed various coping strategies of Temu and others, is available to paid subscribers. Please consider becoming a paid subscriber yourself and supporting our work.
Cheers,
Ed Sander – Research Editor
Will tariffs kill Temu?
The United States recently adjusted its tariff policy. This change stems from the trade restrictions implemented during the previous president's period, which aimed to reduce the share of Chinese products in the US market.
The United States announced a 10% extra tariff on Chinese goods and cancelled the $800 duty-free policy (de minimis). However, problems in the latter's implementation process led to a backlog of express delivery. US Customs is not yet prepared to cope with policy changes regarding personnel and technology, which is causing logistics problems. Implementation of some policies has, therefore, been postponed. These tariff adjustments will eventually be put in place, but it will take time to improve the relevant mechanisms, and it is expected to take at least three months to implement them fully.
The total tariffs imposed by the United States on Chinese goods previously amounted to about 17% and will increase by another 10%, bringing the overall tariff to nearly 30%. If China and the United States cannot reach an agreement at the national level, the additional 10% tariff on Chinese products may increase further. At the end of February, a second increase of 10% was announced. [Please note: the interviews this report is based on were done before the announcement of this second increase of 10%.]
More seriously, if the United States revokes China's most-favored-nation treatment in the World Trade Organization, tariffs may increase by another 10% to 20%, and the total increase may reach 50%-60%. This escalating trade conflict between China and the United States will undoubtedly have a long-term impact and pressure on the cross-border e-commerce industry.
The total tariffs on certain goods may rise significantly; for example, the tariff on clothing could be as high as 35%, which would lead to a substantial increase in prices. The fully managed model, in which packages are shipped to consumers from warehouses in China, may be hit the hardest because cancelling the $800 duty-free policy may cause certain goods to lose their competitive advantage. In contrast, semi-managed and localised businesses will be mainly affected by the additional 10% tariff, which will also bring considerable challenges to them.
This strategic shift will profoundly impact the US economy and consumers and reflects the complex challenges faced by the government in balancing economic development and policy implementation. The measures may increase inflation because consumers will eventually bear these costs. In the long run, the United States hopes to reduce its dependence on imports by promoting the reshoring of manufacturing, but this process will take a long time to show results.
Impact on cross-border e-commerce
The new policy has a multifaceted impact on cross-border e-commerce companies. First, abolishing the tax-free policy for packages worth less than $800 will significantly increase merchants' operating costs. Previously tax-free goods will now be subject to import tariffs, ranging from 1% to 30%, depending on the category of goods. In addition, an additional 10% surcharge is required, which significantly increases the total cost.
Under the adjusted customs clearance mode, each order must also pay a handling fee of around $2.75. A small parcel with a declared value of $10 could now cost as much as $16.75. This adjustment in customs clearance regulations will undoubtedly impact cross-border e-commerce and consumers and may lead to higher commodity prices or affect the demand for cross-border shopping. Note, however, that the declared value typically differs from the consumer selling price, as we will explain later. As such, the relative price increase for the consumer could be less dramatic.
After implementing the new policy, the customs clearance process for cross-border e-commerce has become more complicated. Since small packages must apply for import licenses and pay tariffs separately, the air delivery time will be extended from 7-14 days to 14-21 days, similar to the sea transportation time.
Since the U.S. Customs and Border Protection has not yet issued detailed implementation guidelines, the procedures during the transition period have been confusing. The U.S. Postal Service once stopped accepting small packages from China and Hong Kong, but due to the tremendous impact, the service was restored after only a few hours.
About 1 million cross-border packages enter the United States daily, and insufficient customs personnel may lead to a backlog of goods. This delay in delivery time may worsen customer satisfaction and increase order cancellation rates.
The new policy impacts the competitiveness of cross-border e-commerce platforms. For instance, Temu's low-price strategy has been affected to a certain extent, but even if the price increases by 10% to 17%, its overall price advantage still exists. On the other hand, Shein's ‘quick response’ strategy will be more significantly restricted. As the customs clearance time will be extended to 21 days, Shein will have difficulty responding to changes in market demand as quickly as before.
In addition, the new policy has made customs declaration procedures more cumbersome, increasing the cost of the small-volume order model.
The new tariff policy will impact different types of cross-border e-commerce companies in different degrees. Companies that mainly rely on overseas warehouses will be relatively less affected. Under the sea shipping model, the 10% additional tariff is limited to the cost increase on each commodity, and these companies can offset the impact by increasing the price of each item by $1 - $2.
Platforms that rely on the direct mail parcel model, such as Shein and Temu, will be significantly affected, and similar businesses, such as AliExpress, will not be spared. In contrast, platforms such as Amazon and Walmart - while also being hit by the extra 10% tariffs on goods from China - have advantages in localisation because their supply chain layout is more in line with the new regulations. This differentiated impact could lead to significant changes in the market landscape.
Size matters
The new small parcel tax exemption policy changes impact e-commerce platforms and merchants of different sizes and types differently.
Small merchants with an annual turnover of less than $500,000, who account for about 40% of cross-border e-commerce sellers, are highly dependent on the small package tax exemption policy, so the new tariffs will directly affect their profits. The overall cost of small parcels will increase by about 30%. At the same time, the profit margin of self-delivery is usually only 15%-25%, which has led to the risk of many sellers facing losses or even exiting the market. Some companies that carry out self-delivery have applied to terminate their business, and some Amazon sellers who originally switched to the self-delivery model are returning to the FBA (Fulfillment by Amazon) model.
The situation is also not optimistic for medium-sized sellers with an annual income of about $1 million. These sellers already have low profits, and the new policy may complicate their operations. However, this change may ease price wars, further consolidating the market advantages of large sellers.
Cancelling the small package tax exemption policy has less impact on large cross-border e-commerce platforms and top sellers. Large cross-border e-commerce companies such as Shein and Temu have established overseas warehousing and localised operation systems. They don’t depend much on the small tax exemption policy, so they can better cope with the additional costs brought by the new regulations. These large platforms have stronger risk resistance and have established a sound compliance system, so this policy change has less impact on their operations.
For top sellers, small package tax exemption is just an additional benefit and does not constitute their main competitive advantage. The cancellation of this policy has a limited impact on their business model and profitability. These large sellers usually have perfect supply chain management and scale advantages and can absorb the additional costs by optimising processes.
Cross-border e-commerce platforms have responded well to policy changes. Although the extension of customs clearance time may temporarily affect efficiency, these platforms can still maintain efficient services by adjusting logistics strategies, such as adopting a semi-managed model (shipping from overseas warehouses).
Large companies such as Amazon and Walmart mainly rely on sea transportation, and taxes must be paid on their goods, so this policy change has no substantial impact on them. Amazon's FBA service is mainly for large-scale B2B or centralised warehousing and does not involve small personal parcels, so the de minimis policy does not affect it. However, the policy changes will affect Amazon Haul, which may be why it plans to roll out to Europe later this year. [1]
The new regulation treats all market participants equally, and all platforms are still in the same competitive environment. Platforms with low prices as their main advantage are still competitive in price. For example, even though Temu needs to pay tariffs, its product prices are still more attractive than Amazon's. Therefore, although this policy change will impact some platforms, it is not expected to change the existing market competition pattern fundamentally.
The new policy may even have some positive effects, such as reducing price competition and helping to ease vicious price wars, which will benefit large enterprises. In addition, the new laws and regulations have improved the industry's overall compliance level, which is conducive to regulating market order and enhancing consumer trust. From a long-term perspective, these changes may drive the industry in a healthier and more orderly direction and positively impact industry development and consumer confidence.
The new policy will help platforms achieve healthier and more sustainable development and respond to stricter regulatory requirements by improving compliance. When competing with local US e-commerce, Chinese companies can leverage their advantages in efficient production and technological innovation, such as DTC models and artificial intelligence. However, some smaller cross-border e-commerce and independent platforms may exit the market due to difficulty in adapting to the new regulations, and large platforms may absorb their market share.
In general, this new policy is likely to change the competitive landscape of the cross-border e-commerce market, tilting the market towards large sellers.
Impact on product categories
The new cross-border e-commerce policy will significantly impact the sales trend and market structure of high-value goods.
First, due to the cancellation of the tax exemption policy for small packages, there is expected to be a growth trend in goods with a value of more than $800, including high-end products such as smartphones, portable computers, refrigeration equipment and large-screen TVs. In the past, these high-value goods were rare on some cross-border e-commerce platforms because they could not enjoy the de minimis tax exemption. The new policy will eliminate this imbalance in price range and promote the rapid development of related categories. With the enrichment of the variety of goods on the platform, overall sales are expected to increase. This brings new development opportunities for cross-border merchants.
After implementing the new policy, U.S. Customs is likely to strengthen spot checks, especially the inspection frequency of small packages will increase significantly, leading to higher compliance standards in the industry. The textile industry must comply with relevant U.S. regulations, such as the Textile Fiber Products Identification Act and the Wool Products Labeling Act. Not only that, products must also provide proof of origin.
For products using cotton, if proof of compliance with the Uyghur Forced Labor Prevention Act cannot be provided, they may face the risk of fines or seizure. The new policy also requires mandatory testing of technical indicators such as fiber composition and flame retardant properties, which may be a challenge for small businesses because they may find it difficult to afford these testing costs due to insufficient funds, thereby increasing their operating pressure. However, for large companies like Shein, the cost changes caused by the new policy do not significantly impact their overall business. This situation may reshape the industry landscape, again giving large companies more advantages, while small companies may face more significant challenges.
The political angle
In the context of Sino-U.S. trade frictions, the economic policy measures taken by the two governments are based on different considerations. The United States decided to significantly increase import tariffs for economic and political reasons. China's Ministry of Industry and Information Technology has clarified that it hopes to pass on the additional costs to American consumers by raising prices as a countermeasure.
From an economic perspective, increasing tariffs can compensate for the shortfall in federal revenue caused by tax cuts and protect domestic industries. However, the US government must consider the risks of supply chain disruptions or foreign suppliers exiting the market that excessive tariffs may cause. In addition, due to the pressure brought by the election cycle, the US president needs to ensure that short-term economic indicators perform well to balance economic interests and political demands.
American consumers are facing a significant increase in the cost of living, which may profoundly impact the economy and society. The increase in the cost of living is likely to weaken consumer demand, and it may also cause public dissatisfaction and even protests. The price of eggs in the United States is already 12 times that of China, and the continued rise in the prices of other commodities will further increase inflationary pressure.
In this situation, Chinese exporters have adopted a strategic response. They have tried to pass on the higher cost of living to American consumers by raising the prices of their exported goods. The purpose of this strategy is to make American consumers feel greater economic pressure so as to prompt them to put pressure on the government to adjust the current trade policy. Specifically, Chinese exporters hope the US government can reduce the current 10% tariff, or at least avoid further raising the tariff to 60%. Whether this strategy can effectively influence US trade policy remains to be seen.
The rest of this report, which investigates the coping strategies of e-commerce platforms in general and Temu specifically and evaluates the impact of the policies on Temu’s goals, is availaible to paid subscribers.