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A tax loophole Shein exploited to become the U.S.’s largest fast fashion retailer might help it skirt a new ban on forced labor too

June 20, 2022, 2:55 PM UTC

A law to crack down on China’s alleged use of forced labor was one of the few pieces of legislation the U.S. Congress could agree on last year. When the Uyghur Forced Labor Prevention Act unanimously passed both the House and Senate and became law in December, one of its sponsors, Sen. Marco Rubio (R–Fla.), called it “the most important and impactful action taken thus far by the United States to hold the Chinese Communist Party accountable for their use of slave labor.” Another sponsor, Sen. Jeff Merkley (D–Ore.) said the law “sends a powerful, bipartisan message that the United States will not turn a blind eye” to China’s violations of human rights.

But the new law may have a blind spot, particularly for Chinese brands sending goods directly to U.S. customers. Chief among them: retail giant Shein, the world’s third most-valuable startup and the dominant fast fashion brand in the U.S., occupying 30% of the market.

The new legislation bans imports made even partially with materials or labor sourced from the Xinjiang region of China, where authorities reportedly force the region’s Muslim Uyghur minority to work against their will. (Beijing denies that Uyghurs are persecuted.) The act will require any importer of Made in China goods—including giants like Nike, Uniqlo, and Adidas—to be ready to prove its wares are not the product of forced labor from Xinjiang or else face delayed shipments, seized goods, or even trade sanctions.

Traditional retailers that import Chinese-made products by the container-full will likely find the law effective as an incentive for trying to avoid Xinjiang cotton. Bulk deliveries are easy for U.S. Customs and Border Protection, the agency enforcing the law, to intercept and expensive for the retailer to lose. But customs agents will have a harder time policing smaller parcels that go directly to consumers, like the plain white envelopes and brown cardboard boxes—filled with $13 dresses, $20 shoes, $5 jewelry—that Shein ships to Gen Zers’ doorsteps. Shein’s direct-to-consumer sales propelled the startup to a $100 billion valuation in April, and now the business model also may help the online retailer escape the new law’s scrutiny.

Shoppers hold up Shein bags at the company’s pop-up store in Madrid.
Cezaro De Luca—Europa Press/Getty Images

Since 1930, the U.S. has banned imports made with forced labor, but the new law is harsher in that it assumes importers, once accused by customs officers, are guilty until proven innocent. Under the new legislation, importers must demonstrate that any suspect goods flagged by customs agents are forced-labor free. 

The law applies to all goods from Xinjiang, a region in China’s arid northwest that produces cotton, tomato paste, and solar panels, but it’s likely to hit clothing and textile companies especially hard. Roughly 20% of the world’s cotton supply comes from China, and over 80% of Chinese cotton comes from Xinjiang. Clothing supply chains are notoriously opaque. Retailers partner with overseas suppliers, who in turn, outsource production and receive raw materials from various sources, muddying the supply chain to the point that brands have a hard time determining where their products come from. Supply chains are even harder to track in Xinjiang, where the Chinese government reportedly surveils citizens and businesses and restricts outsiders from accessing factories.

“To maintain a high level of quality in the inspection process on the ground, inspectors need to visit factories and see for their own eyes whether or not forced labor is being used,” says Arthur Dong, professor of strategy and economics at Georgetown University’s McDonough School of Business. “Chinese authorities control who gets to visit Xinjiang, and this is where the third party inspectors may run into a brick wall.” 

Cotton from multiple growing areas frequently ends up in the same yarn, which is then processed again into fabric. In recent years, some U.S. apparel brands like Patagonia, L.L. Bean, and one-time Victoria’s Secret parent L Brands have tried to rid their supply chains of Xinjiang cotton, but the task of identifying and eliminating cotton from the region was so difficult the retailers decided the only way to do so was to stop using Chinese cotton altogether

To make things even tougher, the U.S. customs agency has not specified how brands can comply with the new law despite it taking effect on Tuesday. The agency published a list of potential documents an importer could provide to prove its goods are forced-labor free—purchase invoices from suppliers and sub-suppliers, third-party reports of factory visits, a supply chain map—but it’s unclear whether an importer will need to show all, or only some, of the documents to be cleared by customs. 

Experts doubt whether any retailer can genuinely comply with the new law, let alone Shein with its outsize network of Chinese suppliers. Shein relies on a web of 6,000 factories, all based in China, far larger than H&M’s roster of 1,519 factories or Nike’s 533. 

Genuine inspections of Shein’s 6,000-plus small-to-mid-sized suppliers would be so “costly and burdensome” it would likely no longer make financial sense for Shein—a brand known for its ultra-low prices—to do business in the U.S., says Chris Tang, faculty director at the UCLA Center for Global Management, who researches global supply chains. 

When asked how Shein would comply with the new law, a spokesperson said the company conducts “regular, comprehensive audits of our suppliers on a regular basis, [and partners] with third-party firms to audit suppliers.”

Shein’s 2021 sustainability and social impact report says that the company’s partners must refrain from using forced labor, allow for random inspections by Shein and its third-party auditors, and provide certified documents to prove their compliance with the code. The same report acknowledges that 12% of Shein’s suppliers have engaged in multiple, major infractions—like using forced labor, engaging in serious environmental pollution, and disregarding health and safety measures—and need to take “immediate action,” while 66% were found to have some workplace “risks” and require “corrective action.”  

It’s unclear whether Shein will have to prove its supply chains are free of forced labor since the e-commerce giant seems uniquely positioned to dodge the new law’s enforcement mechanisms.

The 12-year-old online retailer, based in Nanjing, China, surged in popularity during the COVID-19 pandemic, capitalizing on an agile, online-only business model that uses real-time data, social buzz, and A.I.-driven design software to flag trending fashions and get them from concept to virtual store shelves in no more than 10 days. 

American Gen Zers’ enormous appetite for Shein’s ultra-cheap apparel have made the U.S. the company’s largest market and boosted the startup’s valuation to $100 billion after a $1 billion to $2 billion funding round in April that included investments from private equity firm General Atlantic and venture capital giants Sequoia Capital China and Tiger Global Management. Shein is now the world’s third most valuable startup behind ByteDance, the Chinese parent of TikTok, and Elon Musk’s SpaceX.

U.S rapper Saweetie attends a Shein event in California in September 2021.
Matt Winkelmeyer—Getty Images

Shein has capitalized on quirks of the tense U.S.-China trade relationship to grow its business in the U.S. A U.S. rule implemented in 2016 that waives import taxes for packages valued at $800 or less—known as de minimis shipments—spares most Shein parcels bound for U.S. doorsteps from the extra levy. In 2018, Beijing issued a tax exemption for Chinese direct-to-consumer exports to defend them against the Trump administration’s tariffs—another measure that insulates Shein’s bottom line.

In the case of the Uyghur Forced Labor Prevention Act too, Shein’s model of shipping low-value packages directly to consumers could help save the startup from a crackdown that’s likely to ensnare boatloads of Chinese goods

“I’ve never heard of de minimis shipments of clothing being held up for forced labor concerns,” says Manny Levitt, a senior associate focused on economic sanctions and export controls at law firm Miller & Chevalier.

The new law doesn’t exempt shipments below a specific dollar value, but policing individual packages would be a resource-intensive operation for the customs agency. “[Customs] is not going to scrutinize these little under-$800 shipments to the same extent as they would a cargo container full of goods heading to a brand store,” Levitt says. 

Even if customs agents wanted to expend the resources to flag every Shein parcel, shipments sent from the brand would be hard to identify. First, there’s the issue of volume. According to the U.S. Customs and Border Protection, the bureau receives nearly 2 million packages valued at $800 and under per day. Over a tenth of the value of Chinese exports to the U.S. now arrive in the form of de minimis packages, customs data reviewed by the Wall Street Journal show, soaring from less than 1% a decade ago. According to the Journal, the U.S. imported $67 billion worth of de minimis shipments in 2020, up from $40.5 million worth in 2012, with China accounting for over $46 billion of them. The Uyghur Forced Labor Prevention Act unlocked $27 million in new funding for customs to enforce the law, but experts are unsure if that’s enough money to cover the legislation’s massive scope.

Second, there’s the matter of identifying shipments from Shein. The de minimis regulation requires minimal data on shipping forms, meaning the true identity of the sender is easy to obscure. The parcels Shein sends via air cargo can list individual customers or third party customs brokers as the “importer,” and the warehouse or logistics firm that last touched the parcel—rather than Shein itself—as the “seller.” E-commerce platforms’ reliance on third-parties makes it hard for customs agents to obtain “adequate information on the [true] identity” of the seller, says Lawrence Friedman, partner at Barnes Richardson who focuses on trade disputes with the U.S. Customs and Border Protection. 

The U.S. customs agency has admitted that the information it receives on de minimis parcels isn’t enough to “target efficiently… and assess the security risks” posed by such shipments. The agency in 2019 launched an ongoing pilot program that asked e-commerce brands, logistics providers, and couriers to voluntarily submit more data on de minimis shipments, acknowledging that the agency “may not receive any advance information on the entity… such as the seller or manufacturer” sending the shipment to the U.S. 

Elva Muneton, the acting executive in charge of implementing the new law for U.S. customs, says the act “applies to everything and anything;” there are no exceptions for low-value shipments. On Friday, Robert Silvers, an under secretary for the Department of Homeland Security, vowed strict enforcement of the new law when it takes effect Tuesday. “We will not allow goods made with forced labor to enter this country,” and “our timely and strong implementation of this law is proof of our commitment to that,” he said. 

But Tang argues that the potential for direct-to-consumer brands like Shein to skirt scrutiny makes the legislation more of a political statement that serves to highlight U.S. opposition to China’s alleged abuses in Xinjiang than an effective tool to stop forced labor.

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