Explained | How a US tax loophole supercharged China’s exports

When Congress raised the threshold for imported goods to enter the United States tax-free to $800 from $200 nearly a decade ago, it threw open the door to the American consumer market.

Chinese companies rushed in. First on platforms like eBay and Amazon, and then on apps like Shein and Temu, exporters funneled the products of China’s vast manufacturing supply chain straight to doorsteps in the United States.

This single policy change in 2016 helped transform the economic relationship between the two countries.

While the United States has received factory goods from China for decades, and China’s manufacturing efficiency has loaded the supply chains of American businesses, the expanded tariff-free loophole got American shoppers hooked on buying their exercise clothes and household gadgets online at rock-bottom prices. And in China, millions found work in factories that sold goods on e-commerce marketplaces — not just China’s own, like Shein, Temu and TikTok, but also Amazon and Walmart.

This trade had ballooned. Some 4 million packages a day entered the United States last year with no customs inspection and no duties paid.

That changed Friday, when the latest measure unraveling trade between the world’s two largest economies took effect. Most packages from mainland China and Hong Kong are now subject to tariffs even if they are worth less than $800.

People in both countries are already feeling the change. American shoppers are seeing higher prices when they check out on their phones, and Chinese exporters are scrambling to find buyers outside the United States.

Some factories in southern China, where much of this manufacturing is centered, have suspended operations since the beginning of April, raising concerns that laborers will be put out of work.

Zhang Yikui, who sews clothes that sell on Shein and Amazon at a factory in Guangzhou, the hub of China’s garment industry, said his factory used to make 100,000 pieces a month. Now orders are down to around 60,000, Zhang said Thursday. He and about 40 colleagues, surrounded by piles of Shein bags, were sewing denim dresses.

Zhang was resolute that they would find buyers. “People in other countries still need to wear clothes,” he said. “And in the United States, they don’t make this kind of thing at all.”

Even little-known manufacturers in China had been able to build successful businesses selling to Americans, said Eddie Chan, an e-commerce consultant in Hong Kong who previously helped run Walmart’s China e-commerce operation.

“Over the last couple of months, things changed so fast,” he said.

The trade tensions pose a major challenge for China’s economic growth, which has largely been powered by exports. In April, while President Donald Trump ratcheted up tariffs to 145% for more than half of China’s exports to the United States, new orders for export sank to their lowest level since the end of 2022, according to official data released this week.

Ting Lu, chief China economist at Nomura, a Japanese bank, said in a note to investors this week that almost 6 million people in China could lose their jobs in the near term because of the tariffs, and as many as 16 million in the long run.

The Chinese government has struggled to wean the country off its decades-long dependence on real estate. The collapse of the real estate market, where most Chinese households build their wealth, propelled a sharp decline in prices and left consumers reluctant to spend.

China’s cross-border e-commerce industry, with thousands of factories as its lifeblood, has been one of the few bright spots.

The rise of marketplace platforms like Amazon and Shein, which was founded over a decade ago, coincided with a push by the Chinese government for small businesses to do more to reach overseas markets.

The apps acted like a funnel for the huge variety of goods made in Chinese factories. They enabled Chinese businesses to send packages directly to shoppers, allowing them to move inventory swiftly in response to buying trends, and made it possible for even small factories in China to be global businesses, said Moira Weigel, a Harvard University professor writing a book about online marketplaces.

All this was made even easier in 2016. The thinking in Congress was that raising the tax-free limit to $800 would give consumers and small businesses more access to cheap goods from overseas, and that other countries would respond by opening their markets more to American goods, spurring U.S. exports. But the United States remained an outlier among its main trading partners. China’s threshold for tax-free imports is $7.

For nearly a century, federal law has carved out inexpensive goods, known as de minimis imports, from import taxes. The threshold, which had stood at $1 for decades, was raised to $5 in 1978 and $200 in 1993.

The bump to $800 opened the floodgate, and China has been by far the biggest exporter of de minimis goods. In 2018, Chinese companies exported about $5 billion in single packages, with an average value of $54. By 2023, that total had soared to $66 billion, according to data from the Congressional Research Service.

The trade tensions, and the end of the tax-free policy in the United States, threaten to bring all this to a grinding halt.

Han Dongfang, founder at China Labor Bulletin, which tracks protests over factory closures in China, warned that the impact of the tariffs could be “way worse” than the pandemic for the country’s workers.

Some factories have turned to e-commerce platforms in Europe and Southeast Asia in search of new markets for their products. E-commerce consultants in China are offering tutorials to help businesses sell their goods on eBay in Japan or Amazon in Brazil.

Other Chinese sellers tried to stockpile goods in the United States. Some bought warehouse space from Amazon and Walmart.

The Chinese government has responded by not only imposing high tariffs on U.S. imports but encouraging consumers to buy products made in China. But that could prove difficult if more people are unemployed, said Qiu Dongxiao, head of the economics department at Lingnan University in Hong Kong.

“Even those people who have jobs right now are very cautious when they spend money because they are not sure whether they will still have their jobs tomorrow,” Qiu said.