Germany is backing a significant overhaul of European Union import tax regulations, which could eliminate the tax exemption for low-value parcels. This exemption has allowed online retailers such as Shein and Temu to dominate the market with their low-cost products sourced from China.
Critics in the United States have already raised concerns about Shein and Temu exploiting a similar import tax exemption to undercut competitors and avoid customs inspections. This practice enables these companies to offer incredibly low prices, like $8 for dresses and $25 for smartwatches. Shein, preparing for a London IPO after facing regulatory hurdles in the U.S., could be significantly impacted by this regulatory change.
Current EU Regulations and Proposed Changes
Currently, the EU exempts parcels valued under €150 ($163) from customs duties. Germany’s main retail association, Handelsverband Deutschland (HDE), has been lobbying against this exemption, arguing it has led to a surge in small parcels entering the EU, overwhelming customs authorities. These authorities often lack the capacity to ensure all products meet EU regulations.
Germany’s finance minister, Christian Lindner, has expressed support for abolishing the €150 duty-free limit. The German finance ministry welcomed the European Commission’s broader customs reform proposal, which includes ending this exemption.
In response to inquiries, Shein stated, “We seek to comply with all relevant local laws and regulations of the countries in which we operate, including in relation to customs and tax compliance.” The EU is considering this change as part of a comprehensive customs reform initiative proposed in May 2023.
Industry Response and Implications
Shein claims its affordable prices are due to a technology-driven, on-demand business model and a flexible supply chain. Temu, owned by Chinese online retailer Pinduoduo Holdings, similarly denies relying on the duty-free policy for its growth, citing supply-chain efficiencies and operational proficiency as the main factors behind its rapid expansion.
The industry association Ecommerce Europe, which includes members like Amazon and eBay, has warned that scrapping the duty-free limit could increase trade frictions and provoke retaliatory measures from major trading partners like the U.S.
The European Parliament preliminarily approved the customs reform bill in March, but it will be further assessed after the European elections in early June with a new parliament in place.
Market Impact and Analysis
The European Commission reported that two billion parcels valued under €150 arrived in the EU from non-EU countries in 2023. This volume has strained customs operations, and the Commission has noted that the import tax exemption encourages sellers to split shipments, with up to 65% of parcels being undervalued to exploit the tax break.
For investors, the potential elimination of the tax exemption presents both risks and opportunities. Shein and Temu may face increased operational costs, which could impact their pricing strategies and market shares. Conversely, local EU retailers might benefit from a level playing field, potentially boosting their competitiveness. Investors should monitor the progress of these regulatory changes and adjust their strategies accordingly.
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