Illustration: Aïda Amer/Axios
The corrosive effect of a duty loophole on American retailers was thrust back into the spotlight Monday with the announced liquidation of a major fashion chain.
The big picture: Packages valued at less than $800 have a exemption from added duties, which has enabled foreign online retailers like Temu and Shein to sell super cheap goods to American consumers.
Driving the news: Forever 21 today announced that all of its U.S. stores are poised to go out of business after their owner filed for Chapter 11 bankruptcy protection.
- The retailer — which has about 354 stores and more than 9,200 employees — was a pioneer in fast fashion, becoming a once-ubiquitous presence in American malls and a destination for teenage shoppers.
- Forever 21 — which filed for bankruptcy once before in 2019 — said it would continue to seek a buyer of its business or some of its assets in a deal that could keep its stores open at the last minute.
Zoom in: Forever 21 blamed inflation and the surge of Chinese retailers Temu and Shein in part for its downfall.
- “The ability for non-U.S. retailers to sell their products at drastically lower prices to U.S. consumers has significantly impacted the Company’s ability to retain its traditional core customer base,” F21 OpCo co-chief restructuring officer Stephen Coulombe said in a court filing.
Between the lines: The impact of the “de minimis” exemption grew substantially in 2016, when Congress raised the value threshold to $800.
- What followed was an “explosion” in the number of shipments entering the U.S. through the channel, “reaching nearly 1.4 billion packages last year, due largely to online shopping,” Reuters reported in February. “More than 90% of all packages coming into the U.S. now enter via de minimis.”
- Over that time, the effects have been described as a “paradigm shift” in retail.
Follow the money: President Trump briefly suspended the duty loophole in the early days of his second term before restoring the exemption.
- The Commerce Department said the suspension is on hold until it confirms that “adequate systems are in place to fully and expediently process and collect tariff revenue.”
- A White House official tells Axios the administration “is committed to levelling the playing field for American companies and workers” and plans to end the exemption “in short order.”
Reality check: “Both Shein and Temu have taken share from Forever 21. The tariff loophole has helped them to do that. However, it is not the only cause of Forever 21’s demise,” GlobalData retail analyst Neil Saunders tells Axios in an email.
- “The company has suffered from poor merchandising and a lack of brand clarity. Some of the failure must be placed at its own doorstep.”
The bottom line: The $800 loophole has reoriented the American shopping landscape.
