Another battle is brewing over a Chinese tech startup that's become a big hit in the USA. This time all eyes are on fast fashion e-commerce outfit SHEIN, which allegedly keeps its prices low by exploiting a loophole to avoid paying taxes.
SHEIN designates its customers as importers of the products sold on its app or site. That means SHEIN does not itself have to pay import tariffs on the clothing it sells to American consumers. Unless an order exceeds $800, SHEIN operates duty-free.
Most of what SHEIN sells is … let's say inexpensive. Eight hundred dollars would get a customer many more cheap and cheerful garments and accessories than they could reasonably wear before styles change. Thus, triggering the reporting requirement is not a common problem.
Chinese media this week reported a rumor that the clothing brand is at risk of being shut down over the tax evasion at the urging of a campaign called Shut Down SHEIN.
That campaign was launched late last week.
"SHEIN's questionable and anticompetitive business practices allow it to sell [at prices] below market products," said Shut Down SHEIN.
For its part, the clothing shop has reportedly denied the rumors it will shut down, or that it has operated illegally.
Going postal
Chinese e-commerce companies have long benefitted from mailing items to the US cheaply thanks to agreements made with the Universal Postal Union (UPU) – the governing body of international mail services. Through UPU, China, despite being the world's second wealthiest nation, paid low rates to mail packages to the US. A few years ago, a Chinese retailer could ship a small packet to the US more cheaply than the same package could be shipped domestically within the US. Such discrepancies madee Chinese sellers even more appealing than domestic ones.
Former president Donald Trump tried to change this in his usual confrontational style: he threatened to quit the UPU and thereby disrupt the global mail system entirely. Thankfully, calmer and more conventionally coiffed heads prevailed, and change began in a phased manner beginning in the second half of 2020.
SHEIN will likely take advantage of the cheaper postage as long as it can.
SHEIN is the US's top fast fashion app, and is growing around the world. The app is predicted to grow gross merchandise value to $80.6 billion in 2025 – up 174 percent from 2022. It even reportedly has its eyes on a US IPO later this year.
According to Statista, the fast fashion app earned over 195 million downloads in 2022.
It added: "The online-only fast-fashion company has a unique business model which makes use of algorithms and big data to predict fashion trends. Its algorithm-driven supply chain enables it to reduce the production time to one week." Thousands of new products appear on the SHEIN app each week, usually at prices rivals can't match.
A report from Rest of World, meanwhile, estimates that over 6,000 clothing Chinese factories bring 2,000 to 10,000 styles to the app each day.
- Store credit card numbers in a debug log, lose millions of accounts. Cost? $1.9m
- US cyber spymaster calls TikTok China's 'Trojan horse'
- Vessels claiming to be Chinese warships are messing with passenger planes
- TikTok cannot be considered a private company, says Australian report
But the tax practices and anticompetitive pricing aren't the only aspects of SHEIN that have brought it scrutiny.
Microsoft discovered earlier this month that SHEIN's app periodically reads the contents of Android clipboards and, if a particular pattern is present, sends the contents to a remote server. Microsoft said it does not know if the behavior is malicious – but it is not necessary for users to shop on the app.
"SHEIN was adding some curious (and dubious, if not actually malicious) code to its Android app that turned it into a basic sort of 'marketing spyware tool'," summarized cyber security firm Sophos on its Naked Security blog.
Aside from potential spying, parent company Zoetop was caught and fined $1.9 million last year for data breaches it tried to cover up.
"An investigation by the Office of the Attorney General revealed that the company failed to properly safeguard consumers' information prior to the data breach, failed to take adequate steps to protect many of the impacted accounts after the breach, and downplayed the extent of the cyber attack to consumers," said the New York Attorney General's office.
Much ink has been spilled about the environmental cost of fast fashion, which sees cut-price clothing acquired by consumers who may wear it on only a handful of occasions. One report [PDF] on the sustainability of fashion condemned SHEIN's use of virgin polyester and oil and high CO2 emissions. It described sustainability promises from the company as "vague."
Furthermore, "15 percent of SHEIN's products contain concentrations of hazardous chemicals that breach EU regulatory limits, further exposing the environmental and human health risks of SHEIN's fast-fashion model," read the report.
Shut Down SHEIN also alleged that the clothes are made under "horrific working conditions" and linked to "cotton picked by slaves in Xinjiang" – a violation of Federal Law and the Uyghur Forced Labor Prevention Act (UFLPA).
According to Reuters, "SHEIN's 'social responsibility' page states that it 'never, ever' engages in child or forced labor, but does not provide the full supply chain disclosures required by British law."
Use of slave labor is one of the reasons the US cites for banning Chinese imports – from silica products to semiconductors.
According to Shut Down SHEIN, the practice of making the customer the importer "shifts the legal responsibility to prove the products are not produced using slave labor to the US consumer, mostly young American women."
The Register spoke with one SHEIN consumer who once worked for another fast fashion company. She alleged that many of the concerns – like environment and slave labor – are rife in the industry, and the Chinese company is hardly an outlier. And when it came to data privacy, she already felt exposed through other apps she relied on – like Facebook and Google products.
"I'm sure SHEIN's spying on me, but who isn't?" she told The Reg.
But while many shrug their shoulders at Big Tech's privacy practices, the US – and increasingly the world – has had a difficult time allowing Chinese companies access to their data.
"This campaign comes on the heels of the US government's renewed scrutiny on SHEIN's close business ally TikTok, with the White House announcing TikTok must sell or face a nationwide ban," said Shut Down SHEIN of its attempt to do as its org’s name suggests.
Drawing parallels between SHEIN and TikTok could make the US more likely to close the loopholes that have made SHEIN so profitable. Such action would likely be bad news for other Chinese e-commerce operators. ®
As an expert in e-commerce, international trade, and technology, my extensive knowledge allows me to provide insights into the complex issues surrounding Chinese tech startup SHEIN, particularly in the context of its alleged tax evasion practices and other controversies.
Firstly, SHEIN's business model involves designating its customers as importers, allowing the company to avoid paying import tariffs on the clothing it sells to American consumers unless an order exceeds $800. This strategy enables SHEIN to operate duty-free, contributing to its ability to keep prices low. The tax evasion allegations have sparked a campaign called Shut Down SHEIN, which claims that SHEIN's practices are questionable and anticompetitive.
SHEIN's success in the US fast fashion market is attributed to its unique business model that leverages algorithms and big data to predict fashion trends. The algorithm-driven supply chain enables SHEIN to rapidly introduce thousands of new products each week at prices that rivals can't match. According to Statista, SHEIN is the top fast fashion app in the US, with a predicted gross merchandise value of $80.6 billion in 2025, representing a significant growth of 174 percent from 2022.
One aspect that has drawn attention is SHEIN's exploitation of the Universal Postal Union (UPU) agreements, which have allowed Chinese e-commerce companies to benefit from low shipping rates to the US. Former President Donald Trump attempted to address this issue by threatening to quit the UPU, but changes began in a phased manner in the second half of 2020.
Beyond tax practices, SHEIN has faced scrutiny for its data privacy issues. Microsoft recently discovered that SHEIN's app reads the contents of Android clipboards and sends them to a remote server, raising concerns about potential spying. Additionally, SHEIN's parent company, Zoetop, was fined $1.9 million for data breaches and inadequate protection of consumer information.
The environmental impact of SHEIN's fast fashion model has also been criticized. A report highlighted the company's use of virgin polyester, oil, and high CO2 emissions, while 15 percent of SHEIN's products were found to contain concentrations of hazardous chemicals that breach EU regulatory limits.
Shut Down SHEIN has accused SHEIN of producing clothes under "horrific working conditions" and using cotton picked by slaves in Xinjiang, potentially violating the Uyghur Forced Labor Prevention Act (UFLPA). Despite SHEIN's denial of engaging in child or forced labor on its "social responsibility" page, concerns about the company's supply chain disclosures persist.
In conclusion, the various controversies surrounding SHEIN, including tax evasion, data privacy issues, environmental concerns, and allegations of labor violations, highlight the multifaceted challenges faced by Chinese e-commerce companies operating on a global scale. The ongoing campaign and increased scrutiny from both the public and government agencies may impact SHEIN's future operations and could potentially lead to broader regulatory changes affecting other Chinese e-commerce operators.
