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Welcome to Crossroads. The days of cheap prices for Chinese e-commerce companies is likely coming to an end. Now, the White House is moving to close a trade loophole. It's being used by Chinese online marketplaces like Xi'an and Temu, which will eliminate the ability of these companies to sell at their significantly reduced prices. Now, first, let's look into what Chinese companies like Temu and Xi'an are doing. They avoid paying duties and tariffs normally levied on Chinese imports by selling and shipping to the United States these low value products by using the de minimis exemption. Normally, that's applied to items that were worth $800 or less. And it wasn't just duties or taxes and so on. The de minimis loophole also allowed these packages to come in with less scrutiny than usual. And this became a major problem as according to the White House, quote, the majority of shipments entering the United States claiming the de minimis exemption originate from several China founded e-commerce platforms. And it notes these numbers exploded over the last 10 years. The number of shipments entering the United States claiming these de minimis exemption has increased significantly from approximately 140 million a year to over 1 billion a year. Now, the White House is planning to close that loophole. In an announcement on Friday, the White House is proposing a new rule that will deny the de minimis exemption to packages coming in from China that would otherwise be subject to tariffs. One example is Chinese clothing. Approximately 70% of textile and apparel imports from China are actually subject to tariffs under section 301 of the 1974 Trade Act. However, Chinese e-commerce companies like Shandemo who have been avoiding allegedly these tariffs by claiming de minimis exemptions. Under these new rules, Chinese textiles and apparel goods would no longer be eligible for that exemption. Now, the White House also is looking to implement more reporting measures for these goods, including by requiring, quote, specific additional data for de minimis shipments, including the 10-digit tariff classification number and the person claiming the de minimis exemption. Not so easy anymore. Now, this de minimis law goes back to 1930. It was mainly to make it so that people could buy duty-free products when they traveled abroad. But the Chinese Communist Party and Chinese companies, they've been exploiting that law to a massive degree. Because what does it do? Well, it lets them ship directly from Chinese factories, directly to individual buyers. And so it's no longer what it was intended for. It's no longer about people traveling and buying some goods and not having to pay taxes on them. It's about companies finding ways to bypass paying normal fees by shipping directly to consumers. Basically, they cut out the middlemen. They cut out the factories. They don't do these huge shipments, not in bulk at least. They ship one item at a time and they manage to bypass those normal fees. Now, what's interesting with this is they also say this new proposed rule, this whole thing, would actually help U.S. authorities identify foreign shipments that have chemicals for drugs like fentanyl, which mainly come from China. The issue is that small packages, well, typically they don't get searched as much as the large shipments. And so for U.S. authorities looking for drug shipments and so on, they're not gonna look into every single tiny individual package, you know, billions of them. They're gonna look at the big shipments. And so this loophole lets the Chinese Communist Party let things slip right past inspections. Now, this is expected to particularly impact Chinese e-commerce sites like Xi'an and Taimu. There are different estimates on what that could actually mean for them. Some analysts are saying it could force the companies to raise prices on shipments to the United States by maybe around 20%, maybe more. We don't really know, but it could have a significant impact on them. This is on top of additional pressure, notably on Chinese e-commerce companies, including proposals to block Xi'an's IPO, a lawsuit against Taimu from the Arkansas Attorney General saying the platform works as, quote, dangerous malware. Taimu is not an online marketplace like Amazon or Walmart. It's a data theft business that sells goods as a means to an end. What Taimu is doing is selling goods at a rock bottom price, not to make a profit off of those, but as a way to get into your phone, your device, and to collect your data, not just traditional consumer data, but using malware, spyware, to have complete access to your information. And one step further, their code is written in such a way to evade detection. All of this against the backdrop of who owns the company, who operates the company, which are Chinese communist officials, former Chinese communist officials. There's another class action lawsuit against Taimu in Illinois, accusing the company of violating customer privacy rights. And look, that's in addition to similar controversies against these e-commerce sites in many other countries all around the world. Now, on the Chinese e-commerce companies themselves, there are different claims on how much they currently pay on import duties. According to the House Select Committee on the Chinese Communist Party, in 2022 alone, Gap paid more than $700 million in import duties. H&M paid $205 million, and David's Bridal paid 19.5 million. So what about these Chinese ones? Well, it says Xi'an and Taimu, however, paid no import duties at all, the committee said. According to CNBC, they say this. The Xi'an spokesperson on Friday at the time disputed the committee's assertion and said that it paid millions of dollars in import duties in both 2022 and 2023. But it notes the lawmakers contend that by avoiding the hefty import duties the United States imposes on most Chinese textiles, apparel, and footwear, Xi'an and Taimu were able to offer extremely low prices. And by doing so, out-compete their import-paying competitors. Other companies can't compete with them. Now it notes that Xi'an has contended that its inventory light supply chain, right? They don't have the middlemen. They just go straight from factories to consumers. That this supply chain and overall business model allow it to offer such low prices, and its pricing structure isn't related to the de minimis exemption. Now, the Chinese companies were already actually seeing some pretty heavy losses, especially for PDD Holdings, which owns Taimu. Bloomberg said this in August of 28. It said, PDD Holdings Inc., founder Colin Huang's wealth tumbled by $14.1 billion on Monday, as shares fell the most in company history after it warned revenue growth would inevitably dwindle. The retreat was Huang's biggest one-day loss ever, dropping in from fourth on Bloomberg's ranking after briefly holding the top spot earlier that month. It's a slide continued Tuesday, the day after, when the Taimu's owner's shares dropped a further 4.1%, knocking another $1.4 billion from Huang's riches. Now look, inside China, Chinese businesses are actually facing a real problem with consumption. They have an issue right now where Chinese people are not buying like they used to. And what does that mean? Well, it means that China has to rely on external markets in order to prop up its economy. They have different proposals on how to get people buying in China again, but that's not gonna work if people don't have faith in their future wellbeing, right? If they believe that China's on the decline, they're gonna sit on their money and not spend it. They're gonna hoard it. They're gonna keep it as their rainy day check in case they need to buy food. They're not gonna be going around buying luxury goods. Now, China has two problems. On one side, they have a problem of too many products sitting on their shelves. They have overproduction, right? They have too many products, too many cars, too many things they need to sell, and nobody's buying them. Two, they have a problem of under-consumption. People don't want to buy in China. Then three, actually, the big one is they're having trouble selling abroad because of the trade war. Outside of China, Chinese businesses are facing this growing trade war, not just in the U.S., but also in Europe and everywhere else. We'll be talking more about this, though, after we come back from a quick break. Welcome back. The White House is looking into closing a loophole being used by Chinese e-commerce companies like Xi'an and Taimou. Now, this is the de minimis exemption. It allows Chinese companies heavily to avoid paying tariffs for low-value goods and thus sell at significantly reduced prices. And this was becoming a big problem in the United States, as this whole shipments, these de minimis shipments, they exploded over the last 10 years from approximately 140 million shipments a year to over one billion. The White House has now proposed that measures would limit the de minimis entries for goods specifically from China. And outside China, notably, Chinese businesses, they're facing a growing trade war. For Chinese e-commerce companies, what does this mean? Well, this will very likely hit even harder because at the current low prices of products, even with that, financial companies have predicted the platforms could already be losing around $30 on every single sale. They're basically selling at such cheap prices, despite the fact they avoid paying duties, despite the fact they avoid inspections, despite the fact they cut out all the middlemen, they're still losing money, allegedly, on every single sale. Add to that the weight of foreign tariffs that they're avoiding paying in many instances, and you have a losing business model. And not to mention the fact that other countries, including in Europe, are trying to crack down on the Chinese Communist Party subsidizing products so that they can basically sell below the red line. They can sell at prices nobody can compete with. And if they do that, what happens? Well, they put their competitors out of business. They then have the monopoly. Then they can raise prices, just how they typically operate. That loophole is looking to be closed right now in many different ways, because they're saying that China needs to play on a level playing field. And if they're trying to rig the game against all their competitors to shut down competition, and they're trying to gain a global monopoly, well, that's not good for anybody. Now, look, already the business model is not sustainable with these Chinese e-commerce companies. It's putting huge pressure on manufacturers in China. In fact, they're protesting in front of the headquarters of these companies. So what happens when that very thin profit margin, actually already below the red line, takes another hit? Or even a few more for that matter? Well, that's when they start getting to the area of, well, if they barely are making it right now, at least according to the data we're able to look at, if you hit that a bit more, that pushes them below the threshold where they're probably not gonna succeed. Now, as I briefly mentioned earlier, there's also allegations that some products are being sold on these Chinese platforms being used with Chinese forced labor, slavery. This goes back to a congressional report from June of 2023. This is the Select Committee on the CCP from the House. It says on May 3rd, the Select Committee opened initial investigations into Nike, Adidas, Shein, and Temu. It notes the report's findings describe Shein and Temu's exploitation of U.S. de minimis provisions to evade customs enforcement, where they normally, again, check products and make sure they're not illicit drugs or other illegal things or products being made with slave labor. And it's by doing so, nearly all their products are valued under $800 and can enter the United States uninspected and free from duties that most American clothing brands pay. It notes the report also revealed that Temu has no system, allegedly, to ensure compliance with the Uyghur Forced Labor Prevention Act, the UFLPA. It notes that all but guaranteeing that shipments made by Uyghur forced labor are entering American homes, again, because of this de minimis exemption. And of course, that has to do with the Muslim minority group in Xinjiang of China, mostly, who are persecuted by the Chinese Communist Party. A lot of the garment industry is made with forced labor in China, slavery. And again, the United States has tried cracking down on that to put a stop to it. The problem is when you have this whole de minimis exemption, it means you can't properly investigate and find whether they're shipping things that come from those locations. It notes in the report, Chairman Gallagher and Ranking Member Krishnamurti identified four specific findings. Key finding one, it says, Temu and Xi'an alone are likely responsible for more than 30% of all packages shipped to the United States daily under the de minimis provision, and likely nearly half of all de minimis shipments to the United States from China. It says key finding two, Temu's business model, which relies on the de minimis provision, is to avoid bearing responsibility for compliance with the UFLPA, again, that Anti-Forced Labor Act for Uyghurs, and other prohibitions on forced labor, while relying on tens of thousands of Chinese suppliers to ship goods directly to U.S. consumers. And that's important as well because for these companies, a lot of it is clothing. And now it's key finding three, Temu conducts no audits and reports no compliance system to affirmatively examine and ensure compliance with the UFLPA, making sure there's no slave labor. The only measure, it says, Temu reported that it takes to ensure that it is not shipping goods to Americans that are produced with forced labor in violation of U.S. law, was that its suppliers agree to boilerplate terms and conditions that prohibit the use of forced labor. Check the box here that you did not use slaves to produce this product, essentially. And note that key finding four, Temu admitted that it does not expressly prohibit third-party sellers from selling products based on their origin in the Xinjiang Autonomous Region. Again, one of the main areas where you have this Muslim minority group, which the CCP brutally persecutes. Now, these latest actions against Chinese e-commerce sites, it's all happening as the United States House of Representatives, they're wrapping up what they've been dubbing China Week. And also as the U.S. government pushes for more tariffs on Chinese goods overall. All of this is in turn taking its toll on the Chinese Communist Party. And it's now becoming apparent that even the regime's actions to save its economy within China, they're not working. Forbes said this, when Chinese stocks lose an amount roughly equivalent to Japan's entire market, it might be time for President Xi Jinping to do something about it. And preferably something new. It notes a $6.5 trillion has been raised from mainland borrowers since the 2021 peak is an epically large price to pay for Beijing's policies these last few years. From COVID-19 lockdowns to tech company crackdowns to glacial efforts to stabilize a crashing property market, Xi Jinping's Communist Party hasn't done Asia's biggest economy any favors. It notes further in, if successful, a pivot from state enterprise dominance to a model that prioritizes private sector innovation will be one of history's most lucrative narratives for investors. They're trying to convince the Chinese Communist Party that to save itself, it has to adopt these free market principles. And you actually see this narrative across a lot of different news websites. Yet it says it remains too big an if for comfort if in the Xi era. They're not sure if Xi Jinping will do that. And I think that last part is important. A lot of analysis that's coming out in the West from different financial websites and analysts and so on, a lot of it is on recommendations for China's economy and has to do basically with the dream that the Chinese Communist Party will adopt more free market principles. They're suggesting, hey, if China just plays fair, if they just adopt free market principles, take their boot off the back of the businessman's head a little bit, let them get some air, that maybe the Chinese economy will recover. The problem with that analysis, because you see a lot of recommendations from different businesses all around the world for China and how to fix its problems, the reality for the CCP is the opposite. The Chinese Communist Party is doing the opposite of what they're recommending. The CCP is expanding state control over businesses. The regime is becoming more authoritarian, not less. It is increasing its role and its hand and its, again, policies to micromanage businesses. It's not taking its foot off it. It's making it even stronger on its back. And even Chinese netizens, notably they're talking about this. A key point with their whole garbage time meme that was going around in China, garbage time being the part in like a sports game where your team is losing and you just have to watch them lose because you know they can't come back. They call that garbage time. They're suggesting the Chinese economy is in garbage time. And again, this is coming from within China. They're saying, hey, we just have to watch it die. Many netizens in China believe they have to watch the Chinese economy collapse and there's nothing they can do about it. And a key point of their concern is over state interventionism. They believe the cause of this is the Chinese Communist Party's economic approach, that it's flawed at its very foundation. And that rather than back down on state interventionism, again, where the Chinese Communist Party intervenes in the markets and puts its finger on the scale so that one area succeeds and everybody focuses on that area and then all the other ones can't compete once they go out of business, that that problem is deepening the problems they're facing. And because of this, through state interventionism, the Chinese Communist Party's making the problem even worse. And that seems to be where all the hopes and dreams of investors, wondering if things could change, really come to an end. At the foundation of their analysis, many are saying the Chinese economy could be saved if the Chinese Communist Party basically stopped being communist. But the Chinese Communist Party's not gonna do that. For the CCP, the survival of the party is its first priority. And when the regime is facing a crisis, it will destroy everything in order to save the party. It seems the track the Communist Party's on right now is to do just that. Well, everyone, that's all for today. Thank you for joining us. Let me know what you think in the comments. Also, please help us get the word out, help share this episode. As always, please take care of yourselves, stay informed, and stay free. Thank you.