How a tariff rule aimed at China could affect U.S. ad spending

The exemption allows shipments valued at $800 or less to enter the U.S. without duty and with little scrutiny. But under a new rule the administration said it plans to propose, parcels containing merchandise that would be subject to tariffs under trade law will no longer be eligible for de minimis treatment. About 70% of Chinese textile and apparel shipments are subject to those tariffs and will now have to go through more formal channels to enter the U.S., administration officials said.

The financial pressure that would place on the likes of Temu, Shein, Alibaba and other Chinese or China-founded e-commerce companies could throw the growth trajectory of the U.S. ad industry off course, one analyst said. At present, U.S. ad spending is on track for one of its best performances in 20 years, with full-year noncyclical sales expected to increase by 8.9% in 2024, media investment firm Magna said Monday.

The relatively new entry of China-founded e-commerce players in recent years has contributed to the strength of the U.S. ad market, benefiting Meta Platforms and Alphabet’s Google in particular.

Meta’s top advertiser in revenue for 2023 was Temu, whose parent company PDD Holdings spent nearly $2 billion on ads across its platforms that year, The Wall Street Journal reported. Temu also became one of Google’s top five advertisers by spending last year, the Journal reported. In February, Temu bought pricey commercial time during the Super Bowl for the second year in a row.

Any disruption to the U.S. business of Temu and others will have an outsize impact on the ad industry at large, said Brian Wieser, an industry analyst and chief executive of consulting firm Madison and Wall.

The de minimis exemption helps keep overseas e-commerce retailers’ prices low and competitive. Take it away and certain products may no longer be competitive, and thus less likely to be promoted with advertising spending, Wieser said.

The entry of new high spenders into the ad market has also forced incumbent advertisers to increase their spending to remain competitive, Wieser said. If Temu and others decrease their ad spending, that could make their rivals feel more comfortable easing up on the gas, he said.

Amazon.com’s multi-billion-dollar advertising business also benefits from the e-commerce importers that would be hit by bigger tariffs, he added.

“We don’t really know how badly this will hurt," Wieser said. “But it will hurt."

Temu and Shein didn’t immediately respond to questions about their future ad spending. Temu told the Journal last week that its growth doesn’t depend on the de minimis policy and that it is reviewing the new rule proposals, while Shein said it looks forward to working with stakeholders on de minimis reform.

Temu was the fifth-largest digital advertiser in the U.S. in the second quarter of 2024, up from 11th during the same period in 2023 and 67th in 2022, according to market intelligence firm Sensor Tower. Shein was the 13th biggest digital ad spender in the second quarter of this year.

Temu recently transitioned to a new program to recruit sellers with inventory outside of China, which might help the company swerve around some regulatory speedbumps. PDD’s stock price dipped on Friday following Biden’s announcement but has since rebounded. Meta’s stock price held steady.

Other industry observers weren’t convinced that restricting the de minimis exemption will hurt U.S. advertising.

The U.S. is too important to Temu and Shein for them to back off their battle for market share, according to Ivy Yang, founder of consulting firm Wavelet Strategy and writer of a newsletter that analyzes Chinese global companies.

“The sheer size of the consumer base and the potential for growth make it a critical market that can’t be ignored," she said.

Temu had already diversified its focus and ad spending beyond the U.S. into Europe, spooked in part by the U.S. government’s pending ban on the China-based TikTok, the Journal reported in May.

Global platforms like Google and Meta will remain the biggest beneficiaries of Temu’s digital marketing spending, regardless of the country in which it advertises, Yang said.

Temu and other e-commerce companies might spend big on ads to spread their names around, but they also chase customers through deals, promotions, and consistently super-low prices that likely already require them to absorb some costs, said Seema Shah, vice president of research and insights at Sensor Tower. It is unlikely the de minimis change will rock their overarching strategy, she said.

“If these guys want to eat this extra cost just to be slightly cheaper, they have the capability to do that, based on what we’ve seen so far," Shah said.

Write to Katie Deighton at katie.deighton@wsj.com