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The My Wife Quit Her Job Podcast With Steve Chou
566: New US Crackdown Just Killed Dropshipping – What Sellers Must Know
00:13:03
In this episode, I’m going to break down why the aliexpress dropshipping business model is essentially dead. I’ll break down what happened, why it happened and what it means for you. What You'll Learn The new deminimus legislation
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Welcome back to the podcast, the show where I cover all of the latest strategies and current events related to e commerce and online business. Today I'm going to talk about how recent legislation is effectively going to kill dropshipping from China in the next 18 months. So if you're thinking about starting a dropshipping business, you might want to reconsider. But before we begin, I wanted to let you know that tickets are now on sale for sellers summit 2025 over@sellersummit.com the seller summit is the conference that I hold every year that specifically targets e commerce entrepreneurs selling physical products online. Unlike other events that focus on inspirational stories and high level advice, mine is a curriculum based conference where you will leave with practical and actionable strategies specifically for an e commerce business. Every speaker I invite is deep in the trenches of their e commerce business, entrepreneurs who are importing large quantities of physical goods and not some high level guys who are overseeing their companies at 50,000ft. I personally hate large events, so the Seller Summit is always small and intimate. Every year we cut off ticket sales at around 200 people, so tickets sell out fast and we've sold out every single year for the past eight years. If you are an e commerce entrepreneur making more than $250,000 or $1 million per year, we also offer an exclusive mastermind experience with other top sellers. The Seller Summit is going to be held in Fort Lauderdale, Florida from May 6th to May 8th. Go grab your ticket over at sellers summit.com now onto the show. Welcome back to the podcast. In this episode, I'm going to break down why the China Drop shipping model is essentially dead. I'll break down what happened, why it happened, and what it means for you.
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Now. First off, those of you who have followed me for a long time know that I don't like the AliExpress dropshipping business model. Not only do AliExpress products have poor quality control, but as a seller, you're proliferating the sales of cheap throwaway junk. But for those of you who are new to dropshipping from China, here's how it works. As a seller, you list products that you find on AliExpress on your own online store without holding any inventory. Then, when a customer places an order, you then purchase the item from the AliExpress supplier who ships it directly to your customer. This approach removes the need for any upfront inventory investment and reduces the risks involved in managing stock. So basically, you can get started with AliExpress dropshipping for practically no money because the prices in China are significantly cheaper than in the US you're basically charging a big markup to US Customers for doing little or no work. For example, this snoring mouthguard sells for $39.99 on Amazon, but on AliExpress it can be purchased for only $1.72. That is literally a 23x markup. Now, shipping direct from China to the US is also super cheap because of EPACKET shipping, which was created to facilitate the growth of e commerce between China and the United states. Because of ePacket, which started in 2011, shipping rates from China to the US are are significantly cheaper than shipping domestically in the US especially for lightweight packages. For example, shipping a 1 pound parcel from China to the US costs around a buck to a buck 50, while shipping within the US can cost several times more depending on the destination and the carrier. In addition, AliExpress dropshippers don't have to pay import duties and tariffs either because of the de Minimis rule. The de Minimis rule allows any packages coming into the US that are worth $800 or less to not have to pay any customs, taxes or fees. And this rule is in place to make it easier and cheaper for people to buy small items from other countries like toys or gadgets without getting hit with extra costs when they arrive. And these advantages are the reason why so many dropshipping companies have popped up over the years. Companies like CJ Dropshipping, De Essers, Alidropship and Autods offer integrations to popular shopping carts like like Shopify, BigCommerce and WooCommerce to automatically handle the back end logistics. So basically all you have to do is install one of these plugins, pick what you want to sell, set your price, click a button and your product is listed on your shop. Then when an order is placed by a customer, the software automatically handles the supplier fulfillment from China. It all sounds super easy and I hope I didn't get you too excited because the government just destroyed this business model. And here's the full story. By the way, if you're interested in learning how to start a profitable online store the right way without dropshipping from China, make sure you sign up for my free 6 day ecommerce mini course below that will walk you through the entire process. And it's 100% free. So several weeks ago the Biden administration introduced new changes to the de minimis rules to reduce the abuse by Chinese e commerce platforms like Temu and Shein. Now, I don't want to get too into the weeds about Temu and Shein. But Temu and Shein are companies based in China. That's that ship products to the US direct from Chinese factories at rock bottom prices. Essentially, you can think of Temu like the biggest Chinese dropshipper on the planet. They round up Chinese suppliers and have them list their products online at rock bottom prices even lower than AliExpress. Then when an order comes in, the Chinese supplier ships the product directly from China to the end customer in the us the products and shipping are super cheap and they don't have to pay any import taxes. Now, over the years, Temu has experienced huge growth since its launch in 2022, rapidly expanding to 79 countries by this year and becoming one of the most visited online shopping platforms in the world. In just two short years, they've managed to attract a third of Amazon's traffic, and their low prices have been crushing the competition. For example, Amazon's apparel sales have fallen 30% year over year as Temu and Shein continue to steal market share. Anyway, the US government has taken notice of this unfair competition and finally decided to step in with new legislation to shut them down. There are three major changes which I'll summarize for you so you don't have to read the official press release. Now, the first change basically states that all China dropshipping sellers have to pay both customs duties and tariffs under sections 301, 232 or 201 of the US Trade Law, regardless of the value of the package. Now, in the good old days, AliExpress dropshippers didn't have to pay any taxes by keeping the value of individual shipments under $800. But not only do sellers have to pay customs duties now, but they also have to pay tariffs for every shipment, no matter how small. And right now, these tariffs cover about 40% of all imports from China. Section 301 targets goods like electronics, textiles and machinery. Section 232 affects imports of steel, aluminum and other materials. And section 201 tariffs cover products like solar pan and washing machines. So basically, if you dropship products under any of the above categories, your costs are going to go up big time. Most dropship consumer goods fall under section 301, so chances are you're going to get hit. Now, you might be thinking to yourself, paying the extra tariffs and duties isn't that big of a deal after all. With the snoring mouthguard example I gave earlier, even if your costs double, you're still making a killer profit of 12x. But it's the second and third part of the new de minimis changes that completely destroy the dropshipping business model. The second part of the de minimis rule change is that you as a seller must now collect information from your buyer to give to the government. So first off, you have to provide the 10 digit tariff classification number for the products that you sell, which allows the US Customs and Border Protection to flag problematic items or items that should be subject to duties. No big deal, right? But here's the kicker. As a dropshipper, you also now have to reveal the buyer who is claiming the de minimis exemption. Typically, when you import something into the US as a business, you have to provide your employer identification number. The EIN is used for customs documentation, such as the importer security filing and customs entry forms. However, if you're importing goods for personal use, like one of your dropshipping customers, you have to give them your buyer's Social Security number. Now, how many customers do you think will be willing to provide you with their Social Security number to make a cheap purchase for a product shipped from China? I don't know about you, but I don't give my Social Security number out to anyone, let alone some random dropshipping store on the Internet. There's just so much identity theft going on right now in the US it is nuts. Plus, it's going to be pretty obvious from anyone shopping in your store that you're getting your stuff from China. People are already paranoid about Chinese companies collecting your information. There's no way you're going to get their Social Security number now. As if requiring your buyer's Social Security number wasn't bad enough, the third and final change to the de minimis rules make things even worse for dropshippers. The new law stipulates that whenever you sell something from China to a US customer, you must now prove that it adheres to US Safety regulations. All importers of consumer goods will be required to file certificates of compliance electronically at the time of entry, even for de minimis shipments. Now, why is the US requiring this? It's because tons of crap sold on AliExpress is outright dangerous. For example, if you do a search on AliExpress for a phone charger, you'll find that none of the products are UL certified. So basically, if it's poorly made, it could cause a fire in your home. Remember those hoverboards from China that were popular several years ago? They basically died off because many people's houses burned down from the batteries exploding. Dropshippers like Temu have been getting away with shipping children's toys with unsafe levels of lead, phthalates and other harmful chemicals. Shein has been accused of selling textiles and clothing that contain hazardous chemicals such as formaldehyde and azodized, which can cause skin irritations or allergic reactions. Shein has also sold cosmetics from China with harmful chemicals like mercury or hydroquinone which can cause serious health risks including skin damage or long term toxicity. Now with this new rule, the importer of record will be required to file these certificates of compliance. And guess who the importer of record is? In the case of dropshipping, it's the buyer. So basically the government is putting the burden of compliance on your customer. And who in their right mind is going to take responsibility as a buyer of cheap junk from China? No one. Now, implementing these changes won't happen overnight as it involves a lot of additional paperwork. It's not as simple as flipping a switch, and if the government started enforcing this immediately, our ports of entry would be backed up for years. But it's just a matter of time before AliExpress dropshipping and dropshipping from China will die. The prices will increase because the de minimis loopholes have been closed and as a dropshipper you now have to pay tariffs and customs duties. Customers aren't going to give you their Social Security number and no buyer will be willing to accept the liability of filing a certificate of compliance. I chatted with several colleagues about this new legislation and most people think that it will take about 18 months for the changes to take place, but it's going to happen now. Does this mean that all dropshipping is dead? No, it's mainly dropshipping from China or international dropshipping that will be affected. If you dropship domestically within the US everything should remain the same. And if you do AliExpress dropshipping, where the product is being shipped from a local warehouse within the U.S. you should also be fine. But let me ask you this. If you're starting an online business, why put so much effort into selling cheap junk from China? The poor quality will lead to constant customer service headaches and you're not adding any real value into the world. I've interviewed many e Commerce business owners on my podcast and several of them used to do dropshipping. And the key phrase here is used to Dropshipping is not a good long term business model. Even the CEO of Spockit who came on my podcast last year admitted as much Dropshipping can be a good way to test the waters of ecommerce if you're on a tight budget. But creating your own branded products is always the better long term strategy.
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Hope you enjoyed this episode. I've never been a fan of dropshipping and now the writing is on the wall. Just don't do it. For more information and resources go to mywife quitherjob.com Episode 565 Once again, tickets to the Seller Summit 2025 are now on sale over at sellers summit.com if you want to hang out in person in a small intimate setting, develop real relationships with like minded entrepreneurs and learn a ton, then come to my event. Go to sellersummit.com and if you're interested in starting your own e commerce store, head on over to my wife, quitherjob.com and sign up for my free six day mini course. Just type in your email and I'll send the course right away via email.