Shein Controversy: Forced Labor, Tax Evasion, and Evironmental Damage Claims

In recent years, Shein has become an icon for cheap clothes despite being embroiled in a few high-profile controversies. The Chinese online shopping platform has been accused of exploiting workers, using child labor, contributing to global warming, and avoiding import tariffs. The Shein controversy is an excellent example for business owners to learn about building brand reputation and crisis management.

Our dedicated team of experts at Business2Community has organized the complete story of the Shein controversy. From the causes to public responses to consequences, this article provides everything you need to know how to avoid public outcry against your organization.

The Story of the Shein Controversy

Shein (pronounced She-In) is a Chinese-owned private apparel company based in Singapore with a history of drawing controversies over its manufacturing standards, tax evasion allegations, forced labor accusations, and more.

Founded by Chris Xu in 2008, Shein drops thousands of new on-trend items each day and has dominated the fast fashion industry with its ultra-low prices. It sells women’s clothes, household items, accessories, menswear, pet supplies, electronics, and shoes made in factories across Southeast Asia and China.

As a company with over $2 billion in profits in 2023, navigating the whole Shein controversy can give you a better idea about running a sustainable business and provide insights about dealing with criticisms and backlash.

“Inside the Shein Machine: Untold” Revealed Poor Working Conditions at Shein Factories in China

As consumers become more conscious about ethical brands and practices in recent years, Shein has come under fire for its possible human rights violations and unethical practices. In October 2022, British TV channel Channel 4 released the documentary Inside the Shein Machine: Untold, detailing the poor working conditions in Shein factories in China. It was later picked up in the US by CBS.

In the documentary, undercover journalists were sent to Chinese factories to investigate the human rights abuse allegations the brand faced. It found that garment workers had to work 75 hours a week – around 17 hours per day – to produce hundreds of clothing items at one factory. Workers were only allowed one day off each month to supplement the speedy production of the company.

Production activities would get so busy that some workers had to wash their hair during lunch breaks – all for a salary of a few cents per clothing item – while the company retained the right to significantly cut down an employee’s salary if there were defects on an item they had produced.

In addition, the factories filmed in China didn’t live up to legal standards, suggesting that the company may have violated China’s labor laws. Some manufacturing sites were set up in residential buildings illegally while other sites kept poor hygiene and couldn’t provide safe working conditions for employees.

Shein’s business practices received an enormous amount of backlash, following the release of the documentary. In response to the public uproar, Shein claimed that it conducted an independent investigation into the allegations and found that while two factories had workers working long hours, it denied that the situation was as bad as described. The Guardian quoted the company at the time as saying:

While these are significantly less than claimed in the documentary, they are still higher than local regulations permit.

Most importantly, the ultra-fast fashion retailer denied accusations that it would deduct money from any employee’s daily wage for defective clothing products. It also promised to invest $15 million in an effort to improve factory standards and employee welfare.

In an attempt to rebuild its public image in mid-2023, Shein partnered with social media influencers and fashion bloggers to show their followers about the happy employees and garment workers at its factories. The campaign had the opposite effect, disturbing viewers as influencers gushed unauthentically about the factory conditions.

@pdsbiz

The Internet is calling out several influencers for defending Shein and “dispelling myths” about the controversial company. #Shein Even though the influencers reportedly claim they were not paid to attend the trip or post about what they saw, you have some saying the trip itself is the compensation. Though you also had outlets like Mashable calling out She-in for turning to marginalized influencers for this trip. Right, most of the influencers on this trip were people of color, some were plus-size, with Mashable adding that: “Non-white creators are, historically, offered fewer opportunities than white creators and make less money(opens in a new tab) when they do get opportunities. That makes an offer from a brand like Shein a very exciting prospect, and much harder to turn down.” And DaniDMC, who has kind of become the main character of this controversy, posted a now-deleted video where she said that, as a plus size creator, she does have fewer opportunities, this was the first company to take her on a brand trip. #Business #DaniDMC #FastFashion

♬ original sound – PDS Business

Concerns About Child and Forced Labor in Shein’s Supply Chain

Aside from being criticized for not providing an acceptable work environment, Shein was also entwined in more serious accusations like the possible involvement of forced labor and child labor. Most accusations are related to the Xinjiang region of China, where human rights issues are regularly under the global spotlight. China has long tried to assimilate the largely Muslim Uyghur population in this region through oppression of various forms, allegedly including reeducation camps, forced labor, sterilization, drastically increased surveillance, and more.

In 2022, Bloomberg conducted laboratory tests on some Shein products and found cotton originated from China’s Xinjiang region. The US government considers all products made in the region to be a result of forced labor. Lawmakers urged the government to launch an investigation into the supply chain of the fashion brand to identify any breaches in US laws in May May 2023.

Regarding the forced and child labor questions, the online discount store had repeatedly stated that professional relationships were on a voluntary basis. In August August 2023,  Peter Pernot-Day, a spokesperson from Shein told NPR:

We have zero tolerance for forced labor. We have zero tolerance for child labor.

Exploiting Tax Loopholes

The US House Select Committee on the Chinese Communist Party published an investigative report in June 2023, arguing that the fast fashion giant Shein was dodging US tariffs by exploiting loopholes. However, it’s not really a loophole at all. Section 321 of the Tariff Act of 1930 simply states that small shipments below $800 in value do not have to pay import tariffs.

Chinese fast fashion companies like Temu and Shein almost exclusively ship products below that value, effectively avoiding taxes and the provision of product details to the authorities. Together, the two Chinese ecommerce giants were sending around 600,000 parcels into the US daily as of February 2024.

The report raised concerns from policymakers as the government aren’t able to collect transparent information from these brands without import declarations. Furthermore, the absence of import tariffs meant these companies were able to offer products way below industry average prices, threatening local businesses and creating an unfair advantage over traditional retailers like Zara and H&M.

Designers Filed a Lawsuit Against Shein for Stealing Designs

In July 2023, three artists, Krista Perry, Larissa Martinez, and Jay Baron, filed a Racketeer Influenced and Corrupt Organizations Act (RICO) lawsuit against the Chinese ecommerce company for racketeering. RICO laws are helpful for prosecuting criminal enterprises of various kinds like the Mafia and if Shein is indeed regularly stealing IP for profit, RICO laws will likely be the best avenue to fight the practice. These artists alleged that Shein copied their artwork without any modifications and sold them on its platform without consulting them first.

“Shein has grown rich by committing individual infringements over and over again, as part of a long and continuous pattern of racketeering, which shows no sign of abating,” their representative stated in court filings.

One of the artists said that after she tried to contact the fashion retailer about the infringement issues, the company only offered to pay her $500, which she declined. The brand had not offered her anything else since.

Dominating the Fast Fashion Industry with Negative Environmental Impact

Ultra-fast fashion has always attracted criticism due to its adverse environmental effects on the planet. It encourages consumers to purchase new clothing items regularly, creating waste and huge carbon emissions during the production and transportation process.

Shein was estimated to be pushing out anywhere between 2,000 to 10,000 new clothing items and accessories each day in 2022. The fast-paced production can take a huge toll on the environment. By 2023, the company was creating around 6.3 million tons of carbon dioxide annually, way below the UN’s target to reduce global carbon emissions by 2030.

The brand has been attacked by responsible buyers and governments over its failure to commit to sustainable practices and the sheer volume of waste associated with its production. It was accused of fueling global warming with its production patterns.

As a result, Shein promised to invest around $50 million in upgrading its ethical production standards in the next 5 years.

A Series of Disputes With Its Chinese Rival Temu

Temu, another leading Chinese ecommerce platform that was only launched in 2022, has become a main rival to Shein. Both platforms target customers looking for cheap garments and household products.

Shortly after Temu’s launch in the US, the two became entangled in legal battles. In December 2022, Shein sued rival Temu for allegedly spreading misinformation about the company through social media influencers it worked with.

 

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Then, just 6 months later in July 2023, Temu filed a lawsuit in Massachusetts against Shein over its monopolistic business tactics, saying it was pushing suppliers to work exclusively with the brand.

At the time of writing, both lawsuits have since been dropped.

The Consequences of the Shein Controversy

These serious accusations have significantly damaged Shein’s international image, leading to governments taking action to sanction the platform and a decrease in its popularity. Without offering concrete evidence and solid action plans to address controversies effectively, Shein has faced a few obstacles in expanding its operations and its effort to become publicly listed.

Shein Experienced Negative Sales Growth

After overtaking Amacio Ortega-owned Zara as the most Googled fashion name in the world in 2022, Shein experienced a decline in sales growth since Q3 2021 due to the backlash. Between Q3 2022 to Q2 2023, the business experienced negative sales growth.

Overall, the company still generated $2 billion in revenue in 2023. However, the platform may be looking at further decline in sales growth if it fails to regain the public’s trust and build a more positive image.

Shein Let Go of a Bunch of Low-Quality Suppliers

Following the backlash over poor factory conditions and workers’ welfare, shoppers began demanding a change. In 2023, Shein enforced higher standards for its business partners and let go of a lot of suppliers that didn’t meet its requirements to raise the quality of its output and operation standards.

Many of these manufacturers turned to Shein’s biggest competitor, Temu, due to its more relaxed requirements about factory sizes and standards.

Shein Faced Increasing Challenges to Go Public in the US

The many negative reports surrounding the business made it increasingly difficult for the privately held company to go public. In November 2023, reports began circulating that Shein had filed a confidential initial public offering (IPO) application to the Securities Exchange Commission to go public in the US with an estimated valuation of $90 billion.

However, its IPO application was met with criticism as the Sino-US trade war worsened and distrust over Chinese brands deepened. US Senator Marco Rubio asked the Securities Exchange Commission to withhold Shein’s application unless the firm could provide transparent information about its data risks, ties to China, and other information that concerned the US’ safety. He demanded a thorough investigation of the Chinese retailer and believed an IPO would pose tremendous risks to US investors.

As the situation became volatile in the US, Shein decided to consider a London IPO instead in February 2024, where it also faced challenges since the firm could not provide an ultimate human beneficiary, or a human owner, which is a legal requirement in the UK.

As of April 2024, no decision had been made about its IPO date in both the US and the UK.

New Regulations Against Ultra-Fast Fashion Companies

In response to the growing demand to combat global warming and reduce its carbon footprint, France became one of the first countries in the world to pass a bill to penalize ultra-fast fashion companies in March 2024. It believes the approach could hinder the growth of these businesses and bring in a fairer business environment for competitors. The bill bans these retailers from advertising their products and services in the country.

At the same time, US senators have urged the government to change regulations and block tax loopholes utilized by these platforms to ensure the livelihood of local businesses. They emphasized the “out-of-control” problem was damaging American companies and needed to be rectified promptly.

What Can We Learn From the Shein Controversy? 

Over the years, Shein has achieved magnificent sales results globally as an affordable shopping platform for cheap clothes and accessories and even launched a physical pop-up store concept in 2018. However, its opaque operating model and questionable business ethics have caused tremendous problems for the firm in recent years, leading to a drop in sales growth and authorities planning sanctions against it.

From forced labor accusations to tax evasion tactics, Shein has faced a number of controversies. Together with its private approach and not disclosing much public information, the platform is facing challenges to become publicly listed.

To run a sustainable and responsible business, you need to study consumer preferences, ethical standards, and legal compliance in the region you operate. A negative public image can significantly damage your sales and hinder growth. The bigger you grow, the more interested regulators and governments become about how you operate, so staying on the right side of the law and public opinion is paramount.

When facing a controversy like Shein is, the best way to assure your investors and stakeholders that you are a safe company is to be transparent about the situation and offer solid plans to improve the issues.

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