What role does transhipment play in avoiding trade war tariffs?

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Transhipment as a Strategy to Mitigate Trade War Tariffs

Transhipment serves as a method for businesses to circumvent tariffs imposed during trade wars, particularly when the value added in the country of origin, such as China, is relatively low. This practice involves minimal processing, often limited to relabelling, in a third country before goods are re-exported, presenting them as originating from that intermediate nation. Such a strategy is employed to avoid the impact of nominal tariffs, which can translate into significantly higher effective tariffs on the actual value generated in the country of origin.
The Mechanism of Effective Tariffs

The distinction between nominal and effective tariffs is crucial in understanding the rationale behind transhipment. For instance, an estimated 10 per cent of a US$425 jacket produced in China and sold in the United States is attributed to Chinese value-added. A nominal tariff of 25 per cent applied to the total product value would thus result in an effective tariff of 250 per cent on the Chinese contribution. This substantial effective tariff rate incentivises companies to shift production, even if it involves relocating to a third country for transhipment, provided the cost of relocation is less than the effective tariff increase.
Identifying Transhipment Hubs

While transhipment is an illegal activity, it remains a viable, albeit risky, strategy for companies seeking to mitigate tariff impacts. Authorities have identified key geographical locations that serve as transhipment points. Notably, the US Customs and Border Protection has pinpointed Vietnam, Malaysia, and the Philippines as countries frequently used for these operations. Despite its illegality, engaging in transhipment can reduce, though not entirely eliminate, the economic inefficiencies stemming from supply chain disruptions caused by trade disputes.
Enforcement and Consequences of Transhipment

The United States Department of Commerce has actively responded to transhipment activities by implementing additional punitive duties on goods found to have been rerouted through third countries to avoid tariffs. This enforcement action aims to deter the practice and uphold the integrity of trade policies. For goods with a high proportion of value added in China, transhipment might be less frequently pursued as the effective tariff may not be substantial enough to warrant the costs and risks associated with relocation and rerouting.

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What role does transhipment play in avoiding trade war tariffs?

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