Transshipments and the Ongoing U.S.-China Trade War

Giancarlo Cueto – 2019 has seen the renewed weaponization of trade tariffs, making it prohibitively difficult for foreign manufacturers, particularly those from China, to undercut U.S. markets. Not only have these tariffs focused on U.S. consumers, but they serve as a bargaining chip to further our international policy ambitions when dealing with leaders abroad. As trade talks continue to progress with China, where there is mutually expressed hope that an agreement could be reached in the next few weeks, one must consider how much impact these tariffs have actually had. While the U.S. has publicly claimed that it generated billions of dollars from the tariffs, there have been reports that Chinese corporations were not as debilitated as one might think.

Transshiping is the practice of moving cargo from one state to another by using a third state as an intermediary in an effort to evade trade restrictions. The most common of these trade restrictions are tariffs, quotas, and duties. Transshipments are not necessarily illegal and have been used for decades as a way to reduce costs and streamline shipments of goods. However, in 2018 accusations were made that Chinese steel manufacturers were circumventing tariffs by routing their products through other Asian countries, such as Vietnam. China is no stranger to such allegations. In the 1990’s, the U.S. had annual quotas placed on Chinese textiles, and after careful review it was uncovered that they were using Hong Kong as a pit stop to avoid quotas.

Part of the problem lies in the loopholes that current federal rules of origin provide. As the rules state, items shipped into the U.S. are required to identify their countries of origin. We see these “Made in . . .” stickers or stamps on a daily basis, but these do not necessarily reflect the true origin of the product. If a product is “substantially transformed” in an intermediate country then that country is given permission to say the product was made there.

A recent U.S. Agency ruling illustrates how rules of origin work. In September 2018, U.S. Customs and Border Protection (CBP) issued a significant ruling in Energizer Battery v. United States, further defining country-of-origin rules. CBP determined that Chinese engine components imported into Mexico for further assembly into an electric motor were not “substantially transformed” into an electric motor in Mexico per the country-of-origin rules. As a result, the assembled electric motor remained a product of China, and was thereby subject to the U.S. government’s retaliatory tariffs on imports of Chinese electric motors. CBP’s determination was based on a 2016 U.S. Court of International Trade’s decision finding “substantial transformation” only when a product emerges with a new name, character, and use. Importers have thus been put on notice that simply assembling the finished good is not sufficient to change the country of origin for any given product.

Making the problem more complex, U.S. border agents are now facing transshipment and country-of-origin issues stemming from organic products such as honey. A special agent with Homeland Security Investigations has said that “food fraud is a growing epidemic across all types of products.” In December 2001, the U.S. imposed anti-dumping duties on Chinese honey because it was being sold significantly under fair-market value. In 2016, special agents seized nearly 60 tons of illegally imported Chinese honey that had been falsely declared as originating in Vietnam. Using laboratory testing, agents were able to determine that the honey had a greater than 99% match with honey from China. Federal authorities have arrested a number of individuals that have assisted transshipment and mislabeling efforts.

Overall, while efforts have been made to counteract these illegal practices globally, U.S. Customs agents have an increasingly difficult job. New technologies like blockchain have been offered as a solution to more accurately track shipments from their points of origin to destinations. It will be interesting to see how a potential U.S.-China trade agreement impacts the practice of transshipping.

Leave a Reply

Your email address will not be published. Required fields are marked *