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Shipments from Third Countries Seeing More Scrutiny Amid Efforts to Avoid China Tariffs

Tuesday, July 02, 2019
Sandler, Travis & Rosenberg Trade Report

Shifting manufacturing operations to change a product’s country of origin is a longstanding and legitimate way to mitigate tariffs on goods imported into the U.S. While many U.S. companies are properly using this method to reduce their exposure to the 25 percent additional tariff the U.S. has imposed on hundreds of billions of dollars’ worth of goods from China, others are taking shortcuts by simply transshipping goods from China and labeling them as products of a third country. Importers should pay closer attention to their supply chains to avoid such illegal activity.

According to press reports, Vietnam has been a particular target of scrutiny by U.S. officials on the hunt for Chinese goods seeking to avoid the Section 301 tariffs. Trade data show that U.S. imports from Vietnam have surged as those from China have declined in the wake of the tariffs. Some of that increase is legitimate, an article in The Loadstar notes, as “there is a significant number of Chinese businesses setting up factories in Vietnam to legally produce and assemble goods” and foreign direct investment from China into Vietnam has hit “record levels.” This trend was already underway due to increasing labor and other costs in China but appears to have accelerated in light of the U.S. tariffs.

However, observers say at least some of the increase is also due to transshipment, or goods made in China being re-routed through Vietnam where they are labeled as products of that country and then sent on to the U.S. to avoid the tariffs on China. A Bloomberg article said Vietnamese officials recently found “dozens of fake product-origin certificates and illegal transfers by companies trying to sidestep U.S. tariffs on everything from agriculture to textiles and steel” from China. In response, officials have reportedly pledged to strengthen factory inspections, tighten the supply of certificates of origin, and increase penalties on trade-related fraud.

Other countries in Southeast Asia could get caught up in this scheme as well. A Reuters article states that the U.S. has fined several companies for transshipping goods through a Chinese-owned special economic zone in Cambodia, and other sources say U.S. Customs and Border Protection has vowed to impose civil or criminal penalties or take other enforcement actions if the problem turns up elsewhere. The Wall Street Journal cited a CBP spokeswoman as stating that transshipment has been “flagged in Malaysia and the Philippines in recent months.”

President Trump, who has demonstrated a proclivity for imposing tariffs to address any number of issues, could be considering such measures in response to the transshipment issue. According to press sources, Trump said in a recent TV interview that “a lot of companies are moving to Vietnam,” which “takes advantage of us even worse than China” and is “almost the single worst abuser of everybody,” an apparent reference to trade practices. Trump added that the two countries are “in discussions” but gave no further details.

These developments highlight that while shifting production remains a legitimate means of reducing tariff liability, those utilizing it should take steps to ensure that their supply chain partners are following applicable rules and that those efforts are sufficiently documented. It is also important to have a plan in place in case transshipment or other violations are discovered.

Sandler, Travis & Rosenberg has decades of experience assisting companies in these types of situations. For more information, please contact Sally Peng in Hong Kong, Kristin Smith in Washington, D.C., or Lenny Feldman in Miami.

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