U.S. imports of goods transshipped through Vietnam would be subject to an additional 40 percent tariff under a trade deal the two countries ostensibly reached recently. This provision – reportedly echoed in agreements with other Asian countries and thus widely seen as an attempt to prevent Chinese goods from circumventing higher tariffs when destined for the U.S. – has sparked discussion within the trade community about what “transshipped” might mean in this context.
Transshipment, at its most basic, refers to the movement of goods between different conveyances, such as airplanes, trains, or trucks, during transit to their final destination. In the context of trade facilitation and enforcement, however, this term takes on a more specific and often contentious meaning, distinguishing between legitimate logistical practices and illicit attempts to circumvent trade regulations.
Illegal Transshipment: Tariff Evasion and Misrepresentation
Illegal transshipment involves deceptive practices aimed at avoiding tariffs or other trade restrictions by misrepresenting a good's true country of origin. It can involve (1) physically diverting goods through a third country, performing minimal or no operations there, and claiming it as the country of origin despite no substantial transformation occurring there, or (2) claiming an incorrect country of origin without physically routing the goods through that country.
These practices became more prevalent during the first Trump administration as manufacturers sought to bypass higher U.S. tariffs on Chinese-origin products by rerouting goods through countries like Vietnam and Mexico. However, such actions can lead to fines, penalties, and even jail time for importers.
Legal Transshipment: Documented and Compliant Movement
In contrast, legal transshipment adheres to established guidelines for transferring cargo, ensuring that all goods are properly documented and accounted for and comply with the laws of the destination country. This often involves goods remaining under customs control in an intermediate country, not entering that country’s commerce, and undergoing only necessary operations like loading, unloading, or activities to preserve the goods’ condition.
Many free trade and preferential trade agreements allow a duty exception for such in-transit goods shipped directly through third countries. Evidence such as bills of lading showing the U.S. as the final destination supports these claims. If goods are legally transshipped, the duty applicable to imports from the appropriate country of origin is applied.
Implications of the U.S.-Vietnam Agreement
The U.S.-Vietnam agreement reportedly provides for a significant 40 percent tariff on transshipped goods, and other Asian countries have apparently agreed to similar provisions. While we don’t yet know what will be considered “transshipped,” initial indications suggest a broader interpretation than goods simply rerouted through Vietnam for relabeling.
For example, there is some speculation that a value test could be applied whereby goods could be deemed transshipped if 50 percent or more of their value is attributable to a third country (e.g., China). This could subject products manufactured in Vietnam but heavily reliant on Chinese components to a tariff of 40 percent rather than the 20 percent imposed on Vietnamese-origin goods, significantly impacting multinational corporations and U.S. companies with Vietnam-based factories that use Chinese inputs.
If this provision is retained, U.S. importers can likely expect enhanced enforcement of origin rules in both the U.S. and intermediary countries like Vietnam, Korea, Taiwan, and Thailand, all of which have made pledges in that direction so far. This could include closer scrutiny of trade documentation, increased inspections of manufacturing facilities, and stricter monitoring of supply chains linked to high-risk jurisdictions like China. Preparing now by understanding applicable rules and collecting documentation to prove compliance can save headaches later.
The ambiguity surrounding the definition of “transshipment” under this agreement underscores the need for continued vigilance and adaptation in navigating an evolving global trade landscape where the lines between legitimate and illegitimate trade practices are being redrawn, potentially leading to significant economic disruption for intermediary countries and complex challenges for global supply chains.
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