As President Trump’s worldwide tariffs go into effect, one important element remains fuzzy: How will the government treat goods and materials that pass through more than one country before arriving in the United States?
The latest batch of duties includes a rate for each country. But there is also a provision for goods that are “transshipped” from one country through another for the purpose of receiving a lower tariff. They face an extra charge of 40 percent, in an effort to prevent Chinese goods from being moved — or, in the eyes of administration officials and other critics, laundered — through countries subject to lower tariffs.
Here’s the confusing part. It is already illegal to pass something off as originating in, say, Vietnam when it was made in China. So why would a tariff apply to something that’s not supposed to happen in the first place?
“Importers are scratching their heads,” said Stephen Lamar, the executive director of the American Apparel and Footwear Association. “The new rules that appear to legalize, but tax, currently prohibited transshipment activities fly in the face of common sense enforcement.”
Some supply chain professionals are wondering whether the Trump administration actually means to accomplish something quite different: taxing all materials that originate in China at a higher rate, even if they are part of a product assembled in another country before being exported to the United States. That would have big implications for the configuration of supply chains and, ultimately, costs for consumers.
A spokesman for the White House confirmed that on top of the 40 percent penalty on goods it determines were transshipped, it is “exploring” new rules to apply higher tariffs on components that come from one country, are incorporated into a product in another and then shipped to the United States.
“The administration has zero tolerance for transshipment and other methods of undermining our tariffs, and we are working closely with our trading partners to proactively address these concerns,” said the spokesman, Kush Desai.
In the meantime, trade lawyers and supply chain professionals are flying blind. Many have sought clarification from the Office of the U.S. Trade Representative and received no satisfactory answers, they said.
“The big problem we’re all having is there’s no definition of what’s happening,” said Marc Busch, a professor of international business diplomacy at Georgetown University’s School of Foreign Service. “We don’t know how this can be vetted. We don’t know whether these requirements look like what we have been used to seeing in real, bona fide trade deals.”
The practice of transshipping, as it is generally understood, became more common during the first Trump administration, when the president singled out China for higher tariffs. It can be hard for Customs and Border Protection officials to spot goods that have been moved through other countries to hide the true origin, but when they found such shipments, the goods would be subject to penalties.
Charging different tariffs for components or parts in a finished product is more complex. Trade agreements often account for materials that come from outside the signatory countries. The U.S.-Mexico-Canada Agreement, for example, has “rules of origin” that define how much of a product must come from North America to cross the borders tariff-free.
Those kinds of precise rules typically require years of negotiation and extensive compliance programs so that companies understand where components come from, and can prove it. Many companies don’t know enough about which countries provide the raw materials and parts in their products because they haven’t always needed to.
“These things always end up being good enough for the purposes,” said Simon Ellis, who leads supply chain strategies at the consultancy IDC. “If, with tariffs, all of a sudden now there is a clear cost pressure to have better information, companies will improve their tools.”
That cost pressure may arrive quickly. An executive order signed by Mr. Trump says customs officials may not allow for “mitigation or remission” of the tariffs on transshipped goods; in other words, they should not be lenient. The Department of Justice has also created a fraud unit to pursue tariff evasion with criminal penalties.
If the Trump administration does end up charging higher tariffs for components from China or other countries, it could take years for manufacturers to find alternative sources. Countries in Southeast Asia have become proficient at assembling products made from fabrics, wiring, wafers, chemicals, and other parts and materials from China. Setting up new factories is a significant undertaking.
For now, many companies are hoping to manage through it.
“I think people are not going to chase their tail, because everything can change with a post,” said Mark Burstein, senior vice president at Inspectorio, a supply chain management platform, referring to Mr. Trump’s habit of issuing policy directives on social media.
Instead, Mr. Burstein said, his clients are placing smaller orders more frequently so they can absorb tariffs in smaller chunks, rather than making big payments to the U.S. government in one go. Importers are also looking for less expensive materials so they can deliver a similar product without raising prices too much.
Another strategy is pushing liability as far down the supply chain as possible. Brands that ultimately sell products in the United States could require vendors to sign contracts that assume responsibility for any extra costs.
“You would want legal speak in there that says something to the effect of ‘If you transship, you’re liable for the 40 percent tariff,’” said Jonathan Eaton, who advises companies on supply chains at Grant Thornton, an accounting and consulting firm.
As the Trump administration figures out what it wants to do about materials and parts from third countries, Sally Peng, a senior managing director at FTI Consulting in Hong Kong, hopes it does so carefully.
She works with many apparel manufacturers that currently know very little about what they will have to pay for the materials they buy from China. There’s little point in making big changes until they know for sure how the U.S. government will define transshipments.
“I have people tell me that ‘until the rule is clear, I’m going to stay in China,’” Ms. Peng said. “That’s not what is intended, I’m sure.”
Lydia DePillis reports on the American economy. She has been a journalist since 2009, and can be reached at [email protected].
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