American Tariffs on China Are Being Blunted by Trade Cheats
Date: Thursday, June 27, 2019
Source: The Wall Street Journal
Data from Vietnam show surges in both imports from China and exports to the U.S., highlighting how transshipment circumvents levies
Billions of dollars worth of China-made goods subject to tariffs by the Trump administration in its trade fight with Beijing are dodging the China levies by entering the U.S. via other countries in Asia, especially Vietnam, according to trade data and overseas officials.
The Trump administration has for more than a year sought to weed out the practice known as transshipment, in which Chinese exports typically are minimally processed or altered during a brief stop in a third port and then re-exported as a product originating from the third port. Such circumvention threatens to crimp U.S. plans as it prepares to add tariffs on to $300 billion of Chinese exports, from toys to electronics, essentially covering all its China trade. The U.S. already has placed 25% tariffs on some $200 billion of Chinese exports.
In the first five months this year, exports to Vietnam from China of electronics, computers, and machinery and other equipment have sharply increased compared with a year earlier. In turn, so have exports of such goods from Vietnam to the U.S., Vietnamese trade data show.
“The phenomenon of trade fraud through labeling of the origin of goods as being produced in Vietnam is increasing,” the Vietnamese Ministry of Industry and Trade said. “Such fraudulent labeling not only directly affects products and consumers, but also significantly reduces the reputation and competitiveness of goods manufactured in Vietnam.”
Vietnam’s customs agency said this month that it instructed its provincial and municipal branches to step up inspection and verification of certificates of origin, a document that accompanies all international shipments, according to state media. The regulator said companies, which it didn’t identify, had been importing Chinese goods, replacing the labeling to say “Made In Vietnam,” then re-exporting the goods to the U.S., Europe or Japan.
Vietnam, which abuts China’s southern fringe, last year was at the center of a Trump administration effort to curb transshipment of Chinese exports of steel and furniture via Southeast Asian countries, including Thailand and Malaysia.
A spokeswoman for U.S. Customs and Border Protection said it has identified illegal transshipment of Chinese goods through several countries, pointing to cases in recent months in Vietnam, Malaysia, and the Philippines. She said the agency will continue to pursue such evasion.
Washington’s campaign in recent years included slapping punitive duties, in addition to the broad tariffs, on Chinese-origin goods from steel to furniture that the U.S. Commerce Department deemed to have been transshipped. It is unclear how far the measures succeeded in curbing the trading malpractice. Recent trade data from Vietnam and Taiwan, and official statements from Cambodia, indicate the problem still exists.
Outside Asia, nations such as Serbia and Mexico also play these middleman roles, shippers say. But U.S. officials and industry analysts say Vietnam has for years played a pivotal role in importing Chinese steel, lightly treating it, and then re-exporting the product as a Vietnamese good—thereby giving Chinese steelmakers and Vietnamese processors a means to end run the U.S. tariffs.
In May 2018, the U.S. imposed duties of more than 250% on certain Vietnam steel exports after finding they contained “a significant portion” of Chinese steel. The ruling hinged on the Commerce Department’s conclusion that the costs for steelmakers in Vietnam to increase the product’s value with additional processing and coatings were “minor and insignificant.”
U.S. officials are stepping up enforcement against companies re-exporting Chinese goods via the Chinese-owned Sihanoukville Special Economic Zone in Cambodia, accusing unidentified firms of transshipment, the U.S. Embassy in Phnom Penh said. Companies in the zone make and trade products including garments, bags and leather goods.
“The Department of Homeland Security has investigated and fined a number of companies for evading tariffs in the U.S. by routing goods through Cambodia,” Emily Zeeberg, a media official for the embassy, said in an email this week.
Vietnam, which has benefited from the trade dispute between the U.S. and China, is vulnerable to losing some of its newfound business if the country is perceived as a transshipment center. It is primed to benefit from a reordering of the global supply chain. Many companies, including Apple Inc. supplier Foxconn Technology Group and electronics giant Sharp Corp. are weighing plans to migrate manufacturing capacity out of China to hedge against the cost of the U.S.-China trade fight.
President Trump said Wednesday that many companies are moving to Vietnam, but that “Vietnam takes advantage of us even worse than China.” In the interview with Fox Business Network, Mr. Trump called Vietnam an abuser and said the U.S. is in discussions with the Asian nation.
The reshaping of global supply chains, particularly in tech, is set to continue even if President Trump and his Chinese counterpart Xi Jinping make headway on any kind of trade deal at the G-20 meeting this week. Such physical relocation is in its infancy, analysts say, and it is too soon to influence the sharp swings already evident in the trade data, which U.S. and Asian government officials say is more likely due to transshipment.
Vietnam’s exports of computers and electronics to the U.S. increased 71.6% in the first five months this year to $1.8 billion, more than five times the pace of its exports of such products world-wide. In the same period, its imports from China in this category rose 80.8% to $5.1 billion, four times the pace of its world-wide figure, the data show.
In the January-May period, exports to the U.S. of machinery and equipment from the Southeast Asian nation rose 54.4% year-over-year to $1.7 billion, compared with a 6.7% rise globally, Vietnam data show. Imports from China in the same time frame rose 29.2% to $5.7 billion, around twice the pace posted for world-wide imports.
The practice of transshipment is widespread enough that it has spawned port infrastructure to support it, trade professionals say.
“Many buildings called factories are set up in Vietnam which are really storage structures to hold goods being sent here, but are really made in China,” said Jeffrey Newman, founder of Jeffrey Newman Law, a Boston-based firm that handles tariff-evasion cases.
Vietnam customs officials didn’t immediately respond to a request for comment.
Trade trends in Taiwan, a major tech exporter, also have drawn attention. The island’s exports to the U.S. of servers, switches, routers and other computer gear rose 56.3% to $4.3 billion in the January-April period, nearly three times the broad export growth to the U.S. of 20%.
Taiwan’s economic ministry said this month that it is monitoring for signs of transshipment, but attributed the increase to strengthening U.S. demand and increased Taiwanese investment.