A Short Primer on Transshipment

A sleeper issue in the trade agreements announced so far is the question of transshipment, a term that so far appears to be undefined in the agreements. How it is ultimately defined will have a big impact on how the various agreements operate and on the economies of the countries that have signed them.

In its simplest form, transshipment refers to moving an item from country A to country C with an intermediate stop in country B. Increasingly, these intermediate stops are not benign. For example, a product from country A might simply be relabeled as a product of country B so that when it enters C, the tariff assigned to country B is applied instead of the one assigned to A. This is customs fraud and has been illegal for decades.

Other examples involve substantial transformation: A product from country A is substantially transformed in country B into a new product. One example is steel slabs melted and poured in country A, which are exported to country B where they are rolled into steel sheet, strip, or wire, and are then shipped to country C. Under international customs rules, that is a substantial transformation which makes the steel a product of country B. However, if the administration were to decide that because the steel was melted and poured in country A, it is a product of that country, it would upend decades of international customs rules and practices and force the rearrangement of many supply chains.

There are many other examples in between these two extremes. A common one is when a product’s parts and components are manufactured in country A, shipped to B where they are assembled into the end product, which is then exported to C. This raises the question of how much work has to be done in country B in order to shift the product’s country of origin.

Under existing customs rules, origin is usually determined either by substantial transformation or by the percentage of content from the country of final manufacture. Normally, if more than 50 percent of a product’s content by value comes from that country, the product is considered to have originated in that country. That would mean, for example, that a product whose main parts and components are manufactured in country A but which is assembled in country B would be considered to have originated in A, absent a substantial transformation. Sometimes, however, countries impose special rules that go far beyond a 50 percent content standard. One example is the auto rules of origin in the United States-Mexico-Canada Agreement.

In addition, there are two other potential permutations of the substantial transformation issue underway. First, the World Trade Organization and the Organisation for Economic Co-operation and Development have been developing a method to determine origin based on value-added rather than substantial transformation. A second approach would base origin on nationality of the manufacturer. That would mean, for example, that a product made in Vietnam by a Chinese-owned company would be considered a product of China even if more than 50 percent of its content was Vietnamese.

Neither of these formulae are operational, but the fact that “transshipment” appears to be undefined in the trade agreements opens the door to the United States demanding nontraditional approaches that would conflict with internationally agreed-upon customs rules and procedures. That, in turn, raises questions of motivation and enforcement.

There appear to be two reasons for aggressively attacking transshipment. The first is to force supply chains to exclude Chinese inputs. Derisking by Western firms has been going on for some time, and a popular Chinese response has been various creative forms of transshipment, usually involving moving the final assembly and part of the production process to a third country. The administration’s inclusion of anti-transshipment provisions in some of the trade agreements is an attempt to deal with it.

The second purpose is to push back on Chinese overcapacity and force them to eat their own surpluses. Recent trade data shows that while the U.S. deficit with China declined by $9 billion from 2023 to 2024, it increased by more than $13 billion with Mexico and Vietnam. That suggests attempting to deal with overcapacity unilaterally is like squeezing a balloon—it simply pops out somewhere else. Success in dealing with it will depend on the United States’ ability to persuade other countries to join the effort. The transshipment penalties are designed to encourage that.

Success in this effort inevitably depends on enforcement. Nobody admits they are illegally transshipping, so the burden is on customs authorities to identify it and assess the correct duties. That will be difficult, particularly in countries that have close relations with China and no particular incentive to help U.S. customs authorities, or in countries where bribery and corruption are common. It may also be politically difficult. While guaranteeing that Vietnamese products, for example, are, in fact, Vietnamese, may be in the long-term interest of the Vietnamese government, in the short term, cracking down on transshipment will cause job losses and economic disruption.

The essential element of a successful enforcement strategy will be clear, detailed definitions of transshipment and substantial transformation. The latter is already well-defined in customs rules, but the former has always been elastic. It would be least disruptive if the administration chooses to maintain the existing rules on substantial transformation and focuses most of its attention on fraudulent transshipment.

Be on the lookout for a longer version of this commentary to be published on CSIS.org.

William A. Reinsch is senior adviser and Scholl Chair emeritus with the Economics Program and Scholl Chair at the Center for Strategic and International Studies in Washington, D.C.