With new 40% Tariff, Trump tries to box in China

Observer

5 days ago

Ever since President Donald Trump began raising tariffs on goods from China during his first term, Chinese companies have raced to set up warehouses and factories in Southeast Asia, Mexico and elsewhere to bypass US tariffs with indirect shipments to the US market via other countries.
But on Thursday, Trump took aim at all indirect American imports, which he blames for part of the $1.2 trillion US trade deficit. The president imposed 40 per cent tariffs on so-called transshipments, which will take effect in a week. And a senior administration official who briefed reporters said work was underway that could broaden considerably the definition of indirect shipments.
The new rules cover indirect shipments from anywhere, not just China. But China, with its massive factory infrastructure and expansive manufacturing ambition, has been the main country to develop a global network for such shipments. Trade experts were quick to predict that China would be the most affected — and the most annoyed.
'The trade provisions are a thinly veiled attempt to box in China — China will view them as such, and this will inevitably spill over into trade discussions with the United States,' said Stephen Olson, a former US trade negotiator who is now a senior fellow at the ISEAS-Yusof Ishak Institute, a research group in Singapore.
Trump's executive order Thursday created a new category of imports: goods that are transshipped through other countries instead of coming straight from the country of origin. The 40 per cent tariffs on these goods will be on top of whatever tariffs would have applied if the goods had come directly from the country where they were originally made.
The legal definition of transshipment is quite narrow: a good that did not undergo a 'substantial transformation' in the country through which it was indirectly shipped. Countries in Southeast Asia like Vietnam have long denied that they allow a lot of transshipment, and they have been tightening inspections to prevent it.
They contend that their soaring imports of Chinese components are being assembled into new and different products that can appropriately be labeled as made in their countries, and not labeled 'made in China.' In addition to the new 40 per cent tariffs on transshipment, the Trump administration plans to put in place so-called rules of origin for indirect shipments in 'a few weeks,' the senior administration official said.
Rules of origin are meant to assure importers that goods really were manufactured where their sellers say they were.
To be effective, rules of origin must be written strictly, as they are for goods to qualify for free trade agreements with the United States. For example, the United States-Mexico-Canada Agreement, which replaced the North American Free Trade Agreement, require that as much as 75 per cent of cars be manufactured in North America to qualify for duty-free treatment in crossing borders.
Brad Setser, an official under the Obama and Biden administrations who is now a senior fellow at the Council on Foreign Relations, said that setting rules of origin could make a big difference. 'The most significant long-term change from the Trump tariff barrage may be creating rules of origin that define the Chinese content,' he said.
But other experts were less convinced that the Trump administration would set stringent rules, particularly when discussions have been underway for a possible summit this autumn between Trump and Xi Jinping, China's top leader. The Chinese government has called for the removal of tariffs on its exports and further tightened its considerable restrictions on the purchase of American goods.
Workers at a clothing factory in Ho Chi Minh, Vietnam, where 60 percent of fabrics for manufacturing come from China. — NYT
'There is nothing in there about content from certain countries, and that is helpful because it means that they aren't risking the wrath of China at this point in time,' said Deborah Elms, the head of trade policy at the Hinrich Foundation in Singapore.
The first country-specific trade deal reached by Trump to tackle transshipment head on was one on July 2 with Vietnam. It included a 40 per cent provision on goods indirectly shipped from China. The provision has turned out to be a blueprint for a sweeping new strategy to limit China's role in the world's supply chain.
But a month later, Vietnam has not publicly confirmed the transshipment provision. With the exception of Indonesia, transshipment tariffs also have not been featured in announcements of subsequent deals with other countries in Southeast Asia.
In recent weeks, Trump has also modulated his strident tone on China. He reversed a previously hard-line position on the export of artificial intelligence chips to China. Not long after, he told the president of the Philippines that he didn't mind if the country got along with China because the United States also had a good relationship with China.
For countries in Southeast Asia that had raced to placate Trump over the months since he first announced his reciprocal tariffs, the flip-flopping has created both a sense of uncertainty and a dose of cynicism about the new agreements they have with the United States.
At the same time, many countries in Southeast Asia have explored ways to crack down on Chinese companies that reroute exports through their countries without doing any further processing. Governments in the region have streamlined customs practices and promised to quash counterfeit and illegal trade. They have given serious thought to reducing the amount of Chinese content in the products they assemble and export.
Multinationals like Walmart account for a sizable share of US imports and have fairly detailed information on how their products are made. But some analysts question whether US Customs and Border Enforcement is capable of identifying whether packages really come from China.
'Enforcement is likely to be challenging, and even if outright rerouting is reduced, trade diversion will continue to dampen the impact of US tariffs on China's aggregate export performance,' Capital Economics, an economic analysis consulting firm, said in a research note. — The New York Times