Commentary: US ‘transshipment scam’ narrative raises troubling prospect of a purity test for Southeast Asia
If the US sees all trade as a potential scam, trading partners would do well to prepare for more tariffs, says Hinrich Foundation’s Deborah Elms.
Docked cargo ships are loaded with shipping containers at Port Elizabeth, New Jersey, U.S., July 12, 2023. REUTERS/Mike Segar/File Photo
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SINGAPORE: If the United States were simply arguing against illegal transshipment, there would be little objection across Asia. Governments in the region have taken steps to clamp down and eliminate the practice for years.
But the Trump administration seems to be going much further, accusing more than 40 countries, including nine in Southeast Asia, of participating in a “Great Transshipment Scam”. For the world’s largest economy, all trade is a potential scam.
The White House argued precisely that in an August report, written by trade adviser Peter Navarro. He painted a picture of a global network designed to sneak Chinese goods into the US by routing them through third-country markets to evade American tariffs. Every year, the report claims, the US “loses tens of billions of dollars” to illegal transshipment.
But its definition of problematic trade seems to be widening and raises the troubling prospect of a new kind of “purity test”.
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BLURRED LINES
Washington may be blurring the line between legitimate supply chain shifts and illegal tariff evasion.
Illegal transshipment largely involves re-labelling goods without any change to the products, such as using fraudulent paperwork to indicate that items originated in a different market. These moves have always been illegal.
By contrast, companies legally engage in trade by substantially transforming goods from raw materials, parts and components sourced from anywhere into new products. The US supported this diversification of trade flows in the past.
The question was what counted as substantial to be considered as being made in that country. This is not a new concern. American border agencies have spent decades issuing specific rulings on how to achieve legal transformation.
A key difference is that past administrations looked into individual company practices, such as the movement of solar panels through Southeast Asia, to determine whether trade patterns were legitimate or simply a pathway to evade US tariffs.
US HELPED CREATE THE CURRENT SITUATION
The irony is that Washington helped create what it now distrusts.
Despite the White House’s claims of widespread cheating, firms have reshuffled trade arrangements into the US mostly because of growing gaps in its tariff application across the region.
When identical products are charged different tariffs, some companies have an incentive to move production across borders to keep costs low. Under the current tariff structure, an identical t-shirt imported from Laos could be tariff free, receive a 10 per cent tariff if it came from Cambodia and 12.5 per cent if sent from the Philippines.
During President Donald Trump’s first term in office, he raised tariff levels for goods imported from China to high enough levels to push firms to diversify out of China and into the region.
This strategy, often called “China plus one”, often served firms well and drove inbound investment across Southeast Asia. Now, however, these activities are increasingly being called into question.
And the problem of differential tariffs will only become more complex with ongoing US policy changes. Section 301 tariffs, of either 10 per cent or 12.5 per cent, are now in place against 60 different trade partners over forced labour practices. Another Section 301 probe is pending conclusion against 16 economies for overcapacity issues.
NOT JUST ABOUT CHINESE COMPONENTS
But shifting parts of the supply chain out of China may no longer be enough if Washington’s fight against illegal transshipment becomes heavily fixated on Chinese connections.
The White House report highlighted Vietnam’s electronics sector in Ho Chi Minh City and Malaysia’s plastic manufacturing in Penang as evidence of “ugly sister cities” taking jobs from American workers. It also specifically called out Singapore as part of an alleged scheme to move Chinese goods through “small, opportunistic” actions in logistics that allow China-linked rerouting of goods.
The US appears ready to ask trade partners to exclude a wide and growing array of Chinese raw materials, parts and components in any product that might eventually arrive in the United States. These concerns have been raised in bilateral consultations.
At the same time, the US is also taking steps to dramatically transform the operations of US customs. This includes requesting significantly more information about imported goods and much deeper tracking and tracing of goods back, potentially, to raw materials.
The increasing use of technological solutions to support customs declarations on imported goods could also be used to request information about Chinese content, investment or corporate involvement in the production of goods.
These concerns have been raised repeatedly by the US in bilateral consultations with trade partners. The same sentiment was just raised by US Treasury Secretary Scott Bessent with his recent comment that “the rest of the world is going to have to examine their terms of trade with China”.
Asian partners have repeatedly expressed concerns about exactly how such examination will be conducted and what sort of “involvement” by China is actually on the table.
Given the reliance of Chinese inputs in most Asian supply chains, US actions could significantly alter existing production patterns. The dense production and logistics networks crossing Singapore and Southeast Asia will be hard to undo.
Increasing scrutiny could quickly devolve into some sort of “purity test” for goods.
PREPARE TO FACE SECTION 338
And Mr Trump now has more tariff weapons in his arsenal. Besides Section 301, he also recently imposed tariffs on Canada using an obscure trade tool called Section 338 that has not been used since its creation in 1930. On Tuesday (Sep 8), he used the same law to ban certain Canadian imports entirely and subject more goods to a 50 per cent tariff.
Under Section 338, a US President can impose tariffs of up to 50 per cent on trade partners with no process or procedures to be followed and no review of the action to be taken by Congress.
Given Mr Trump’s personal obsession with bilateral trade deficits in goods, countries named in this transshipment report that export more to the US than they import would do well to prepare to face Section 338.
The use of novel trade tools against allies and adversaries alike paired with a narrative that conflates all trade with scam activities suggest that Asia will continue to see extremely turbulent trade ties with the United States.
The signs to watch will be how the sweeping claims in the transshipment report will translate into actual trade action.
Deborah Elms is Head of Trade Policy at the Hinrich Foundation.
Source: CNA/ch
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