Over recent weeks, several alleged cases of trade circumvention by foreign companies, mostly believed to be from China, have been reported in Vietnam and Cambodia. These companies are allegedly transshipping and re-routing exported goods through third-party countries in a bid to evade U.S. tariffs during a period of ongoing trade tensions between the United States and China.
On June 9, Vietnamese customs published a notice stating that it would be cracking down on goods of Chinese origin illegally relabeled “Made in Vietnam” by exporters seeking to avoid U.S. tariffs imposed on Chinese imports amid trade tensions. Saigon also announced that it has instructed its provincial and municipal branches to increase inspection and verification of certificates of origin to better identify and impose penalties on businesses that carry out such violations.
Subsequent reports followed on June 19 when the U.S. fined several Chinese companies for exporting goods via Sihanoukville Special Economic Zone (SSEZ) – a Chinese-owned SEZ in Cambodia – in another similar alleged attempt to dodge U.S. tariffs on Chinese goods. Cambodia’s commerce ministry has denied these allegations after issuing a statement on June 23 stating that the U.S. claims were “baseless” and that the operating procedures in such economic zones was clear.
The Trump administration has made it a key priority to tackle transshipment aimed at evading U.S. tariffs, a practice in which Chinese-made goods are minimally processed or briefly altered in a third port before being re-exported as a product originating from the third port. The advent of transshipment and other trade circumvention methods threaten to hamper Washington’s plans to enforce its latest round of 25 percent tariffs on USD 200 billion (EUR 177 billion) worth of Chinese imports and a potential further round of tariffs on USD 300 billion (EUR 264 billion) of Chinese imports. The U.S. Customs and Border Protection (CBP) has also reportedly identified similar recent cases of illegal transshipment of Chinese goods in Vietnam, Malaysia, Cambodia, and the Philippines as well as in non-Asian countries such as Serbia and Mexico.
“Made-in-Vietnam” packaging labels
Vietnam alleges that there have been numerous reported instances of some importers illegally repackaging goods from China with fake “Made in Vietnam” country-of-origin packaging labels. These goods then apply for a Vietnamese certificate of origin and are eventually exported to American, European, and Japanese markets. Vietnamese customs authorities cited in a statement that the illegal transshipment of goods happens most often in the sectors of “textiles, seafood, agricultural products, honey, steel and iron, aluminum, and timber products.”
The allegations of transshipment cases appear to be supported by recent trade data. Over the first four months in 2019, U.S. imports from China have fallen by 12 percent while imports from Vietnam grew by 32 percent over the same period. From January to May 2019, sharp increases in exports from China to Vietnam of electronics, computers, machinery, and other equipment have been reported with Vietnamese exports to U.S. for such goods also rising heavily within the same period. For instance, Vietnam’s imports of computers and electronics from China have increased by 81 percent from last year while Vietnam’s exports to the U.S. of the same products increased by 72 percent.
Similar cases were also reported last year as part of the Trump administration’s efforts to target illegal transshipment of Chinese exports of steel and furniture via Vietnam, Thailand, and Malaysia. In May 2018, the U.S. imposed duties of more than 250 percent on certain Vietnamese steel exports due to “a significant portion” containing Chinese steel.
Routing goods through Cambodia’s special economic zone
On June 28, the U.S. Embassy in Cambodia released a statement indicating that the “Department of Homeland Security has inspected and fined a number of companies for evading tariffs in the United States by routing goods through Cambodia.” These companies were reportedly located in Cambodia’s SSEZ, although U.S. officials declined to name or say how many companies had been fined for avoiding the tariffs, how large the fines were, or what goods the companies had been exporting. The SSEZ is 210 kilometers (130 miles) west of Phnom Penh and is a Chinese and Cambodian joint venture in the Belt and Road initiative which exports predominantly textiles, garments, bags, and leather products.
The latest developments of alleged trade circumvention could have dire consequences for Cambodia. Under a current trade agreement with the U.S., the Generalized System of Preferences – which was expanded in 2016 – allows for goods from Cambodia (particularly garments, textiles, and travel goods) to be exported to the U.S. duty free. Phnom Penh, which is already facing a potential suspension from another similar trade program from the EU, could see its privileges revoked under the GSP which could directly impact the ability of foreign manufacturers to continue to export goods duty-free, particularly in the textiles and garments sectors.
According to the U.S. Embassy, there have been two cases since 2017 of companies operating in the SSEZ being charged with anti-dumping duties after having been found to transport transshipped goods such as chemical glycine and steel pipe-fittings.
Trade circumvention practices may persist
The latest reports on transshipment and other trade circumvention practices in Cambodia and Vietnam highlight a growing trend among foreign companies – particularly Chinese exporters and suppliers – that may be looking for avenues to skirt the U.S. tariffs during an uncertain regulatory climate. Although neither Cambodia nor Vietnam provides specific details on the identity of the companies, total volume of goods being transshipped or major industries involved, there is reasonable evidence to believe that cases of alleged circumvention of U.S. tariffs could be far-reaching in third-party regions such as Southeast Asia and beyond.
From a supply chain perspective, the rise of trade circumvention practices for the purposes of evading U.S. tariffs is problematic on a number of fronts. Given the growing trend of multinational companies contemplating shifting production from China to Southeast Asia, such practices can expose these manufacturers to substantial legal and criminal penalties. Foreign manufacturers will therefore need to ensure that these production shifts are well-documented and supply chain professionals will need to work collaboratively with their respective trade and compliance departments to ensure that supplier vetting, sanctions, and due diligence is sufficiently covered if transshipment cases were ever to occur. Supply chain managers are advised to continue tracking developments through Resilience360 and understand how trade circumvention risks amid the U.S.-China trade war could potentially impact business operations in third-party markets such as Southeast Asia, Mexico or Serbia.