The Trump administration is looking to clamp down on content from China and other non-market economies in U.S. supply chains by imposing novel rules of origin in its new tariffs – a move it says will combat “transshipment,” but one customs practitioners and analysts say is a novel, expansive interpretation of the term that could create enforcement challenges alongside confusion for importers.
Transshipment – which typically refers to a good transiting through a third country without undergoing additional production there – has been a focus of the administration’s trade policy. Provisions addressing it featured prominently in the tariff letters President Trump has sent to about two dozen trading partners, executive orders setting new tariff rates, and the handful of framework agreements with trading partners that the White House has made public.
For instance, Trump’s July 31 order setting new tariff rates for more than 90 countries (including the EU and its member states), imposes a 40 percent ad valorem rate for transshipped goods on top of whatever duty they would otherwise incur. His previous tariff letters similarly specified that transshipped goods would be subject to higher tariff rates.
But a provision in the framework agreement the administration reached with Indonesia a week earlier suggest a more fundamental change in how the administration identifies transshipped goods. The U.S. is seeking to include language in its deal with Indonesia that would subject goods containing a certain amount of components from non-market economies – like China – to the higher transshipped duty rate, a senior administration told reporters in July.
While the administration will continue to take aim at “classic transshipment,” where goods are misrepresented as originating from a third country despite undergoing no production there, the official said, it is also seeking to sweep in goods with significant content from third countries, particularly non-market economies.
“The point of the transshipment rules is to ensure that we have in our bilateral trade agreements – that the two parties maintain the benefit and there’s not a third party that’s getting an undue benefit without making the type of commitments that we have,” the official said.
A joint July 22 statement from the U.S. and Indonesia does not make a direct reference to transshipment but does specify that the two sides “will negotiate facilitative rules of origin that ensure that the benefits of the agreement accrue primarily to the United States and Indonesia.”
“I don’t think transshipment is the right word,” Sandler, Travis and Rosenberg Managing Partner Lenny Feldman told Inside U.S. Trade. He said the administration appears to be implementing a new trade policy concept under the umbrella of “transshipment” provisions.
“Transshipment is if there’s no value-added in the third-party country,” argued Caroline Freund, the dean of the University of California San Diego’s School of Global Policy and Strategy. Third-party content in goods is “just the supply chain,” she said.
“Here the U.S. government is changing the definition of transshipment and substantial transformation,” said Ron Oleynik, a partner and co-head of the international trade practice at the law firm Holland and Knight.
“This is a potentially dramatic shift from what we’ve known,” added Jennifer Diaz, a partner at Diaz Trade Law.
A new flavor
The Commerce Department in certain trade remedy cases has taken an expansive view of rules of origin to impose antidumping or countervailing duties on goods based on Chinese content in products that underwent additional production activities in third countries, according to Oleynik and Feldman. For instance, Feldman pointed to trade remedy cases involving Chinese aluminum extrusions that underwent substantial transformation in a third country. Despite the substantial transformation – a term of art meaning a good has undergone enough third-country processing to be considered a new product from that country – Commerce still levied duties on the extrusions, he said. A similar process played out for tariffs under Section 301 of the Trade Act of 1974, Oleynik said.
The administration’s expansive view of transshipment builds on those processes, Oleynik said, with Feldman adding that the administration’s interpretation is a different “flavor” or “computation” of that same idea.
“It doesn’t matter if you’re not transshipping in the traditional sense. It doesn’t matter if you’re creating value or conferring origin,” Feldman said. “We’re tracking Chinese-origin materials.”
China is the clear target of the administration’s expansive interpretation of transshipment, according to one former trade official. “The president feels very strongly about being cheated by China,” the official said, adding that intertwining a crackdown on transshipment and tariff deals is part of Trump’s focus on China.
But Freund said the 40 percent tariff rate included in the Indonesia framework may not be high enough to deter companies from using Chinese content, in part because some Chinese products face much higher tariffs than even the total after a transshipment penalty.
Confusion and enforcement
Oleynik and Diaz said a new approach to transshipment will sow confusion up and down the supply chain. Changing what confers a product’s country of origin “adds another pillar of complexity” to already complicated rules of origin, Diaz said.
“It’s just going to be more difficulty, more confusion, more questions from Customs, more held-up goods,” added Oleynik.
Importers are required to file customs entry forms with U.S. Customs and Border Protection where they list the incoming product, its harmonized tariff system number, value and a calculation of the duty owed, Oleynik explained. Diaz noted that in estimating the duty owed, importers will have to consider whether tariffs are stacked on top of each other.
For instance, goods coming from China already face, at least, several layers of tariffs, such as the general most-favored nation duties, Section 301 tariffs, and those Trump imposed earlier this year under a national emergency declaration targeting fentanyl trafficking and migration. So-called “reciprocal” tariffs could soon be added to that list. If a good from Indonesia is deemed to be subject to a transshipment tariff because of its Chinese content, importers would have to consider whether the China-specific tariffs would also be included, Diaz said.
Creating a framework that would allow the administration to enforce potential new rules of origin will be “a really tall order,” the former official said. To determine traditional transshipment, the administration employs a team of interagency officials from the Department of Homeland Security, CBP, the Justice Department, missions abroad and others to understand product sourcing, according to the former official. Tracing the chain of custody for a good “is complex” for several reasons, the official continued, including cultural and legal differences.
“A lot of education on what type of documentation the U.S. is looking for is required,” the official said. “It takes a lot of effort.”
“If I were CBP, I would have a hard time understanding what kind of documentation and proof will be necessary,” Diaz said of the new policy. “Are we going to have the ability to audit raw material for every item? We all need a framework to start with. Now we’re all subject to audit risk, penalties and criminality. We need a good framework to ensure that everyone has the ability to comply.”
The difficulty of enforcing new rules of origin will depend on the complexity of a specific good’s supply chain, Feldman said. “I think it really depends on the commodity and supply chain,” he said. “Are there multiple tiers? How complex is the product? Has the supply chain declared [free trade agreement] benefits?”
Freund said that enforcing a new rule of origin designed to identify non-market economy content will be too complicated. “It’s one thing to make a rule, it’s another to implement and enforce it,” she said. She further noted that in many cases even transshipment considered illegal under the long-standing definition is not investigated.
The administration could use the rule as a threat, Freund suggested, in hopes that companies will opt to remove Chinese content from their supply chains. It could also selectively enforce the rule, only focusing on particular sectors known to have significant Chinese content, she continued.
Or, she suggested, Trump could just drop the whole idea.
“We know if things work badly, Trump reverses,” she said. “I don’t think the rule of origin will stick because it will be too cumbersome.”
Feldman, however, said CBP is equipped with good machine-based learning artificial intelligence tools it can use to identify sectors and even factories that would be likely to produce goods that run afoul of a new rule of origin. “They will approach it from an intelligent and educated manner,” he said of the agency.
Importers and suppliers, meanwhile, are “really going to have to ensure they have robust bills of materials – not just an excel spreadsheet,” Feldman said. Importers will need to be able to support any claims that they are not sourcing from China or other non-market economies, he said.
The U.S. and Indonesia must still negotiate the actual rule of origin to address the administration’s expansive transshipment interpretation, a process U.S. Trade Representative Jamieson Greer on Friday said could take months. And whatever rule is negotiated is likely to face legal scrutiny and litigation at the Court of International Trade, Diaz posited.
A new rule of origin could also be tied up in the ongoing litigation over the president’s use of the International Emergency Economic Powers Act to impose the tariffs that compelled Indonesia to negotiate, the former trade official said. – Brett Fortnam (bfortnam@iwpnews.com)