By Lizzy Burden Jan 20 2020 / The Telegraph
Chinese firms may be dodging billions in US tariffs by clandestinely channelling trade through other countries.
Euler Hermes, which insures payments to exporters, shows in its annual global trade report that Asian exporters thought to have been winners in the trade war – taking the place of China as alternative exporters to the US – could be illegally rerouting goods made in China to bypass tariffs in rising “phantom trade”.
The US and China struck a temporary truce on trade last week. But analysing trade data since the start of the spat 18 months ago, Hermes found that Chinese exports to the US of machinery and mechanical appliances fell, while its exports to Japan of these products increased, followed by rising Japanese exports to the US. The pattern began only after US tariffs were introduced on this category of Chinese goods in 2018.
“Trade diversion alone cannot explain this phenomenon as production capacity has not magically changed location, nor have providers swapped instantly,” the report said.
Rerouting trade through other countries – “trans-shipment” – is not illegal if the goods are “substantially transformed” in a third country before being shipped on, and as long as the country of origin is not disguised.
But some Chinese companies have advertised illegal trans-shipment services online, according to an academic study cited by Hermes. One offered “to provide the documents to your government certifying that products are made [in] other low tariff countries instead of China”.
“First, we need to export those products (made in China) to another country (just as Malaysia). It is easy for us to do it and [it] needs to cost you little money. Second, we will finish customs clearance for [that] cargo in Malaysia and then send it to our warehouse, picking [it up] to reloading [it] to the new container.
“Third, finding a local factory to provide all the original documents to your country. And then exporting the products to your instruction post. After the operation of [the] above the origin will be changed from China to Malaysia. You just need to pay the normal import duty.”
Lawrence Hanson, a Texas-based trade lawyer, told The Daily Telegraph that one of his clients had inadvertently received goods marked “Made in China” with a “Made in Vietnam” label simply stuck on top.
Timeline The US-China trade war
- July 2018 Washington slaps 25pc levies on about $34bn of Chinese imports, including cars and aircraft parts. Beijing retaliates with 25pc tariffs on about $34bn of US goods, including agricultural products.
- August 2018 The US imposes 25pc tariffs on $16bn more Chinese goods, including iron and steel products and electrical machinery. China responds with 25pc tariffs on $16bn of American goods, including Harley Davidson motorbikes and bourbon.
- September 2018 The US announces 10pc duties on $200bn more Chinese imports. China places levies on $60bn more US goods.
- December 2018 The two sides agree a 90-day ceasefire. US President Donald Trump halts tariffs on $200bn of Chinese goods until early March. China agrees to buy a “very substantial” quantity of US products.
- May 2019 Trade negotiations break down. The US Department of Commerce adds the Chinese telecommunications giant Huawei to its “entity list”, banning US companies from selling to it without approval. China says it will create its own equivalent list.
- June 2019 China hikes tariffs on $60bn of US products. At the G20 meeting in Japan, the two sides agree to restart trade talks. Trump agrees to ease restrictions on Huawei and halt tariffs. China says it will buy an unspecified amount of US farm products.
- August 2019 The US Treasury declares China a currency manipulator – for the first time since 1994 – knocking the dollar and sending gold prices to a six-year high.
- September 2019 US tariffs on more than $125bn of Chinese imports are implemented as expected.
- December 2019 Washington and Beijing agree to a phase one trade deal days before a 15pc tariff was due to be put on about $160bn of Chinese goods.
Georges Dib, an economist at Euler Hermes, said: “A good that passes from China to Japan to the US is counted twice in global trade, while it probably should not be. I don’t know if it’s trans-shipment but even if it is, Japan, Taiwan and other countries are not the winners we described them to be.”
The report estimates that global trade grew at its slowest pace in a decade last year but “with these phenomena, it may be the case that it grew even slower than we initially thought”, Mr Dib added.
Donald Trump flagged up the issue in 2018, saying: “I’ve watched where the reporters have been writing 2pc of our steel comes from China. Well, that’s not right. They trans-ship through other countries.”
However, US firms are suffering as customs officials seek to enforce rules against the practice.
Peter Quinter, a Florida-based trade lawyer, said that the legal costs of fighting trans-shipment allegations were crippling businesses that import from Asia. “The chance of filing a case against the Government and winning is very, very difficult,” he said.
“You have to spend hundreds of thousands of dollars in legal fees and costs and you’re going to be in court for up to five years.
“If you win, what do you get? Your merchandise, which is worth very little compared to five years ago. And you have to pay the fees for all the years the merchandise was in storage.
“I have a client right now in North Carolina who imports extruded aluminium from Vietnam,” he said.
“Their shipment has been put on hold. They know that any future shipments they import will also be held. So they’re out of business”
US Customs and Border Protection (CBP) said: “Trans-shipment is an ongoing threat to the legitimate flow of trade. CBP is committed to aggressively pursuing unlawful trans-shipment with all of the available legal tools we have at our disposal.”
“CBP works to level the playing field for US businesses by facilitating legitimate trade, while penalising and deterring the violators of US trade laws. CBP employs multiple methods at the port, Centers of Excellence and Expertise, and national level to identify trans-shipments. The agency also engages with foreign customs authorities in accordance with international agreements to support the agency’s enforcement efforts.
“CBP also leverages the expertise of its personnel and collaborates with its external partners to ensure that bad actors do not succeed in tariff evasion schemes.”