Both policymaking and trade enforcement officials are increasingly looking at the transshipment of goods through third countries as a form of tariff evasion.
In this video from The Franklin Partnership, contributing author Omar Nashashibi discusses recent action from U.S. Customs and Border Protection (CBP) on de minimis shipments.
Both policymaking and trade enforcement officials in Washington, D.C. are increasingly looking at the transshipment of goods through third countries as a form of tariff evasion. Officials are now closely scrutinizing goods entering the U.S. from countries not known as major producers of those imports or from countries seeing a spike themselves in imports from China or other countries.
The third-party transshipment import rules
Products not substantially transformed in a third-party country will typically retain their original country of origin designation, and in the case of China, the tariff rate. Importers are often mistaken to think once a product is shipped to a different source it takes on the new host country’s origin.
To qualify as the new country’s product, it must undergo substantial transformation. The U.S. Department of Commerce requires products to undergo. Commerce states “Substantial transformation means that the good underwent a fundamental change (normally as a result of processing or manufacturing in the country claiming origin) in form, appearance, nature, or character, which adds to its value an amount or percentage that is significant in comparison to the value which the good when exported from the country in which it was first made.” There are some variations of this definition for countries with which the U.S. maintains a free trade agreement, but the core definition remains.
The new CBP transshipment rule
This is where an importer can run afoul of U.S. trade laws if the product does not meet the country of origin definition. Then the product is considered transshipped, a form of tariff evasion. U.S. Customs and Border Protection (CBP) finalized an interim final rule effective April 17, 2024 including transshipment in its definition of evasion, which includes efforts to not pay the Section 232 or 301 tariffs, or antidumping and countervailing duties imposed.
CBP increasing scrutiny on transshipments through Mexico
On April 29, CBP initiated an investigation into a U.S. importer of xanthan gum, saying it “found reasonable suspicion” the company imported the product by “transshipping Chinese-origin xanthan gum through Mexico.” As it imposed interim measures, the agency’s complaint said the product is produced in four countries, of which Mexico is not one, but China is.
Production data, historical exports using Harmonized Tariff Schedule codes, and technological and environmental capabilities are among the factors CBP and other U.S. Government agencies will consider in transshipment incidents. Particularly goods entering the U.S. through Mexico are reportedly receiving additional attention if there are recent spike in imports of certain products or no history of growing or manufacturing the product in that or another country shipping to the U.S. and bearing that nation as the country of origin.
The future of the U.S.-Mexico-Canada Free Trade Agreement
The Biden administration says if they in office during the mandatory six-year review in 2026 of the U.S.-Mexico-Canada Free Trade Agreement (USMCA), addressing transshipment through Mexico is likely a priority. The Office of the U.S. Trade Representative is beginning the USMCA review process that will continue with hearings on automotive parts imports this fall and a report to Congress. on the agreement, which Entered into Force in 2020.
In a speech delivered May 16, 2024, White House National Economic Advisor Lael Brainard said the current agreement does “not adequately address the potential transshipment of Chinese exports entering the U.S. market via Mexico.” She added: “We look forward to working with Mexico to address concerns that some Chinese steel exports appear to be flowing through Mexico, and some Chinese auto companies may be considering exporting vehicles and auto parts via Mexico.”
Trade enforcement also eyeing transnational subsidies
The USMCA is subject to a six-year review in 2026, at which point U.S. negotiators will likely seek additional assurances and possibly changes to the agreement to address transshipment through Mexico.
Transnational subsidies are another area drawing attention from trade enforcement policymakers in Washington, D.C. The U.S. Commerce Department released a rule effective April 24, 2024 amending regulation to clarify transnational subsidies are countervailable under U.S. law, making that import subject to a duty rate. The rule refers to these as “subsidies provided by a government or public entity in one country that benefit producers or exporters in another country.”
On May 15, 2024, the Department initiated an antidumping and countervailing duty case related to solar cells coming from Cambodia, Malaysia, Thailand, and Vietnam. The petition for Inv. No. 701-TA-722-725 and 731-TA-1690-1693 alleges “the governments of all four countries subsidize their own solar industries, and facilitate and accept substantial cross-border subsidies to their solar industries from the government of the People’s Republic of China.”
The future of transshipment and transnational subsidies
These areas of transnational subsidies and transshipment will continue to receive additional attention and scrutiny. This is especially true as we move closer to the review of USMCA and shipments from Mexico.
How we can help
Importers should consult with a customs broker or other professionals on proper documentation and verification of country of origin.
Want to know more about how this increased scrutiny might impact your business? Contact us for assistance.
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