Since Donald Trump's so-called Liberation Day in April, the American administration has gone full throttle in its trade war against China, threatening, and then imposing, a 40 percent transshipment tariff on goods destined for the United States. It's a key weapon the U.S. tariff arsenal. The policy, while not explicitly named, is clearly aimed at China by targeting products that are rerouted through countries such as Vietnam, Malaysia and Mexico in an attempt to evade the payment of duties by importers.To put this in perspective, transshipment tariffs are not isolated; they are a crucial part of a broader global tariff strategy. Beyond the immediate impact on China and specific trading partners, they are set to profoundly reshape global supply chains and accelerate the fragmentation and balkanization of trade.
On July 31, the tariff policy was expanded to cover all imports entering the U.S. through transshipment. Any goods rerouted through third countries to evade tariffs will now face a 40 percent transshipment tax. This move significantly increases costs and compliance risks for third countries serving as transshipment hubs. It's not just about higher tariffs. It is essentially a precise supply chain tracing mechanism that penalizes the “China+1” strategy. The policy features two key instruments:
First, it requires tracing the origin through the entire supply chain. U.S. authorities demand that importers provide detailed supply-chain information to verify the origin and processing of goods. To avoid the tax, companies must demonstrate that any processing in third countries is substantial, not just nominal. Failure to do so will result in high tariffs. Under the transshipment tariff policy, “local products” will be clearly distinguished from “transshipped products.” This will target Chinese goods that undergo only minor reprocessing in third countries to evade tariffs, such as those under Section 301.
Second, it combines transshipment tariffs with “place-of-origin” tariffs to increase pressure. Goods transshipped via third countries may face a double penalty under which both the origin-based tariff and an additional transshipment tariff are applied. For example, Chinese goods that undergo minor processing in Vietnam are hit with both the China-origin tariff and the Vietnam transshipment tariff when they reach the U.S.The Trump administration has also implemented country-specific tariffs based on supply-chain roles, targeting key China+1 countries such as Vietnam, Mexico and India. In its trade agreement with Vietnam, whose average tariff rate dropped from 46 percent to 20 percent, goods with Chinese components (or those deemed transshipped from China) face a 40 percent punitive tariff. Similar policies apply to other transshipment hubs, such as Cambodia (49 percent) and Thailand (36 percent).
Moreover, the transshipment tariffs can operate in tandem with the CFIUS (Committee on Foreign Investment in the United States) review mechanisms. This combination restricts supply-chain cooperation between American companies and third countries, further squeezing the space for the China+1 strategy. This policy design makes it difficult for companies to evade tariffs through mere third-country processing. It forces them to redraw their global supply chain layouts. It is a guilt-by-association approach, reflecting the Trump administration's tough tariff stance and its attempt to reshape supply chains at both the regional and global levels.
In the short term, transshipment tariffs will further destabilize and disrupt global supply and industrial chains. The policy will clog global supply chains, making companies' attempts to evade high tariffs through the China+1 model much harder by rerouting goods through a third country. Intermediate goods, such as components from China sent to Southeast Asia and Mexico for assembly, will be especially affected. In short, the high transshipment tariffs and strict place-of-origin compliance requirements for Chinese companies will erode the cost advantages of using lower-tax or lower-cost hubs. This will make supply chain relocation far less attractive.
Over the long term, Trump's policy may drive further divergence in the restructuring of global industrial and supply chains, with three main paths emerging:First, companies may maintain or return to production in China, where the comprehensive industrial ecosystem and economies of scale enhance their competitive edge. As transshipment tariffs rise, reshoring to China becomes a more viable option.Second, some companies may build high-value, independent supply chains in third countries. If those countries can produce key components and establish independent value chains, a company can avoid being deemed engaged in transshipment. However, this requires long-term investment and technology transfer.Third, companies may choose near-shoring within a region or set up factories in the U.S. to reduce tariffs and political risks.Overall, the China+1 model will evolve from a simple tax-avoidance strategy to a more complex process of decoupling or to restructuring at a high reconfiguration cost.
The impact of transshipment tariffs on key third countries, such as Vietnam and Mexico, is significant. Over the past few years, Vietnam has emerged as a top destination for “assembly and export,” as components and intermediate goods from China are diverted to other countries. By imposing a 40 percent tariff on transshipped goods and raising origin review standards, the United States has placed Vietnam in a dilemma: Maintaining close ties with China will be deemed transshipment subject to penalties; but decoupling and building an independent supply chain is costly and time-consuming. Thus, in trade negotiations with the U.S., Vietnam will be forced to accept stricter traceability requirements and endure political pressure.Similarly, Mexico, located in North America, has seen its development space constrained. The transshipment tariff counters Mexico's no-tariff entitlement under the USMCA. The free trade agreement exempts qualified goods that also meet place-of-origin definitions. This diminishes Mexico's appeal as a low-cost back door to the United States.Many third countries also face a difficult choice: They must either compromise and cooperate with the U.S. to retain market access or risk economic coercion for maintaining economic and trade relations with China. This will not only increase geopolitical pressure but may also drive divisions within the region.
The impact of transshipment tariffs on the global economic and trade landscape is unmistakable. They will turn trade frictions into a new normal and drive global supply chains toward some level of decoupling. Pressure from the United States may provoke countermeasures from other economies. Given the WTO's current constrained role, the world economy will become increasingly fragmented.
