Shadow Transshipment Network

Context

The White House Office of Trade and Manufacturing Policy (OTMP) has released The Great Transshipment Scam: Rise, Scope, and Costs, examining the alleged routing of China-linked goods through third countries to circumvent US tariffs.

The report identifies around 40 countries and trading jurisdictions as exposed to transshipment risks and places India in Tier 1, along with Canada, the European Union, Israel, Japan, Mexico, South Korea and Taiwan.

Illegal Transshipment

1. Transshipment means moving goods through an intermediate country before they reach their final destination.
2. It becomes illegal when the route is used to hide the actual origin of goods or secure an improper tariff advantage.
3. Possible methods include minor processing, relabelling, repackaging, re-invoicing and false origin declarations.
4. The US report links the growth of such practices to the Section 301 tariffs imposed on Chinese goods in 2018, which increased incentives to route China-linked trade through other countries.
5. Legitimate manufacturing relocation is different from illegal transshipment. Substantial processing or transformation in another country may legitimately establish a new country of origin.

US Risk Classification

The report groups economies according to their exposure to China-linked transshipment:

1. Tier 1 – Diversified Scale Leaders: Large economies with substantial China-linked trade, diversified industrial bases and significant US-bound exports. India falls in this category.
2. Tier 2 – Economies with Significant Chinese Integration: Countries with strong manufacturing, sourcing and logistics links with China.
3. Tier 3 – Smaller, Opportunistic Targets: Economies considered more vulnerable because of factors such as free zones, ports, bonded warehouses, low-cost labour or limited customs capacity.

India-Specific Concerns

1. The report highlights the Pune–Gujarat–Chennai manufacturing belt in connection with pumps and compressors under HS codes 8413 and 8414.
2. It raises the possibility that China-linked goods or inputs could undergo limited processing in India before being exported to the US.
3. The report does not establish a specific customs violation by an Indian exporter. Its reference to India reflects a broader assessment of transshipment risk.
4. Indian trade researchers have questioned whether the assessment sufficiently distinguishes genuine Indian manufacturing from unlawful origin manipulation.
5. The key issue is therefore not the use of Chinese inputs itself, but whether adequate processing and value addition have taken place to establish Indian origin under applicable rules.

Implications for India

1. Rules of origin: Indian exports could face closer scrutiny of country-of-origin declarations.
2. Exporter compliance: Businesses may need stronger records on input sourcing, manufacturing processes and domestic value addition.
3. India-US trade negotiations: Customs cooperation and anti-transshipment safeguards could become more important in bilateral discussions.
4. Supply-chain resilience: Expanding domestic production of critical components can reduce excessive dependence on external inputs.
5. Customs modernisation: India can strengthen risk-based inspection, digital trade records and origin verification without imposing unnecessary burdens on legitimate exporters.

Broader Significance

1. The issue demonstrates how tariff differentials can influence global production and trade routes.
2. It also highlights the difficulty of distinguishing legitimate supply-chain diversification from tariff-evasive origin shifting.
3. For India, credible origin verification is important for maintaining export credibility and market access while remaining integrated with global manufacturing networks.

Conclusion

The transshipment controversy highlights the growing importance of credible origin determination in fragmented global supply chains. India needs to strengthen customs verification, supply-chain traceability and domestic value addition while retaining access to legitimate imported inputs. This balanced approach can address tariff-evasion concerns without restricting genuine manufacturing and trade diversification\

FAQs

1. What is the Shadow Transshipment Network?

It refers to an alleged network through which China-linked goods are routed through third countries to obtain lower US tariff treatment by concealing or misrepresenting their actual origin.

2. Why has India been placed in Tier 1?

India is classified as a Diversified Scale Leader because of its large industrial base, China-linked trade and significant US-bound exports. Tier 1 does not itself establish illegal activity by Indian exporters.

3. Which Indian manufacturing corridor has been highlighted?

The report identifies the Pune–Gujarat–Chennai belt in connection with pumps and compressors under HS codes 8413–8414.

4. Is using Chinese inputs in Indian products illegal?

No. Imported inputs can be legally used in Indian manufacturing. The concern arises when goods are insufficiently transformed and falsely presented as Indian-origin products to evade tariffs.

5. What are Rules of Origin?

Rules of Origin are criteria used to determine the country associated with a product’s origin. They are important for applying tariffs, trade preferences and customs measures.

6. How could the issue affect India-US trade?

Indian exporters could face greater origin verification and documentation requirements. Anti-transshipment provisions may also receive greater attention during India-US trade negotiations.