40% Transit Tax Precisely Targets China's Supply Chain, Plastic Enterprises' Paths Diverge

On the evening of July 31st, Eastern Time, Trump signed an executive order announcing additional tariffs ranging from 10% to 41% on goods from nearly 70 countries/regions. For the first time, an additional 40% "transshipment tax" will be imposed on all goods that are rerouted through third countries to evade tariffs. The new regulation does not exempt any country.

Traditionally, transshipment usually refers to the situation where goods pass through a third country without additional production in that country. However, the Trump administration's use of this concept has extended beyond its traditional meaning. Under the new policy, goods that are deemed by the U.S. Customs and Border Protection (CBP) to be transshipped to evade applicable tariffs will face an additional 40% ad valorem tax rate, instead of the originally applicable standard or specific country rate. This regulation has been in effect since August 1st.

In the Executive Order on Adjusting Reciprocal Tariff Rates, Trump also stated that the U.S. Secretary of Commerce and the Secretary of Homeland Security should, through the CBP Commissioner, and after consulting with the U.S. Trade Representative, publish every six months a list of countries and specific facilities involved in transshipment evasion activities. This list will serve as a basis for government procurement, national security reviews, and commercial due diligence.

However, this policy faces multiple challenges at the implementation level. Although the Trump administration has announced a 40% transshipment tariff, the United States has not yet published a specific list of goods subject to the 40% tariff, and there is still a lack of detailed "origin rules" necessary to determine what constitutes "transshipment." Key implementation details remain unclear.

A widely circulated speculation among analysts is that the United States may adopt a value-based testing method, whereby if a certain proportion of a product's value (for example, 50%) originates from so-called "non-market economies" like China, the product may be considered a transshipment.

It is obvious that this policy specifically targets Southeast Asian countries that have shifted production from China but still rely on Chinese inputs, especially Vietnam. Earlier, Trump announced on social media that a trade agreement had been reached with Vietnam. According to the agreement, Trump stated that all goods exported from Vietnam to the United States will be subject to a 20% tariff, while any "transshipped goods" will be subject to a 40% tariff. This is a clear pressure on Vietnam to review its own supply chains and reduce dependence on Chinese components.

According to research analysis by Bloomberg Economics, if Trump successfully implements the relevant restrictions, it could impact the transshipment trade, which accounts for 70% of China's exports to the US, further dragging down China's economy.

According to statistics, in 2023, the proportion of value-added exports from China to the United States routed through third countries increased from 14% in 2017 to 22%.

Bloomberg Economics analyzes that if the Trump administration successfully imposes higher tariffs on such "transshipment goods" or enforces stricter supply chain origin requirements, it could affect up to 70% of China's exports to the United States, equivalent to more than 2.1% of China's gross domestic product (GDP), posing a substantial risk to the economy.

The "transshipment" provision mainly affects industries such as electronics, electrical machinery, and instruments. During the 2018 trade war, these industries were subject to a 25% tariff increase by the United States, which led to a surge in export-oriented assembly and processing. If these products are now identified by Vietnam as transshipped exports, they will face a 40% tariff, which means there will be little difference in tariff rates compared to direct exports from China (approximately 40% in Vietnam vs. about 50% from China).

Furthermore, the textile and apparel industry is also affected. The low-cost OEM model may be unsustainable, and low value-added orders (such as T-shirts and jeans) may shift from Vietnam to Bangladesh or Indonesia. The furniture manufacturing industry, including sofas, mattresses, plywood, and wooden furniture, faces a similar situation. The loss of price advantage may trigger a transfer of orders.

Faced with the tariff threat, the downstream low value-added industries in the plastic industry chain are impacted the most. Among them, the consumer electronics industry is particularly sensitive due to its high export dependence (up to 69%). Therefore, it has adopted a global multi-center manufacturing strategy by establishing production bases in Vietnam, Thailand, and Mexico. At the same time, in terms of exports, it uses bonded zone processing trade combined with FOB (Free On Board) pricing, where the tariffs are borne by the US importers to mitigate its own risk.

The textile and apparel industry, due to its low profit margins (only 2.3%-5.2%), finds it difficult to bear the cost of tariffs. Therefore, it can adopt measures such as simultaneous technological upgrades and industrial chain restructuring to mitigate the impact of tariffs, namely domestic R&D combined with overseas production. The domestic headquarters would be responsible for fabric research and development, while overseas factories would carry out garment processing.

Furniture OEM companies face issues of order cancellations and inventory backlog. Stimulating domestic demand and exploring emerging markets are appropriate responses. In overseas markets, such as Japan and Europe, establishing warehousing centers can reduce logistics costs while providing localized services to enhance customer loyalty. On the domestic front, leveraging the well-established consumer channels can help clear inventory and increase market share.

It can be seen that common strategies for successful business transformation include: supply chain restructuring and multi-country capacity backup; simultaneously expanding into the three major markets of RCEP, the Middle East, and domestic demand to reduce dependence on the US market and achieve "market rebalancing"; in addition, developing high value-added products driven by technology to increase premium.

The Trump administration’s broadening interpretation of the concept of “transshipment” marks a significant shift in its trade policy. However, the implementation of this unilateral measure, due to its ambiguous definition and complex enforcement, will trigger systemic confusion and challenges in the global trading system.

The Ministry of Commerce of China has clearly stated that China respects the resolution of its economic and trade differences with the United States through equal consultations. China believes that all parties should stand on the side of fairness and justice regarding the issue of "reciprocal tariffs," and should stand on the right side of history, defending international economic and trade rules and the multilateral trading system. It should be particularly noted that China firmly opposes any party reaching a deal at the expense of China's interests. If such a situation arises, China will not accept it and will resolutely take countermeasures in kind. China is determined and capable of safeguarding its own rights and interests.

Author: Gao Xing, Senior Market Analysis Expert