Overlapping HS-6 baskets provide clues to where transshipment might be occurring, but identifying illegal or problematic activity requires more granular analysis. Many HS-6 codes cover broad baskets of goods, and products can often be substantially transformed without changing HS-6 codes. Conversely, different HS-6 codes might be used for the same product in different contexts or by different countries. Also, analysis of government-reported trade statistics cannot account for instances of misreported value, classification, or origin—which recent research suggests have spiked since new tariffs were levied on China in early 2025. Products as diverse as tungsten carbide, quartz, plastic bagsand batteries have all been found by investigations to have been involved in illicit rerouting schemes.
These examples are plainly fraudulent, but transshipment itself is not inherently illegal or undesirable from a policy perspective. Companies route goods through third countries for several legitimate reasons, including port access, logistics synergies, and inventory storage. Problematic behavior, by contrast, involves concealing or misrepresenting a product’s true origin to evade regulation or obtain a lower tariff rate. Even then, trade practices may be undesirable from a policy perspective without necessarily being prohibited under current trade law. By branding all such undesirable activity as illegal, the White House report conflates entirely legitimate business actions with criminal behavior.
The evidence above suggests that transshipment activity as conventionally defined explains only a subset of Chinese-origin value added flowing into the United States. The remainder is likely explained by routing through more substantial transformation steps in a multistage supply chain. International Monetary Fund research illustrates how such trade reallocation can be driven by Chinese businesses investing abroad, foreign firms relocating from China overseas, and local firms in connector economies turning Chinese inputs into products for the U.S. market. Other research reinforces this finding. A 2026 Federal Reserve studyfor instance, found that Chinese production in Mexico accounted for about 14 points of Mexico’s export gains after the 2018–19 tariffs, while direct transshipment accounted for less than 1 point.
Why Have Tariffs Failed to Reduce U.S. Imports of Chinese Value Added?
U.S. tariffs and trade actions from 2025 onward have shifted supply chain contours but have not reduced underlying U.S.-Chinese trade imbalances. Transshipment fraud explains part of this phenomenon but overlooks more fundamental macroeconomic determinants of the lopsided trade relationship.
China’s economic model accounts for much of the macroeconomic situation. As China’s domestic economic performance continues to underwhelmits leaders have remained committed to an export-oriented growth strategy that props up supply-side economic activity. An undervalued real exchange rate, tepid consumer spendingand entrenched state support for key technology sectors all contribute to China’s widening trade surplus. Given these factors, blocked exports to the United States are unsurprisingly being diverted to other markets rather than absorbed domestically or curtailed by contracted production. Data from 2025 shows that China’s total exports rose 5.5 percent even as its exports to the United States fell about 20 percent, with many displaced exports shifting to the European Union.
Inverse factors contribute to the persistent U.S. trade deficit. U.S. domestic investment has risen on the back of a surge in AI infrastructure spending even as U.S. household savings remain low and the public-sector fiscal deficit widens. This mismatch pulls capital in from overseas to finance the investment, widening net capital inflows and conversely depressing the trade balance. AI spending in particular has pushed imports higherboth from China directly—which dominates global manufacturing of key inputs such as electrical transformers and optical transceivers—and from connector economies that rely on Chinese supply chains for high-tech goods.
These macroeconomic fundamentals force the United States into the position of net importer and China into the position of net exporter, fueling imbalances in their bilateral relations. Such factors have not changed since Washington hiked trade barriers against Beijing in 2025. What has changed is the emergence of sizable tariff differentials—in other words, differences between U.S. tariffs on Chinese products and those applied to other countries.
Historically, World Trade Organization most-favored-nation rates provided a broad ceiling to tariff rates that prevented the emergence of major tariff differentials. Now, many connector economies enjoy an average statutory tariff rate 10 to 20 percentage points lower than China’s or more, as shown in Figure 5. This creates a powerful incentive for companies to relocate operations to lower-rate jurisdictions, even in instances when such shifts may not make much economic sense otherwise. Operating footprint changes in response to tariff differentials do not imply the existence of any central plan from the Chinese government to circumvent tariffs; such outcomes arise through decentralized profit-maximizing market logic, as several economistspredicted shortly after earlier tariff announcements.
Source: www.csis.org
