Rerouting will ease tariff blow to Chinese exports

The Trump Administration has announced that transshipped goods will be subject to a 40% tariff instead of the regular reciprocal rates. This will stack on top of any other tariffs applicable to the true country of origin. In theory then, Chinese goods transshipped via Vietnam will be subject to an average tariff rate of ~70% (the combination of a 40% transshipment tariff, 20% fentanyl tariffs and a 10% baseline that predates Trump's second term). That would be substantially higher than Vietnam's 20% reciprocal rate and the ~40% average tariff on direct Chinese exports to the US. 

It is still not clear how this will be implemented in practice. So far the White House has only said that "a list of countries and specific facilities used in circumvention will be published".  Our China-US Trade Rerouting Dashboard provides monthly estimates of transshipment flows and gives a sense of which countries are likely to end up on the list.

As for the impact on China, we remain fairly sanguine. Enforcement is likely to be challenging and even if outright rerouting is reduced, trade diversion will continue to dampen the impact of US tariffs on China's aggregate export performance. This note from May explains our thinking on the role of rerouting as a tariff offset.