Transshipment and Excess Capacity as Instruments of Tariff Strategy

The world of trade is never really quiet. Last week, White House trade adviser Peter Navarro’s 25-page report “The Great Transshipment Scam,” alleging that over 40 countries, including India, help China evade US tariffs through transshipment,created considerable stir in global trade circles.

It ranks India among what it calls “China’s biggest enablers.” The report says that routing goods through a lower-tariff country and falsely claiming a new origin, creates the financial engine needed to support the “screwdriver factories” across Southeast Asia, Mexico, India, and Eastern Europe. It estimates that $67 billion worth US imports were transshipped from China through the top Hubs Mexico, India, and Vietnam in 2025, producing an estimated $28 billion in lost tariff revenue.

Before evaluating this latest protectionist step, let's start with the number that kicked this off. The incidence was that China was subject to additional tariffs under Article 301 of the US Trade Act of 1974 from April 2018, eventually covering more than $350 billion worth of goods with rates as high as 25%. Tariffs became the defining trade policy instrument of President Donald Trump’s second term.

How remained embedded in global supply chains

By the end of 2025, after multiple tariff rounds, the average US weighted tariff on China had climbed above 50% before falling back following bilateral negotiations in October. Real US imports from China dropped 40% below pre‑trade war levels set in June 2018. The Office of the US Trade Representative (USTR), in its 2024 review of the effects of the trade war, touted the decline in bilateral imports, saying, “tariffs have decreased China’s market share of US imports,” and that diversion to alternative suppliers is “potentially supporting more diverse and resilient supply chains for American producers and consumers.” Yet China remained embedded in global supply chains, often invisibly, through transshipment and component supply.

Even though the Supreme Court ruled in February 2026 that tariffs imposed under the International Emergency Economic Powers Act (IEEPA) were unconstitutional, tariffs are widely expected to continue under Trump 2.0 because the same month the administration launched a new trade investigation into “unfair trade practices” by 16 major economies, including India, China, and the EU.

Announced by Jamieson Greer, head of the USTR, the probe, under Section 301 of the Trade Act of 1974 focused on whether policies and practices of 60 economies, including India, maintained “structural excess capacity” in manufacturing through subsidies, state financing, or suppressed wages.

The deliberate bypassing of trade restrictions, tariffs, quotas, or sanctions through mechanisms like misrepresenting the country of origin, rerouting goods through a third country to exploit lower tariff regimes, or conducting only minimal processing before re‑export is export circumvention. When these practices disguise the true origin of goods, they fall under the category of “illicit transshipment.”

This subset of transshipment involves the transfer of cargo between ports or countries en route to its destination, but without substantive transformation. However,the use of transshipment to prevent trade deflection is also a controversial issue in the proliferation of free trade agreements (FTAs), especially when the illicit transshipment of goods from non-member countries take advantage of preferential access created by disparities in external tariff structures.

Accusations of export‑circumvention are often based on aggregate annual trade balance data, which can reveal sudden surges in exports that appear inconsistent with domestic production capacity. This raises the concern that the flows reflect tariff‑evading transshipment rather than genuine trade expansion. Issues of excess capacity and transshipment therefore carry  immense policy relevance for countries like India.

The White House estimates that every $1 billion worth of transshipment imports from Chinese exporters equalled nearly 6,000 U.S. jobs lost. Categorising India as part of ‘tier-1’ of the transhipment network, the report called India’s Pune – Gujarat – Chennai production belt “ugly sister” cities. “A Chinese pump that leaves Pune as Indian is a pump not machined in Cincinnati, Dayton or Columbus,” the report noted.

Investigations under 301 and the transshipment report coincided with a big win for the Trump administration when the Court of International Trade in New York recently upheld the elimination of the de-minimis exemption, meaning goods valued at $800 or less can no longer enter the US duty‑free. Michigan-based auto parts importer Detroit Axle had sued arguing that IEEPA did not give the president any independent authority to close the tariff exemption.

While the Supreme Court had earlier ruled that the president lacked authority under emergency powers to impose sweeping global tariffs, the trade court rules that IEEPA allowed the president to rescind a trade-related “privilege,” even if that law did not allow him to impose entirely new tariffs, siding with Trump’s authority to close the exemption. These developments certainly aid Washington’s search for alternative legal routes for fresh tariffs after the Supreme Court’s ruling.

India’s trade deal negotiations now face delays

India’s trade deal negotiations with the US, which were said to be close to conclusion after Trade Representative Jamieson Greer’s visit in June, now face delays. On July 23 USTR imposed an additional 10% ad valorem duty on 55% of imports from India. By placing India under scrutiny for excess capacity and transshipment risks, Washington may be attempting to pressure New Delhi into concessions.

The reports blur the line between transshipment as normally understood in international trade where imported inputs undergo genuine domestic value addition before re‑export and illicit circumvention practices involving mere relabeling or minimal processing. The failure to make this distinction undermines the credibility of the findings.

India is hesitating because of uncertainty over how excess capacity and transshipment investigations will be handled. It is particularly sensitive about being treated more favorably than regional competitors which are not subject to Section 301 excess capacity probes.

The Trump administration could be laying the groundwork for another set of curbs through the Congressional route, using these investigations as a pressure tactic to create negotiating leverage and reshape trade terms to America’s advantage. India cannot afford to allow genuine manufacturing to be confused with simple tariff circumvention and must therefore question both the basis and the conclusions of the report.

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