White House Flags India: China Transshipment Risk

The White House has designated India as a Tier 1 country susceptible to China-linked transshipment risks, according to its recent report, “The Great Transshipment Scam.” This classification points to concerns about goods rerouted through third countries to bypass US tariffs.

This designation, which also includes nations like Canada, the EU, Israel, Japan, Mexico, South Korea, and Taiwan, does not accuse the Indian government or all exporters of deliberate evasion. Instead, it underscores the inherent difficulty in distinguishing legitimate trade from potential transshipment in diverse manufacturing economies.

Understanding the Transshipment Mechanism

The US alleges that Chinese exporters leverage third countries for minimal processing, falsely claiming non-Chinese origin for goods. This practice intensified following the 2018 Section 301 tariffs.

• Transshipment itself is not illegal; the issue arises when goods are declared as originating in a third country without sufficient processing.
• India, Mexico, and Vietnam were identified as major hubs for China-origin goods by 2025.
• An estimated $67 billion in goods are projected to be transshipped through these countries by 2025.
• India’s Pune-Gujarat-Chennai production belt, specifically for pumps and compressors, has been highlighted as a potential area of exposure.

Key Financial Implications

• Annual illegal transshipment is estimated between $40 billion and $303 billion, with a central estimate of $75 billion.
• This leads to an estimated $19 billion-$34 billion in lost tariff revenue for the United States.

In response to these findings, US Customs and Border Protection is actively developing an AI-based system named “Detective Border.” This technology aims to identify suspicious shipments more efficiently and accurately.

Potential Impact on India-US Trade

This assessment could lead to more stringent rules of origin discussions in ongoing India-US trade talks. Indian exporters using Chinese components might face requirements for more extensive evidence of local processing.

Such changes could potentially increase compliance costs and customs risks for businesses operating in India. However, the report currently imposes no India-specific penalties or changes to existing tariff rates on Indian goods.