Southeast Asian Countries Engaging in Export Circumvention: Not So Fast

Export circumvention has become a key policy concern in Southeast Asia following the US’ announcements on final reciprocal tariff rates. The Trump administration has threatened to levy an additional 40 per cent tariff on goods that are transshipped with the goal of circumventing the tariffs imposed by the US. This policy is likely to be informed by the argument that such transshipment activities have brought about a decline in China’s trade deficit with the US and a simultaneous increase in Southeast Asia’s trade surplus with the US. On the surface, aggregate trade data does suggest that some export circumvention has occurred — that is, Chinese exporters are routing more of their US-bound exports via Southeast Asian countries. However, if one delves deeper into specific subcategories of exports, the picture is more nuanced.

To analyse this problem, it might be useful to first explain the mechanics of export circumvention via fraudulent transshipments. Theoretically, higher US tariffs on goods imported from China could incentivise Chinese exporters to circumvent these tariffs by masking the true origin of their goods when entering the US market. Such export circumvention would take place if the additional tariffs exceed the cost incurred in circumvention. 

The range of possible circumvention activities is likely to vary, ranging from shell entities to light manufacturing lines. These activities typically begin with importing goods from the origin country (for example, China), which are then quickly re-exported to the destination (the US) within a short period of time. The product classifications of these imported goods (at a disaggregated level) are likely to be the same as those of the re-exported goods. If export circumvention is taking place, we would expect to observe an increase in these countries’ trade deficits with China (due to higher imports), accompanied by an increase in their trade surplus with the US (due to re-exports).

Based on the above arguments, three Southeast Asian countries — namely, Cambodia, Thailand and Vietnam — appear to fit the description (Figure 1). During the 2018-2024 period, their trade deficits with China rose simultaneously, while their trade surplus with the US widened. On the surface, this suggests that some form of export circumvention may have occurred. 

Export Circumvention? 

Figure 1: Annual Trade Balance with China and the US (in US$ millions)

However, the correlations between China’s trade balance with Southeast Asian countries and these countries’ trade balances with the US are much weaker when we analyse the trade data at a more disaggregated level. These correlations are only observed in the textile and garment trade (HS codes 56-63) and only in the cases of Cambodia and Vietnam (Figure 2). The industries are virtually the largest tradable sector for Cambodia, accounting for 38.3 per cent of total imports from China and 31.8 per cent of total exports to the US in 2024. The industries are much smaller for Vietnam, whose corresponding shares were 11 per cent.

Associating trade balances with export circumvention activities could mislead policymakers into undertaking interventions that are not useful in addressing concerns related to the additional and sweeping transshipping tariffs.

These observations should not be taken as conclusive evidence of transshipment to evade tariffs. This is because data coverage of the industry is very broad. It encompasses the entire spectrum of supply chain in the textile and textile article industry: synthetic fibres, yarns, fabrics, garments, and household textiles. The co-existence of the trade deficits with China and the trade surpluses with the US could simply be a reflection of usual production network activities. Firms in both countries import fabrics (HS 50-60) from China, which are then cut, sewn and trimmed before they are exported to the US. These value chain activities existed even before the outbreak of the trade war between the US and China in 2018.

Weaker Correlations 

Figure 2. Cambodia and Vietnam’s Trade Balance with China and the US: Textile and Textile Articles (US$ millions) 

The correlation between Thailand’s trade balance with China and the US in the machinery and electrical equipment industry (HS 84-85) indicates possible export circumvention (Figure 3). However, the correlations are much weaker. In addition, the magnitude of Thailand’s trade deficit with China in this category was only half of that of the trade surplus with the US. In 2024, for example, Thailand’s deficit with China in this trade category was US$16.9 billion — much smaller than the US$33.3 billion trade surplus with the US. Even if Thailand had re-exported all its machinery and electrical equipment exports from China to the US, a significant part of Thailand’s US$33.3 billion trade surplus with the US in this category is unaccounted for. The difference would indicate that substantial manufacturing activities are made on Chinese imports before they are further exported to the US. In fact, multinational enterprises (MNEs) in this industry have long been engaged in a global production network. Trade within this industry reflects inter-country specialisation within the MNE production networks.

A More Nuanced Picture

Figure 3. Thailand’s Trade Balance with China and the US: Machinery, Appliances and Electrical Equipment (US$ millions) 

All in all, the aggregate trade balance is not a useful measure of export circumvention. Associating trade balances with export circumvention activities could mislead policymakers into undertaking interventions that are not useful in addressing concerns related to the additional and sweeping transshipping tariffs. Investigations of export circumvention will require a case-by-case analysis using disaggregated data. The threat of additional tariffs on transshipment products should be based on the extent to which products rely on imported raw materials and intermediates.

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