How much trade is dodging Trump’s China tariffs?

Over the last two years, President Donald Trump has raised taxes on US imports from China by more than 500%.

In 2018, these goods represented more than a fifth of everything Americans purchased abroad. The new taxes, ostensibly leverage for negotiations, seem unlikely to be lifted as discussions between Washington and Beijing turn increasingly turn sour.

So, as you might expect, people are cheating. And that “cheating” is starting to reshape the world economy.

By analyzing trade data, Quartz identified likely candidates for Chinese goods transshipped through third countries and then on to the US in an effort to avoid tariffs. Nearly $400 million in goods fitting this rubric came to the US from Vietnam, Taiwan and Thailand alone in the first quarter of 2020. At the current average tariff rate of 19.3%, after a peak of 21% last year, that might represent up to $60 million in avoided duties.

Gary Clyde Huffbauer, a longtime trade scholar, offers a rough estimate, based on the experience of trade dodging economic sanctions, that 5% to 10% of pre-tariff US imports from China might be mislabeled to avoid the new duties. That estimate represents a range between $22 billion and $45 billion worth of trade, based on 2019 imports from China worth $452 billion.

Like a dam in a river, the new tariffs are sending goods flowing in different directions, carving new channels for the global supply chain. Mislabeled Chinese goods are a bellwether for the next evolution of global industrial clusters already emerging in the wake of coronavirus and rising protectionism.

And while some American companies decry competitors who manage to suborn the trade regime, ideological opponents of tariffs aren’t surprised. The challenge of enforcing and collecting tariffs is made plain by the new duties, which have yet to accomplish their advocates’ goals-shrinking the US trade deficit and winning new leverage in talks with China.

“The initial tariffs are inefficient, so you can say that the scofflaws are improving efficiency by getting around it,” Huffbauer says.

From free trade to fee trade

Before Trump’s trade war, the US boasted some of the lowest average tariffs in the world, with an average duty of 1.6%. That didn’t eliminate cheating, but it tended to confine it to some very specific areas: Goods that were subject to additional penalties under global rules designed to punish nations that give unfair advantages to their exporters.

Whether or not those duties get paid is hard to know. When businesses import goods into the US, the information they give to US Customs on its origins is considered a private matter, and not disclosed to the public even if law-breaking is suspected. So US producers have long suspected that more cheating was occurring than being caught.

They’re probably right: The US Government Accountability Office estimates that since 2001, some $4.5 billion worth of punitive tariffs had been assessed but gone uncollected, largely because of the time-consuming, complex process by which the duties are assessed and collected. And that’s on goods they’ve already identified as violating the rules.

US manufacturers’ concerns about customs enforcement have only risen since China joined the World Trade Organization in 2001 and became the world’s export leader and the largest source of US imports. The sheer size of China’s comparatively cheap labor force re-oriented the global economy around China’s exports. There is even evidence this revolution led the US to experience new political instability.

Undoubtedly, China’s rise generated a re-think of the US national consensus on free trade unfettered by excessive taxes. One consequence was the rejection of US participation in the Trans-Pacific Partnership (TPP), an ambitious Obama-era attempt to create a new free trade bloc, by both Republican and Democratic leaders. Another result, arguably, was Trump’s election, and the tariffs he imposed.

But just what are the results of these new import taxes? A look at trade between China, Vietnam, and the US can help answer that question.

How trade patterns shifted

To understand how trade patterns are shifting, Quartz analyzed global trade data to identify products that seemed likely candidates for tariff evasion. We first chose to look at trade between the US, China, and Vietnam, because Vietnamese exports to the US are already fast-growing and the country is conveniently located for the job.

We used three criteria: First, we looked at exports of products from China to the US that fell from the first quarter of 2017 to the first quarter of 2020 by more than 25%. Out of those, we only considered products whose exports from China to Vietnam, and from Vietnam to the US, tripled over the same period. Finally, we only include exports of products that increased by over $1 million between both China and Vietnam and Vietnam and the US.

We found eight products that met these conditions. They include sweaters, mattresses, and vacuum cleaners, among others. All eight of these products have faced tariff hikes since 2018. We believe these are fishy patterns that suggest mislabeling is afoot.

One example of a product’s trade that looks suspicious is “ handkerchiefs and paper towels.” In 2015 and early 2016, there were almost no exports of handkerchiefs and paper towels from China to Vietnam or from Vietnam to the US. In the first quarter of 2020, both export pairings reached almost $3 million. Meanwhile, handkerchief and paper towels exports to the US from China fell from over $40 million in the first quarter of 2018 to $23 million in 2020. While it is certainly possible that this is a coincidence, it is striking that a sharp increase happened after the US increased its tariff on the product.

We did another search with more relaxed standards. This time we looked at exports of products from China to the US that dropped by 5%, instead of 25%. And we considered products whose China-Vietnam and Vietnam-US trade doubled, not tripled. We found 21 product that met that threshold.

Across all of these products, Vietnam’s exports to the US were almost $300 million higher in the first quarter of 2020 than in 2017. Some significant share of this trade is likely to be evasion.

We also used these lower standards to analyze trade between the US, China and Taiwan, and found five products that met them, including belts and aluminum foil. For these products, Taiwan’s exports were $27 million higher in the first quarter of 2020 than in the same period in 2017. We also found four products that met this criteria for trade between China, Thailand and the US, including air conditioners and wireless headphones, which amounted to $67 million extra in trade. (An appendix at the end of this article includes a list of the products we found to have suspicious trade patterns.)

A peek at the process

While our macro analysis is suggestive, digging down to specifics is harder. The new tariffs that Trump issued against Chinese goods come under the authority of a US trade law known as Section 301, which allows the president to impose tariffs to pressure other countries to end unfair trade practices.

Brian Hoxie, the director of customs enforcement at the CBP, told Quartz that his agents are actively enforcing the new tariffs, but can’t share specific details. “Laws like the Trade Secrets Act that protect the importer’s rights limit how much information we can put out,” he explained.

Other tariffs come with more transparency. In 2015, US lawmakers passed a package of customs enforcement measures in an attempt to sweeten the appeal of the TPP. One gave more teeth to efforts to block the import of goods made with slave labor. Another, called the Enforce And Protect Act, created new transparency around retaliatory duties.

Consider xanthan gum, a chemical harvested from fermenting sugar that is used to thicken everything from salad dressing to the fluids used to drill oil wells. In the US, its key manufacturer is the family-owned company CP Kelco, and in 2012 it alleged that Chinese xanthan gum producers were “dumping” their products into US markets at unfair prices. US trade officials agreed, and imposed duties ranging from 12.9% to 154.1% on the imports.

At one time, it would have been the end of the conversation. CP Kelco could suggest that customs look out for cheap imports based on what it saw in the market, but after that the process was “little bit of a black box,” according to J. Michael Taylor, a partner at the law firm King & Spalding who frequently represents US businesses in customs matters.

That changed with the passage of EAPA. Now, customs can share redacted reports on allegations of trade cheating. In 2019, CP Kelco alleged that some companies, including Dr. Bronner’s Magic Soaps, were importing xanthan gum that was made in China, then re-purchased in India to avoid the tariffs.

The CBP’s investigators agreed, noting in their report (pdf) that one of the Indian re-sellers “has stated not only that it does not produce xanthan gum, but also that the xanthan gum it shipped to the importer was manufactured in China.” Dr. Bronner’s and other importers are now appealing that ruling. If their appeal fails, they will have to pay the full duty on the goods. But any final decision will be made well over a year after the actual goods changed hands, illustrating the slow pace of customs enforcement.

Taylor, who has brought EAPA cases on behalf of his clients, says the EAPA process is an improvement that allows for better enforcement. Still, the CBP has only issued 20 final determinations about alleged evasion of punitive duties since the law was passed.

Chinese goods by any other name

Lawyers for US producers argue that the EAPA rules, which allow CBP to publicly discuss tariff enforcement actions, should be expanded to include the Section 301 tariffs on China, making them more likely to be enforced. US importers, not surprisingly, tend to see existing enforcement as sufficient.

US Customs did say it recovered $840,000 in duties on misclassified imports in the current fiscal year, on everything from auto parts to glass products. In context, the agency has collected $55 billion in 301 tariffs from US importers of Chinese goods since they were first imposed in July 2018.

Thus far, the stated goal of the new tariffs-closing the deficit between US imports and exports-has not been achieved. Many economists are not surprised, because they argue that deficit is driven more by foreign purchases of US assets like Treasury bonds than the trade in goods. The tariffs have decreased the US’s overall imports of targeted Chinese products, but that hasn’t been all that’s happened. The effect of the tariffs has also been to push that commerce to new markets-either through mislabeling or through real shifts in manufacturing.

Amit Khandelwal and David Atkins, a Columbia University business professor and an MIT economist, have examined how distortions in trade -like tariffs and their evasion-affect economic development in low-income countries.

“‘Re-routing’ or ‘trans-shipment’ could potentially lead to actual production in the countries being used for trans-shipment,” Kahandelwal and Atkins wrote to Quartz. “Likely the Chinese firm would need to choose a country with favorable tariff treatment and set up some local infrastructure to carry out the trans-shipment.”

As an example of this, they point to Bangladesh’s huge garment industry. It got its start with a South Korean producer forming a joint venture in the country to take advantage of low tariffs for Bangladeshi goods in Western markets.

The two researchers also observed that there are surprisingly few studies on polices that reduce tariff evasion. It may have something to do with the near-universal view in economics that tariffs are a bad idea in the first place. But they noted the French Nobel-winning economist Esther Dufflo’s observation that her field does not spend enough time on the “plumbing” of economics. “In the case of tariff collection, this would include mundane but important questions like should electronic systems be used at the border to process payments, or how are customs officials paid and incentivized,” they write.

In a world where leaders now look upon these taxes as a key tool for shaping domestic industry and gaining leverage over economic rivals, the black box of tariff enforcement needs to be opened.

The following table shows 21 products with trade patterns that appear to be likely candidates for trade evasion. All saw exports from China to Vietnam and Vietnam to the US double, while China to US exports fell. The following table shows five products with trade patterns that appear to be likely candidates for trade evasion. All saw exports from China to Taiwan and Taiwan to the US double, while China to US exports fell. The following table shows four products with trade patterns that appear to be likely candidates for trade evasion. All saw exports from China to Thailand and Thailand to the US double, while China to US exports fell.

Originally published at https://qz.com on July 13, 2020.