Geopolitics
China's gallium exports: Exports to U.S. completely dried up
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A new White House report titled "The Great Transshipment Scam" has sparked controversy for its claims regarding Chinese tariff evasion. As an economic policy document, it has drawn criticism from reputable economists who, while acknowledging the real issue of tariff arbitrage via transshipment, view the report’s sweeping conclusions as misguided. The central flaw is its conflation of two distinct phenomena: the legitimate "substantial transformation" of Chinese- made inputs in third countries, and the illicit practice of superficially repackaging or relabeling goods to obscure their origin. The report appears to view nearly any international division of labor as illegitimate if it involves significant Chinese content. For instance, an accompanying op-ed by Peter Navarro cites a reclining chair made in Vietnam with a Chinese motor as an example of tariff evasion – a case that, under a conventional interpretation of U.S. customs law, would likely qualify as a legitimate substantial transformation.
Trade data clearly shows that global supply chains have reacted to U.S. tariff policy. The U.S. began raising tariffs on imports from China disproportionately to other countries starting in 2018. As the tariff gap between goods from China and the rest of the world widened, the share of U.S. imports originating from China has fallen – while overall imports overall continued to rise, and the share of Chinese value-add in imports remained steady. Clearly, trade has shifted to circumvent Washington's China tariffs. However, attributing this entire shift to an illicit "scam" is a deliberate oversimplification. Much of this rerouting involves legitimate investment in new manufacturing capacity in countries like Vietnam, Mexico, and India, which use Chinese components to produce finished goods. The report’s narrative ignores this complex reality of globalized production.
The declared goal is to protect U.S. manufacturers from underpriced foreign competition. Yet data shows that the tariff hikes under the second Trump administration have had little positive impact on U.S. manufacturing employment. The report focuses on stricter customs enforcement at U.S. borders, including the implementation of new executive order under Trump II, as its key proposal. The report previews one new enforcement tool, an "AI Detective Border," but provides scant detail on its implementation, which suggests it is likely in a very early stage.
The report is best viewed as an outlet for a hard-line protectionist faction within the U.S. administration rather than a practical and enforceable policy proposal. Its main impact may be on U.S. administration rationales and rhetoric. If its sharp language is taken up by top-level U.S. leaders, it could easily exacerbate trade tensions. The report essentially portrays Chinese exporters as masterminds of a vast tariff evasion scheme, with actors in third countries – including key U.S. allies and strategic partners like India – as "accomplices." This finger-pointing risks creating significant diplomatic friction, particularly ahead of the upcoming Trump-Xi summit in the U.S. scheduled for later in September. In the past, Washington has sought to avoid stirring up tensions ahead of top-level U.S.–China meetings – not so in this case. The actual summit will give a clearer indication how the U.S. administration will prosecute these grievances and China's response.
