Tariffs imposed by countries may trigger attempts by those affected to dodge these taxes by rerouting goods via third-party nations. Following the 2018 U.S.-China trade clash, businesses in the impacted countries explored this strategy. Initial analysis hinted at widespread rerouting, with goods shifted through affiliates before reaching their final destinations, allowing exporters to sidestep tariffs by mislabelling their goods’ origins.
Our recent research, utilising high-frequency trade data, scrutinised rerouting through Vietnam after U.S.-China tariffs were established. Contrary to expectations, data revealed lower rerouting levels than forecasted but a notable increase linked to tariffs. A significant portion of this activity involved Chinese-owned entities operating in Vietnam, painting a complex picture of global trade practices.
For businesses evaluating tariffs’ influences, our findings indicate that while tariffs can lessen competitive pressures, they do not eliminate them entirely. Rerouting is less prevalent than previously believed, but the extent still inflicts higher costs on U.S. consumers. This research suggests that owing to their complexity, origin-based tariffs are less effective than sanctions targeting individual firms.
In our working paper, “Exports in Disguise?: Trade Rerouting during the U.S.-China Trade War,” we examined the rerouting of Chinese goods through Vietnam. Countries with close ties to China, particularly geographically and culturally, show higher rerouting tendencies. As a result, Vietnam rose as a pivotal player, filling the void left by China in U.S. imports during the escalating trade tensions.
Our analysis spanned two comprehensive datasets: the Vietnam Enterprise Survey (VES) and S&P Global’s Panjiva. Through this data, we established various metrics for measuring rerouting, focusing on how products moved from China to the U.S. via Vietnam. Our different classifications allowed for varying degrees of accuracy in assessing rerouting and the extent of trade impact.
The construction of our metrics involved careful evaluation of trade flows. At the country level, we noted substantial rerouting figures amounting to billions, potentially overestimating activities since legitimate trade could inflate these numbers. We subsequently refined our methodology to assess rerouting by province and firm, delivering a more stringent and precise analysis of Vietnamese trade patterns.
The results indicate a stark difference in estimated rerouting figures based on measurement granularity. For instance, we identified 16.5% as country-level rerouting in 2021, dropping to 6.5% at the province level and just 1.7% at the firm level. Interestingly, this suggests that while rerouting exists, actual figures may not align with initial market assessments.
The research investigates the consequences of tariffs on trade rerouting, particularly regarding Chinese goods rerouted through Vietnam following the 2018 U.S.-China trade war. Through detailed analysis, findings show rerouting levels are lower than expected but still increased due to tariffs, predominantly involving Chinese-owned firms. This indicates a need for policymakers to consider more targeted approaches in addressing tariff circumvention, which could help avoid unnecessary cost burdens on consumers.
Our findings underscore the necessity of nuanced measures in understanding rerouting trends in trade. While tariffs can spur increased rerouting, it is often less widespread than anticipated, primarily occurring through Chinese-owned enterprises in Vietnam. As the landscape of global trade shifts, policymakers would benefit from precise data targeting specific firms rather than broad, country-wide tariffs, ensuring fairer trade practices and minimising the economic burden on consumers.
Original Source: hbr.org
