When countries impose tariffs, those affected often seek creative ways to bypass them. This typically involves rerouting goods through third countries to sidestep the additional taxes. Following the tumultuous onset of the 2018 U.S.-China trade war during Donald Trump’s presidency, many questioned whether producers would exploit such routes. Our research reveals that while rerouting did occur, it was not as widespread as initially believed, and most reroutes came via Chinese-owned firms in Vietnam.
Our study, focusing on high-frequency trade data from Vietnam, examines the dynamics of this rerouting phenomenon. Specifically, we tracked Chinese goods rerouted to the U.S. through Vietnam amidst escalating tariffs. Notably, this strategy allows exporters to mislabel goods as originating from non-targeted countries, thereby avoiding higher tariffs. Despite the methods seen, our analysis shows overall rerouting levels were considerably overestimated by analysts and journalists.
Examining the surge of Vietnamese exports to the U.S. post-tariff, we discovered that from 2017 to 2022, Vietnam absorbed nearly half of China’s lost market share. Yet distinguishing trade rerouting from genuine trade growth proved complex, as prior relations between the U.S. and Vietnam already existed. We utilised two comprehensive datasets to meticulously track and measure the rerouting of products, leading to three essential findings.
First, our different measures of rerouting revealed significantly lower rates than expected. We identified only 1.7% at the firm level, compared to more inflated figures at the country and province levels, suggesting that a considerable portion of trade reported as rerouted might be legitimate transactions. Secondly, while rerouting increased due to tariffs, it accounted for only part of the overall surge in Vietnamese exports.
Lastly, the role of Chinese-owned firms in Vietnam was significant, contributing to over 61% of the observed increase in rerouted goods. This indicates that current tariffs aren’t as effective in halting Chinese exports as intended. Business leaders must thus remain vigilant in identifying reliable sources to avoid disruptions in their supply chains, while policymakers should rethink the effectiveness of broad tariffs in favour of specific sanctions against egregious offenders.
Tariffs lead affected countries to reroute goods through third nations, a strategy observed during the U.S.-China trade war. Research indicates rerouting through Vietnam, particularly via Chinese-owned firms, while increased, was not as prevalent as anticipated. Despite tariffs, these firms still impact U.S. markets. The findings call for more precise approaches in policy-making regarding tariffs rather than broad measures, which may be counterproductive.
Our research highlights a nuanced view of trade rerouting during the U.S.-China trade war. While the initial assumptions suggested rampant circumvention of tariffs, our findings indicate that rerouting is actually less common than presumed. Importantly, much of the rerouting was facilitated by Chinese-owned operations in Vietnam, raising questions about the efficacy of blanket tariffs. Moving forward, a targeted approach focused on specific firms may yield better results, safeguarding U.S. interests without imposing unnecessary burdens on legitimate trade.
Original Source: hbr.org
