May 2024 Volume 6

WASHINGTON UPDATE

Transshipment: The New Tariff-Evasion Strategy By Omar S. Nashashibi

In 2023, and thus far through 2024, imports from Mexico into the U.S. exceeded those from China. From 2017 through 2023, the number of twenty-foot containers shipped from China into Mexico nearly doubled. According to a February 21, 2024, article in the Financial Times, Mexico imported more than $9 billion in vehicle parts from China in 2023 while thirty-three Chinese-owned compa nies based in Mexico shipped $1.1 billion worth of auto parts into the U.S. Even the most casual of observers can connect the dots – the Chinese government is either transshipping goods through third party countries and/or subsidizing companies in those nations through economic transnationalism. Whether companies are physically located in China, or operating in third countries, the long reach of the Chinese Communist Party (CCP) continues to injure the U.S. and other North American manufacturers. And goods are not only entering the U.S. through Mexico, exports from Vietnam and other South and Southeast Asian nations continue to surge. The subsidization by the Chinese Government of manufacturers competing with members of the FIA is well known and documented. Subsidies can come in various forms, from cheaper or free energy, to forgiven loans, and non-enforcement of environmental, human rights, and other regulations. The New York Times wrote on April 19, 2024, that the annual net increase in loans to industry in China jumped from $84 billion in 2019 to $670 billion last year – that is not total lending, but the rate of annual increase in lending. These low-, or often no-interest, loans subsidize Chinese industrial produc tion at the expense of American manufacturers. The FIA and its members began raising awareness over transship ment and transnational subsidies with U.S. government officials years ago, and they are now standing up for the industry like never before. The U.S. Department of Commerce on March 25, 2024, released a final rule that took effect on April 24th changing its policy to allow the application of countervailing duties to address transnational subsidies, which it defines as “subsidies provided by a government or public entity in one country that benefit producers or exporters in another country.” This definition would certainly apply to China, including its Belt and Road Initiative. The action by the Biden administration provides an important tool to help American industry defend itself by meeting the rapidly changing demographics of government-subsidized entities that regularly seek to evade U.S. tariffs and duties on their imports. This will provide U.S. manufacturing companies an avenue to combat Chinese government cross-border subsidies that allow businesses

to evade tariffs and import into the U.S. with the CCP’s support. The U.S. government needs effective and flexible trade laws that can adapt to the change in supply chains as competitors engage in tariff and duty evasion by rapidly switching production to another country. This important action by the Commerce Department will help companies defend against countries who rapidly change strate gies and supply chains to evade duties and tariffs through transship ment and transnational subsidies. Also, with an eye towards China, the Biden administration is engaging the Mexican government to start addressing the surge in imported steel and other goods entering the U.S., largely tariff-free. The Office of USTR is meeting with their counterparts to possibly establish a steel, and likely an aluminum, import surge monitoring and enforcement mechanism. Talks could lead to a watch list to track specific types of imports entering the U.S. through Mexico thought to originate in China. The efforts to address transshipment are not a short-term exercise. In 2026, either a President Biden or Trump Administration will engage in negotiations with Canada and Mexico as part of a six-year review of the new NAFTA. The Biden White House has already telegraphed many of the changes it will seek with both parties, with transship ment of goods from China to receive duty-free treatment being the top priority. Former President Trump on the campaign trail has also alluded to trade action targeting imports from Mexico, pledging to impose 100 percent tariffs on Chinese cars manufactured in Mexico. Lawmakers on Capitol Hill are taking notice as well. The U.S. House of Representatives Committee on Ways and Means in April advanced several bills to address shipments of goods into the U.S. from China below cost. Bipartisan legislation is pending that would provide the Commerce Department, and American manufacturers, with additional tools to combat transnational shipments from China and others. The FIA is lobbying in support of these bills to update an antiquated system of trade laws to adapt to today’s global strategy of tariff and duty evasion. As domestic consumption and growth in China slows, the CCP is increasingly looking abroad to help keep its economy afloat. Chinese exports are now valued at roughly $3.5 trillion, up from $2.5 tril lion in 2020. In this election year, the Biden White House sees the threat to American manufacturing, especially those industries concentrated in 2024 battleground states. In April 2024, President Biden called for a tripling of tariffs on imported steel and aluminum from China. Ambassador Katherine Tai, the U.S. Trade Representative, the next day indicated that her office would conclude the four year review

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FIA MAGAZINE | MAY 2024