illegal transshipping

A few days ago, in China Manufacturing: “Elvis Has Left the Building”, we mentioned a South China Morning Post article suggesting the manufacturing exodus from China will not abate, regardless of any patches trade negotiators manage to place on the overall, strained U.S.-China relationship. That article included some sobering stats on the giant sucking sound we have heard coming from China the last couple years:

Compared with June 2018, the month before the trade war began, US imports of goods from Vietnam have soared 51.6 per cent, Thailand 19.7 per cent, Malaysia 11.3 per cent, Indonesia 14.6 per cent, Taiwan 30 per cent and Mexico 12.7 per cent, according to South China Morning Post calculations based on US Census Bureau data for November.

Some of our readers have suggested that illegal transshipment of Chinese goods through these countries may account for a significant part of their export gains. (NB, when transshipment is legal, the goods are classified by U.S. Customs and Border Protection (CBP) based on the country of origin). If true, this would suggest the trend we are observing is a superficial one, which could be easily reversed. It would also suggest that many exporters who are “relocating” are in fact only placing a fig leaf over their China production, hopeful that it will soon be —China— business as usual and/or unable to find an alternative to “just right” China.

Our firm has no doubt that illegal transshipment is a reality. In fact, in “Illegal Transshipping/False Country of Origin — Help Us Help You Get Rich”, we recently highlighted our international trade law team’s success in helping the U.S. government recover $62.5 million from a company called Univar, for seeking to avoid a 329% antidumping duty by sending Chinese goods through Taiwan.

Meanwhile, the imposition of Section 301 tariffs by the Trump Administration has dramatically increased the number of Chinese products subject to U.S. tariffs. As a Pittsburgh Post-Gazette article on Christmas lights (those made in China now subject to 25% tariffs) explains, “Chinese suppliers are finding ways to ditch the ‘Made in China’ label to evade penalties, using neighboring countries like Vietnam to transport goods across borders, relabel them and ship them to the U.S.”.

However, as both our experience with Univar and the Post-Gazette article make clear, the illegal transshipment of goods is an exceedingly risky endeavor. The penalties are high, as we pointed out in “China Tariffs and What to do Now, Part 1”:

Importers that knowingly falsely label the country of origin on their imports are subject to significant fines and penalties under 19 U.S.C. § 1592 and to criminal prosecution under 18 U.S.C. § 542 (import by using false statement) and 18 U.S.C. § 545 (smuggling). Lying about a product’s country of origin can subject you to 20 years in Federal prison.

Meanwhile, the risks of detection are considerable. The folks at CBP are obviously aware of the games people play, and have “become expert at discovering such evasions”. They inspect shipments from Vietnam and the like conscious of the fact that right now there are many Chinese exporters and U.S. importers trying to pull the wool over their eyes. It’s not as simple as simply stitching on a “Made in Vietnam” label; certainly not if CBP decides to probe.

It is important to keep in mind that CBP increasingly has eyes on what happens overseas. In 2018, CBP “conducted more than 10 foreign onsite verifications in Thailand, Malaysia, and Cambodia… crucial to gather evidence for transshipment evasion”. Again, that was 2018. Earlier this year, the WSJ reported that “U.S. officials are stepping up enforcement against companies re-exporting Chinese goods via the Chinese-owned Sihanoukville Special Economic Zone in Cambodia, accusing unidentified firms of transshipment”. CBP also has quite a bit of information about factories that participate in the C-TPAT program, which could potentially be used to corroborate country of origin claims.

Authorities in exporting countries are also on the lookout, as the Post-Gazette article on Christmas lights illustrates:

For Au Anh Tuan, head of customs control and supervision in the General Department of Vietnam Customs, curbing the flow of illegal goods is a struggle. Through October, officials had uncovered about 14 significant cases of exports with fake labels this year.

‘We’ve been working with the ministry of planning and investment in scanning thoroughly FDI from China and Hong Kong,’ he said in a November interview in Hanoi. Chinese foreign direct investment into Vietnam grew by triple digits in 2019, data through November show.

Mr. Tuan said they’ve been looking at the investment value — and especially the scale of factories and technology use — to determine whether investors aim to ‘just set up a place to assemble all the parts they brought from China.’

They also check whether the planned products are subject to U.S. tariffs, a clue that investors may be trying to evade the penalties.

As the manufacturing sector in places like Vietnam continues to grow, expect enforcement to be stepped up. According to the WSJ, Vietnam is “vulnerable to losing some of its newfound business if the country is perceived as a transshipment center” (not to mention vulnerable to tariffs being imposed against it). As put by the Vietnamese Ministry of Industry and Trade, “Such fraudulent labeling not only directly affects products and consumers, but also significantly reduces the reputation and competitiveness of goods manufactured in Vietnam”. It’s one thing for Chinese producers to stiff the United States, and a very different one for them to stiff homegrown companies vying for market share. Word on the street is that the CBP intends to drastically step up its investigations and enforcement against illegal transshipping immediately following the signing of the US-China “phase one” trade deal.

And this provides a nice segue to the final point, which is that, in addition to U.S. and foreign customs, affected companies themselves are also on the lookout for those breaking the rules. As we have pointed out:

One of the biggest hammers against transshipping is the False Claims Act (“FCA”).  The FCA (31 U.S.C. § 3729) allows people or companies to file what are called “qui tam” lawsuits against individuals or companies that directly or indirectly defraud the Federal government seeking triple damages on the government’s behalf. Anyone who knows of the fraud, including a competitor company may file a qui tam lawsuit. And they do.

And we know this because we have represented such spurned competitors in the past—and represent them right now. Heck, if you know of any illegal transshipping going on out there, let us know so we can all profit together from that!

To sum up, without doubt the illegal transshipment of Chinese goods is a reality. At the same time, transshipment is far from being a simple trick that magically makes tariffs disappear. It’s not as easy to conceal as some would think, and the risks associated with getting caught are grave. Prison grave. Massive fines grave (see the $62.5 million Univar paid, as discussed above). With all this in mind, serious importers are wisely choosing to steer clear of such practices.

What are you seeing out there?

 

 

 

 

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Photo of Fred Rocafort Fred Rocafort

Fred is a former diplomat who joined Harris Bricken after more than a decade of international legal experience, primarily in China, Vietnam, and Thailand. His wide range of experience includes starting and operating his own business in Asia, working as an in-house counsel…

Fred is a former diplomat who joined Harris Bricken after more than a decade of international legal experience, primarily in China, Vietnam, and Thailand. His wide range of experience includes starting and operating his own business in Asia, working as an in-house counsel for a Hong Kong-based multinational, as well as many years as a State Department official, providing a client-centric perspective to his legal work. Fred co-hosts Harris Bricken’s weekly Global Law and Business podcast, which covers legal and economic developments in locales around the world to decipher global trends in law and business with the help from international guests.

Fred began his career overseas as a U.S. vice-consul in Guangzhou, China, adjudicating thousands of visa applications and advocating for fairer treatment of American companies and citizens in China and for stronger anti-counterfeiting enforcement. After entering the private sector, Fred worked at a Shanghai law firm as a foreign legal advisor and later joined one of the oldest American law firms in China. He also led the legal team at a Hong Kong-based brand protection consultancy, spending most of his time out in the field, protecting clients against counterfeiters and fraudsters from Binh Duong to Buenos Aires.

Fred is an ardent supporter of FC Barcelona—and would be even in the absence of Catalan forebears who immigrated to Puerto Rico in the mid-1800s. An avid explorer of Hong Kong’s countryside, he now spends much of his free time discovering the Pacific Northwest’s natural charms.