Targeting Chinese-origin inputs
President Trump’s new trade deals in Southeast Asia couple preferential market access for the US with punitive tariffs to choke off China’s ability to route exports through third countries.
At the heart of these deals are additional tariffs of 40 per cent on transshipped goods and tighter rules of origin, a combination that, experts say, risks upending supply chains, undermining foreign investment, and testing the limits of global trade law.
Essentially, the US is sending a clear signal: trade deals will no longer be purely about mutual tariff cuts; rather, they are now instruments of geopolitical competition, designed to constrain rivals and shape the geography of global production.
Adil Nakhuda, a Karachi-based trade economist, explains that transshipment, or origin washing, is typically a method to avoid high tariff duties, especially on Chinese goods. He points out that several countries from the Association of Southeast Asian Nations have been identified as potential targets for additional tariffs on transshipments via customs inspections. “This is not targeted at any country but rather at the use of Chinese inputs in production.”
Washington has secured total market access and a zero-tariff rate from Hanoi in exchange for a 20pc duty — down from 46pc originally announced in April — on Vietnamese exports, besides embedding punitive tariffs on goods transshipped through Vietnam.
Washington’s tariff strategy aims to lock in bilateral benefits for the US while choking off Beijing’s regional export channels
Vietnam, now a manufacturing hub for global brands like Nike and Apple, relies heavily on inputs from China and South Korea for its assembly operations, with most finished goods destined for the US and China — a supply chain structure that now faces steep cost hikes if intermediate goods come from high-tariff countries.
“The share of Chinese content in Vietnam’s exports to the US has increased significantly, from 9pc in 2018 to about 30pc in 2022. Chinese investment significantly increased in Vietnam in the last five years to benefit from the lower tariffs offered to Vietnam. This is part of the ‘China Plus One’ strategy that uses third countries to increase exports of Chinese products to its main market, the US,” muses Mr Nakhuda.
A similar pattern has emerged in Indonesia. Jakarta’s deal with Washington lowers US tariffs on Indonesian imports from 32pc to 19pc in exchange for zero duties on almost all US goods and removal of import restrictions. While such terms might ordinarily make Indonesia an attractive re-export hub, the agreement’s rules-of-origin language indicate Washington is bent on preventing the country from becoming a backdoor for Chinese goods.
The Indonesian government has already pledged to block transshipments to protect the deal, as Trump has been explicit that any goods entering the US via Indonesia from a higher-tariff country will pay both Indonesia’s 19pc rate and the original tariff.
The strategy is clear: lock in bilateral benefits for the US while choking off China’s regional export channels. But this approach is not without collateral damage. Thailand, another beneficiary of the post-2018 shift of production from China, illustrates the stakes. Chinese exports to Thailand and US imports have both grown at over 10pc annually since 2018. Yet its overall trade volumes are still far smaller than Vietnam’s, underscoring how dependent such growth remains on seamless regional supply chains.
The World Trade Organisation has warned that punitive tariffs on transshipped goods are inherently disruptive, especially when transshipment is used loosely and politically. International trade law recognises a change in origin if a product is “substantially transformed” either by changing tariff classification or meeting a regional value content threshold, typically 35–45pc.
For Southeast Asian economies, the implications of transshipment tariffs are significant, as their export-driven growth model hinges on integrating Chinese intermediate goods into low-cost final assembly. Replacing these inputs would require years of major new investments.
The World Trade Organisation warns that punitive tariffs on transshipped goods are inherently disruptive, especially when transshipment is used loosely and politically
While transshipment has indeed contributed to the rise in China’s exports to the region, the bigger driver is structural change: companies relocating production to lower-cost assembly hubs like Vietnam and Indonesia. The ‘China Plus One’ strategy, which has drawn billions in foreign direct investment (FDI) from various countries, including China, is premised on this integration. Curtailing the flow of Chinese components risks weakening these economies’ appeal as manufacturing hubs, and with it the very FDI they count on to expand capacity and boost exports.
Vietnam’s experience illustrates the stakes. Foreign-invested enterprises account for over 70pc of its goods exports. These investors use Vietnam largely as an export platform, with the US as the primary destination. But America itself provides relatively little FDI. Washington’s transshipment tariffs could severely undermine Vietnam’s role as a low-cost gateway to the US market, forcing a rethink of supply chain strategies across the region.
According to Mr Nakhuda, the restrictions will likely impact Chinese investments. “For instance, Vietnam saw a fall in Chinese investment in 2024 as it became more evident that Trump would target Vietnam.”
For countries like Pakistan seeking to attract export-orientated FDI, the lesson is sobering: investors prefer ecosystems with smooth supply chains and predictable market access. Mr Nakhuda says, “The idea is to encourage investments from all countries that have the latest know-how and technical advantages in the production of goods so that Pakistani producers can produce goods more efficiently.”
He says it will become increasingly important for Pakistan not to become heavily dependent on one source for its inputs. For instance, he suggests, joint ventures and agreements can be negotiated at the firm level to encourage the relocation of the production of goods where Pakistan cannot only produce more efficiently but also help the source country focus on goods where they have their own comparative advantage.
Mr Nakhuda emphasises that current trade strategies require a careful eye on the trade surplus with the US while ensuring value chain linkages across the smaller countries that reduce the share of Chinese inputs. “We may also see that China is concentrating more on exporting capital goods such as machinery and equipment rather than intermediate goods, as transshipment and rules of origin do not necessarily take into account the origin of the machinery used in the production of the goods.
“The idea here is for smaller countries to increase the share of value addition in their own goods and export to major markets so that they can take advantage of tariff differences and not be targeted for further penalties through transshipment of Chinese goods as well as increasing the trade surplus with the US.”
Published in Dawn, The Business and Finance Weekly, August 18th, 2025
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