China Continues "Country of Origin Laundering"... U.S. Likely to Use Tariff Negotiations as Leverage

China's Exports Rise 4.8% Year-on-Year in May
U.S. Trade Plunges 43%, Offset by ASEAN and Europe
Negotiation Deadline Approaches... Possible "Transshipment Rules" Like Vietnam

At a side event of the G20 Summit held in Osaka, Japan in June 2019, U.S. President Donald Trump (left) and Chinese President Xi Jinping are shaking hands. Photo by AP

Despite U.S. trade sanctions against China, it has been confirmed that China continued to export goods to the United States indirectly via Southeast Asia through May. With the tariff negotiation deadline set for July 8 (local time), the Donald Trump administration is expected to use this as leverage and may take steps to completely block "country of origin laundering."

According to the Financial Times (FT) of the UK, China's total exports in May increased by 4.8% year-on-year. During the same period, exports to the United States dropped by 43% compared to the previous year, but this was offset by a 15% increase in exports to ASEAN (Association of Southeast Asian Nations) and a 12% increase in exports to the European Union (EU).

By individual country, only two destinations? the United States and South Korea? saw a year-on-year decrease in export volume. In contrast, exports to Hong Kong, Vietnam, Japan, India, Germany, and Malaysia all increased compared to the previous year.

China was able to avoid U.S. tariff sanctions by rerouting exports to the United States through Southeast Asia. Mark Williams, Chief Asia Economist at the UK consulting firm Capital Economics, noted, "This was similar during the first U.S.-China trade war," adding, "U.S. imports from China plummeted, but imports from Vietnam and Mexico surged."

According to Capital Economics' own research, approximately $3.4 billion worth of Chinese goods were rerouted through Vietnam in May alone, a 30% increase from the previous year. Of this, exports of electronic products? including printed circuit boards, mobile phone components, and flat panel display modules? amounted to $2.6 billion, a 54% surge year-on-year. During the same period, indirect exports via Indonesia also rose by 25%.

Chinese exports to Europe also increased during this period, but these were seen as different in nature from exports routed through Southeast Asia. As the Trump administration abolished the "de minimis provision," which had allowed duty-free entry for goods valued under $800 this year, Chinese products that lost access to the U.S. market are now flowing en masse into Europe through Chinese e-commerce platforms such as Temu and Shein. The EU is reportedly considering countermeasures, such as imposing a 2-euro packaging fee on parcels.

Market analysts believe that with the expiration of the reciprocal tariff suspension deadline set by President Trump on July 8, China's indirect exports are likely to decrease. There is a strong possibility that the U.S. will add new regulations on transshipped goods, using the recent trade agreement with Vietnam as a model.

Previously, on July 2, the Trump administration signed a trade agreement with Vietnam that imposes a 20% tariff on Vietnamese goods imported into the U.S., while not imposing tariffs on U.S. goods exported to Vietnam. Although the new tariff rate is significantly lower than the previous 46%, the agreement stipulates a 40% tariff on transshipped goods exported to the U.S. via Vietnam from third countries. This measure is believed to be aimed at China.

The FT pointed out, "Most countries have not yet signed trade agreements with the U.S.," adding, "Future agreements may include additional tariffs on indirect exports like these." So far, only three countries? the UK, Vietnam, and China? have signed trade agreements with the U.S., while South Korea, Japan, the EU, and India are continuing behind-the-scenes discussions.