By Vaibhav Tandon

President Trump’s return to the White House has raised the specter of a renewed round of import tariffs.  But eliminating revenue leaks, caused by countries evading American levies, must be an important element of U.S. trade policy.

White labeling or entrepot trade is the most common way of avoiding tariffs. In this tactic, goods make their way into the U.S. through Chinese-owned facilities in countries like Mexico and Vietnam that face lower duties.  Rerouting is most obvious in data from Vietnam, with the value of exports to the U.S. almost matching Vietnamese imports from China in recent years.

Evasion can take other forms.  Buyers may simply under-report quantities of imports, mislabel the origin of products, or take liberties classifying goods as similar items that are not subject to tariffs.  Chinese exporters have also skirted levies by utilizing America’s “de minimis” exemption trade rule, which allows tariff-free entry of directly-shipped packages worth less than $800.  As per U.S. Congressman Greg Murphy, nearly two-thirds of all parcels under this law arrive from China. 

All of this helps to explain why China's role as a global exporter has not diminished, despite a substantial drop in direct imports to the United States.  China’s share of U.S. imports has declined from about 21% in 2018 to 14% in 2023, implying a $240 billion reduction in arrival of Chinese goods.  Yet, China’s share of global export volume remains at a record high.

Tariff evasion and exemptions have had a sizable impact on reported U.S. trade data.  As per calculations performed by The Economist, America’s goods trade deficit with China is 13% larger than official numbers show.  Goldman Sachs estimates that the 2018-19 trade war led to tariff evasion of $110-$130 billion on imports from China in 2023, a customs revenue loss of $15 billion.

The Trump administration will advance tariffs not only on principle but as a means to refill government coffers.  To succeed, trade officials must focus on weeding out trade malpractice.  Plumbers and pipeline inspectors sometimes rely on x-rays to identify leaks and weak points; supply chains leading to the U.S. can expect a similarly intense level of scrutiny.