Transshipping has become the latest flashpoint in trade enforcement—and the fashion industry is squarely in the crosshairs. While the term traditionally refers to illegally rerouting goods to dodge tariffs, the administration’s broad use of it is creating new uncertainties.
Complicating matters further, there’s growing concern that tariff rules may soon mirror those used in antidumping cases, requiring brands to calculate duties on each input’s origin. For apparel, that could mean juggling multiple standards for determining country of origin—making compliance more complex, more costly and far more risky.
Here in an excerpt from HGI’s “DDP & Other Risky Activities” call, Nicole Bivens Collinson, managing principal, Sandler, Travis & Rosenberg, P.A.; and Vincent Iacopella, president of government and trade relations, Alba Wheels Up, share with HGI founder Edward Hertzman the ways in which rules of origin could be applied—and how fashion needs to prepare.
Watch the full call here.
Edward Hertzman: I’m very confused by this because we’re using the word transshipment in a lot of crazy ways right now. I always thought of transshipment as an illegal activity. But by mentioning transshipment, the president has opened up the idea of some sort of rule of origin accompanying the tariffs and new trade deals, but we don’t really have any details on this. What do we know today? What does Trump mean by transshipping?
Nicole Bivens Collinson: So, what I like to say is we have individuals who are not steeped in the trade world. And when you have non-practitioners using words that have very specific meaning, they don’t necessarily mean what they think they mean. And that’s where I think we are. So, they’ve used this word transshipment, and now the president has come out and said that any goods that [the U.S. Customs and Boarder Protection] finds to be transshipped can be assessed a 40% duty.
Now, we saw that on the same day that Secretary Lutnick of [the U.S. Department of] Commerce went on Fox Business and talked about transshipment, ‘Oh, that’s like if there’s 30% value in there of something, that then you’re going to have to pay that higher tariff, and it’s going to be 40%.’ And I was like, ‘okay, well, does that work in the reverse?’ So if I’m manufacturing something in China and I use 45% Honduran input, which is currently only at a 10% tariff, do I get to only then pay 10% on my good, because it’s trans-shipped and it was Honduran? Why am I now paying the 50% from China when I could pay the 10% for Honduras?
We have seen CBP about the same time post something on their LinkedIn about legal transshipment and illegal transshipment. We’ve seen Customs come out with a CSMS with a link to their guide on transshipment, and their guide clearly lays out what we in the trade industry have always known as legal transshipment and illegal transshipment. Illegal is whenever you are shipping something through a country in an effort to avoid tariffs or quotas or other restrictions. You may be mislabeling it as the country of origin of the other country in effort to avoid tariffs or regulations or restrictions, or whatever. So, that’s illegal transshipment. They have really been emphasizing that.
Now, what does all that mean? I think at the end of the day, again, enforcement, enforcement, enforcement. That’s what this administration is about. I believe we’re going to be in a similar situation that we have been under [the Uyghur Forced Labor Protection Act], in which you are forced to prove a negative. CBP is using AI—Vince talked about how they’ve got these tools, and how you can look at this stuff and see where it’s coming from, and how it’s going. They have tools that are going to show shipping patterns, and suddenly this shipping pattern that used to come straight out of China or Hong Kong or however, now is coming through Mexico.
And [Customs is] going to look at that, and they’re going to say, ‘I suspect that there is transshipment going on, so I’m going to shoot first and ask questions later. You’re getting that 40% tariff today, now you’ve got to come back and prove the negative. You have to come back and prove to me that you did not illegally transship.’ So, it’s just like under the UFLPA, you have to prove that you do not have forced labor in your supply chain.
“The huge takeaway here is that, this whole mapping, visibility and de-risking past a seller, it is not just about UFLPA anymore.”
—Vincent Iacopella
Vincent Iacopella: Nicole is spot on. So, I can’t tell you how many people called me the day of the [Executive Order] and said, ‘Hey, if I pay the 40%, I get to transship now?’ I was like, ‘no, it’s illegal, still.’ So, the language really threw a lot of folks off, but I think that we really have to wait for the administration to define what that means. Think about maybe regional value in [the United States Mexico Canada Agremeent] or something like that. What percentage of Chinese inputs would put me into this higher duty? There’s other talk that maybe it means Chinese ownership in some of the factories, which I think would be really, really onerous.
And, you know, I’ll come full circle and say that like UFLPA, I can’t just know the seller in Vietnam. Let’s say for blouses, I have to know the yarns, I have know the fabric, I have to know what the ginner had. I don’t see a manual way to do that, just like UFLPA, so the private sector has to leverage the automation tools as well.
It’s not enough just to know the seller. I think you’re going to have to go all the way down to billable material if you have to make a statement of how much of it really is, honestly, 100% Vietnam. And then, let’s go back to something we said before, the seller may think they’re doing the right thing. The seller may not even know the yarns. You’re going to need a mapping tool, a visibility tool. I agree with Nicole that if you’re going to do the Vietnam rate instead of the transshipment rate, regardless of the definition, you’re going to have to prove you deserve that lower rate in my view.
EH: So, Nicole, I get the transshipping, but there is a possibility that if I book goods in Bangladesh, that fabric comes from China. Because it’s over a certain percentage of the overall value of the garment, that could be transshipping under Trump’s definition. That’s potentially going to be a really big wrench, because not everyone’s vertically set up.
But now, there is another thing, and I don’t want to misspeak, but isn’t there also, if you use U.S. cotton or a certain amount of U.S. inputs, you could have a lower tariff benefit. How is that working?
NBC: It’s not a lower tariff benefit. It’s a lower value on which you’re calculating the tariff. It’s still going to be 50%. That’s not going to change. But, again, instead of being 50% on $10, it’s going to be 50% on $7.
One of the fears I have is that they’re going to bring [the concept from Antidumping and Countervailing Duties or AD/CVD] into the world of these IEPA tariffs, or other tariffs, and that, if you’re using fabric from China, now I need to know what is the value of that fabric of my good in China, and I’m going to have to pay the 50% on the value of the Chinese content, and then I’ll pay the 10% on the non-Chinese content. We’re seeing that with respect to the way they’re assessing the tariffs on the steel, the aluminum, the auto parts, the copper. You’re able to deduct the value of the steel or aluminum and pay one tariff rate.
We could see that coming into this whole world for textiles and apparel. It would be an absolute mess. You’re going to have a rule of origin for country of origin that we all know, substantial transformation. You’re going to have a rule of origin, potentially, for a free trade agreement. Because we know that there are product-specific rules of origin that you have to follow and meet certain criteria to get that preference. We could have a rule of origin that you have to look at and apply for marking purposes, which could be different from the other two. And now we may have a rule of origin that you may have to use and apply for these IEPA or other reciprocal tariffs. So, you may have four different outcomes in looking at these rules, if they go down this road. And it’s a real fear.
EH: Explain it to me in simple terms. I’m buying this $10 item in India, and now I’m exposed to a 50% tariff. I now go and say, I’m not going to use the local cotton in India, I’m going to buy U.S. cotton grown in America, and ship it to India. How does that change what’s dutiable?
NBC: I’ve got my shirt that’s a $10 shirt. What is the value of the cutting and the sewing? What is the value of the fabric? What is the value of the cotton yarn? What is the value of the cotton fiber? Did I export U.S. cotton fiber? What percentage of that $10 was that cotton fiber? Did I export U.S. cotton spun yarn? What is the value of the fabric? So, of my $10, if I say that $2.50 is the value of the U.S. cotton fiber, I’m going to be able to deduct $2.50 from my value on which I am assessing that 50%.
EH: What does this mean for free trade agreements like USMCA?
VI: In the market people have questions about regional content. So, if they go to USMCA and there’s a reboot of USMCA, are they going to get dinged on this transshipment thing? Or what if there’s Chinese investment in some of the factories? Is that going to disqualify it? They have long-term questions about if they’ll be able to keep that preference with some of the changes coming.
NBC: Like Vince was saying, before the tariffs went in place it was only about 51% of Mexican goods were coming into the United States claiming USMCA, and only about 30% of Canadian goods. And people said, well, why? Why weren’t they using the FTA? It’s because the goods that were being traded were already duty-free.
And so, there was no reason for me to make a USMCA claim. One, I would have to make sure my product met the rule of origin, which is more strict under the USMCA. Two, I’d have to have the paperwork and certificates, and I’d be liable if I made a claim. I could have additional penalties brought against me because I made a false claim on my preference. So they just weren’t doing it.
Now, we’ve seen many of the companies go, ‘oh man, I gotta do USMCA.’ They’ve been qualifying the whole time, but they just didn’t make the claim. So now they’re having to make the claim. What that has resulted in, again, enforcement, enforcement, enforcement. Customs is really focusing in on USMCA claims, particularly for those importers who may not have historically made USMCA claims. Now, because you may be getting a CF-28s and 29s [formal request for information from Customs] and people saying, ‘Show me. Let me see the documents, let me see your certificates.’ And so there’s just greater scrutiny. Importers, the retailers, the brands, and everyone just need to be aware of what the potential is and how they have to have a greater visibility, and it’s not just for UFLPA. I think the apparel industry in particular was luckily that you got a 5-year head start on almost every other industry, because you had already started looking at Tier 2, Tier 3, Tier 4.
VI: The huge takeaway here is that, this whole mapping, visibility and de-risking past a seller, it is not just about UFLPA anymore. It’s a value, origin, regional content, and not just a seller. As Nicole said, you gotta go down the billable material in some cases… and the only way to do it that I see is in an automated way. I don’t think that the paper trail’s going to cut it, but I think it’s a huge issue that Nicole raises.
