It’s been six weeks since Donald Trump posted about the trade deal with Vietnam. Since then, the U.S. administration has issued Executive Orders updating the tariff rates on dozens of countries, but it was the specific language in Trump’s Truth Social post on July 2nd that still has the industry puzzled. In addition to the 20 percent tariff on the southeast Asian nation, the president added there would be “a 40 percent tariff on transshipping.” Transshipping, the act of routing goods through another country without “a substantial transformation” to circumvent customs laws, was already on the books as an illegal action, so why this cryptic statement? Over time, it’s become clear that he was likely referring to some sort of origin rule, which had been eluded to in the “Liberation Day” Executive Order. But even more than a month later, no details have emerged.
Since then, the industry has been left to ponder how rules of origin might be applied, whether they will specifically target materials from China—and most importantly—how they could possibly be enforced.
When asked about transshipment on Fox Business on August 7th, U.S. secretary of commerce Howard Lutnick called the practice of routing goods through another country “nonsense” that this administration aims to stop. He said the tariff rates in the Executive Order are meant for goods from those countries only. The transshipment penalty would kick in for goods comprised of inputs originating from anywhere else.
“So that’s the idea, which is, if it’s your country, you pay your tariff, and if it actually has significant content, like 30 percent, from any other country, then it should be taxed at that other country’s tariff. And that’s a higher tariff, obviously, and that’s the idea,” Lutnick said.
Nicole Bivens Collinson, managing principal, operating committee, and international trade and government relations practice leader with Sandler, Travis & Rosenberg, said based on the secretary’s statement, she feels it was a test balloon to see how industry would react. But she said the biggest takeaway was what Lutnick didn’t clarify.
“What I didn’t hear him say is, if I have a product that I’m making in Switzerland, which has a 39 percent tariff, and I use 50 percent Honduran inputs—Honduras has a 10 percent [tariff]—do I get the lower tariff? It’s got to work both ways, and countries could use that potentially to lower their duty liability by using inputs from those countries that are only subject to a 10 percent tariff.”
Even with Lutnick’s comments on air, questions remain—some spurred on by the government itself. Despite—or maybe because of—the secretary’s comments, U.S. Customs and Border Protection (CBP) posted about transshipment on LinkedIn. The post, which signaled a possible disconnect between departments, read, “With the new 40 percent tariff on illegally transshipped goods, the cost of illegal transshipment will be even higher.”
The use of “illegal” was telling, according to Bivens Collinson. “It looked to me like CBP was trying to get out in front of the administration to say, ‘We’re talking illegal transshipment. We’re not talking about this 30 percent thing, because that would be an enforcement nightmare,’” she said.
And in fact, whether you’re a brand, an importer or a customs agent, the level of complexity that would come with deciphering which tariffs and duties to apply to every item—in the apparel industry and beyond—is truly frightening.
Already the customs landscape is complicated with Most-Favored Nation (MFN) rates and free trade agreement stipulations, some of which include their own rules of origin.
“We’re looking at potentially having four rules of origin for four different things,” Bivens Collinson noted. “I might be able to get something that would have to be marked country of origin China. For duty purposes, I could get USMCA MFN zero, but because it also contained Chinese goods, I would have to pay the higher duty rate for China, and potentially a 40 percent penalty because it’s transshipped.”
Deciphering enforcement
Adding rules of origin—defined by value or volume—would not only push costs higher, but make the customs puzzle, well, more puzzling.
That’s particularly true for some raw materials more than others. Fashion firms doing business in the U.S. are already used to tracing and verify the origin of the cotton in their goods—though plenty still get caught in that net. CBP reported 875 apparel-related detentions in 2024, valued at $44.6 million. But experts say authenticating the origin of man-made fibers is another challenge altogether. And the level of difficulty is highly dependent on how far back the provenance must be traced.
In the case of the United States–Mexico–Canada Agreement (USMCA, also known as CUSMA) and the Dominican Republic-Central America FTA (CAFTA-DR), duty-free eligibility into the U.S. adheres to the yarn-forward rule. The pending trade deals could follow suit, or they could stipulate fiber or fabric-forward, each of which would have widely different implications for apparel supply chains. There is also the chance they could demand another option.
“Seventy percent of the goods that are being sold right now are man-made fibers, and the biggest raw material for that is petrochemicals. Are we going to go to that extent?” asked Zaki Saleemi, SVP of global sales for Material Exchange, and former SVP of Pakistan-based denim producer Crescent Bahuman. “What point onwards are you going to take the synthetics?”
Saleemi wonders how that would even work—and how much it would cost. Given the expense of cotton origin testing, he said he couldn’t guess.
Whatever the White House decides on rules of origin, the government has signaled its commitment to upholding them. In May, the U.S. Justice Department issued a memo outlining its stance on stopping white collar crime—and customs fraud and tariff evasion were explicitly listed in the top 10 priorities.
Now, the U.S. is enlisting its trading partners in the fight.
“I think [enforcement] will be tough. That’s why the U.S. is asking for some type of certification from the export government, so that they would carry much of the burden on policing and certificates,” said trade attorney Ron Sorini, co-founder and principal at Sorini, Samet & Associates, adding the U.S. would then just need to spot check.
For Sorini, oversight could mirror the efforts under the quota system, which required the export country to issue licenses and verify capacity. This case would be different, because they’d also have to take content origin into account.
Already, countries like Vietnam and Thailand have stepped up enforcement. In Thailand alone, the Washington Post reports dozens more product categories may be added to the list of those regularly scrutinized for transshipment.
Ultimately, CBP could borrow from the Uyghur Forced Labor Protection Act (UFLPA) playbook—at least that’s what Bivens Collinson is hearing. “If they suspect the goods might be meeting this definition of transshipment, they will go forward with assessing the additional 40 percent tariffs and then make you prove a negative,” she said.
As any company caught in a similar situation with suspected Uyghur cotton can attest, that’s a costly outcome.
“What it’s going to boil down to, if we get an origin-based rule, then we’re going to have to have traceability built into it,” Saleemi said.
Tariffs aside, MeiLin Wan, founder and CEO of supply chain traceability consultancy GenuTrace, wouldn’t be surprised if some of this new Customs might is used to step up rules already in place. Take for instance, the origin rules in existing agreements. Plus, CBP hasn’t leaned into audits related to UFLPA but that too could come to pass.
“They can request at least up to five years of records. They haven’t pulled that trigger on any of these companies yet, but there are a lot of things that the government can do now,” she said.
Already, she’s heard from CBP that the agency has invested in audits in CAFTA-DR mills, visiting in person and going through the books over the last year. “Maybe that will be the roadmap. Maybe they’ve learned a lot from that process that they can apply to specific language around these other rules of origin,” she said.
Verifying compliance
The days of simple paper documentation are over, whether rules of origin come into play or not given the tangle of new tariff rates, according to Wan. “It will emphasize and amplify the need to be that meticulous and that rigorous about your supply chain,” she said.
She also anticipates other countries following suit with trade laws that would also allow them to capture more of the revenue owed to them. As a result, she’s calling for a combination of physical verification and digital passports to deal with this new trade environment.
While Wan calls the prospect of the government flipping the switch on origin rules across all input types at once “highly concerning,” she can envision a scenario in which it starts with U.S. cotton.
In May, Senators from across the U.S. drafted legislation to incentivize the use of U.S. cotton. The Buying American Cotton Act would offer tax credits on the sale of any soft goods items that include verifiable cotton from the States. With this initiative in the headlines, Wan said it would make sense for the government to phase in rules of origin with a focus on cotton first. This would prompt the industry to not only rework supply chains but also adopt the traceability tools needed to be compliant across all materials in the future.
Whatever the scale and scope, Wan said fashion firms may soon find that their current compliance measures are leaving them open to risk. “There’s so much reliance on just, ‘Oh, if a third-party inspection firm goes in, that’s good enough,’ and actually it may not be,” she said. “If these rules of origin come into play, the company, the importers, are going to have to take more responsibility. And maybe that’s a better spend of resources as well.”
That change alone could shift the sourcing landscape, she said, noting that the effort of taking these measures in house could prompt brands and retailers to consolidate their supplier base.
Shifting the landscape
While it’s too soon to predict how deeply sweeping origin rules could change the industry, there’s no doubt there would be upheaval, given apparel’s current reliance on China for raw materials, quick turns and complicated production.
Eventually though, there could be benefits.
Sorini points to how the yarn-forward stipulations in CAFTA-DR has driven the industry to increase capacity in the region. “It helped U.S. yarn spinners, a lot U.S. fabric makers. But it also spurred new investment in Central America,” he said.
The same could happen for the industry on a larger scale, if access to Chinese materials becomes prohibitively expensive.
“Assuming they allow for accumulation among Asean countries, which would be Indonesia, Philippines, Vietnam, Cambodia, you’d see a ton of investment go into Vietnam and maybe here and there you’d see some capacity going in Philippines and some in Cambodia,” he said.
None of it will happen overnight though. Sorini estimates it would take the industry at least three years to ween off of its current commitments to China—and he hopes the administration will allow for a runway at least that long.
“You’d wipe out the apparel industries in a number of countries if they implemented it too quick,” he said.
With the proper time to prepare, fashion could accelerate the move toward regional vertical operations that’s already underway. In the short term, Wan said this will favor countries like Vietnam, India and Pakistan with Turkey and nearshoring countries not far behind.
Still there will be categories that will be the last to exit China, even as prices increase. Top of the list for Saleemi are any that require technical synthetics. While he acknowledges the innovation in Japan and the capabilities in South Korea and Taiwan, he said China excels in the stretch and recovery brands like Lululemon, Aloo and Athleta demand. “People are going to have to pay duties because they’re not going to compromise their product integrity by going to just any factory.”
Ultimately, Saleemi said activewear is a good example of China’s dominance and the scale of change rules of origin could prompt.
“Everything comes from China. For the last 25 years, they’ve done a good job,” Saleemi said. “With this whole China thing, you’re asking for a global reset.”
