Exports in Disguise?: Trade Rerouting during the US–China Trade War

This paper introduces a new measure of tariff evasion through rerouting and applies it to the 2018 U.S.–China trade war, focusing on Vietnam as a transit country. We use transaction-level trade data and define rerouting as the flow of a granular eight-digit HS product from China, through Vietnam, to the United States within a given quarter. We consider several levels of geographic aggregation – country, province, and firm – which yield increasingly conservative estimates of rerouting. To examine how rerouting responded to the trade war, we exploit
product-level variation in tariff exposure as well as the timing of tariff implementation. For the average product-level tariff increase, rerouting rises by 3.6 percentage points at the country level, 2.5 at the province level, and 1.4 at the firm level. These treatment effects represent a 21.1% increase in country-level rerouting, a 20.5% increase at the province level, and a 14.3% increase at the firm level compared to pre-trade war values. We also find that rerouting was largely driven by new establishments and Chinese-owned enterprises. Finally, our results indicate that the trade war raised revenue and profits among firms in Vietnam and altered their input composition in ways consistent with increased rerouting – specifically, reducing labor and increasing materials as a share of output.

Non-Technical Summary

During the first few weeks of Donald Trump’s U.S. presidency, tariffs have been threatened or levied on China, Canada, Mexico, and other countries. One key economic question is whether companies in these targeted countries will circumvent these tariffs by rerouting goods through third-party countries; this is typically done by shipping goods to an affiliate or separate business partner before exporting them to the final destination. This practice allows exporters from the targeted country to illegally avoid the higher taxes assigned to their goods by labelling them as originating from a non-targeted location.

Our recent work using high-frequency trade data examines this issue by analysing rerouting through Vietnam following the 2018 U.S.-China trade war. We identify three key findings:

1. Finer measurement suggest much less rerouting than previously believed.
The granularity of our measure significantly influences the estimated extent of rerouting. In 2021, 16.5% of Vietnamese exports to the U.S. were classified as country-level rerouting in our research, in contrast to 6.5% at the province level and only 1.7% at the firm level. These figures translate to approximately $15.9 billion, $6.3 billion, and $1.6 billion in rerouted goods, respectively.

The firm-level measure likely underestimates rerouting because groups of companies could work together: some importing from China, others repackaging and relabelling, and others reexporting to the U.S. However, it’s unlikely that companies in completely different parts of the country would be coordinating in this way because of the additional transportation costs involved; therefore, the country-level measure likely overstates rerouting. Consequently, we favour the province-level measure, which captures the combined activities of companies located near each other in Vietnam.

2. Still, trade war tariffs increased rerouting through Vietnam more broadly.
For the average tariff increase on Chinese exports, country-level rerouting increased by 4.0 percentage points, province-level rerouting increased by 2.5 percentage points, and firm-level rerouting increased by 1.5 percentage points. While these treatment effects are relatively small in levels, they represent large increases over their pre-tariff (2018) levels: a 22.9% increase at the country level, a 20.5% increase at the province level, and a 15.3% increase at the firm level.

There is clear evidence that re-routing is happening and that many operations have moved to Vietnam specifically to avoid tariffs. However, these figures also show that re-routing only accounts for a portion of the total export increase from Vietnam to the United States during this time. The rest of the growth represents value-added production that contributes both to Vietnamese livelihoods and to better quality and lower-priced goods for American buyers.

3. Chinese-owned firms in Vietnam have a disproportionately large role in firm-level rerouting.
Our results suggest that 61.4% of the increase in trade war rerouting was due to Chinese-owned firms located in Vietnam, suggesting that broad, origin-specific tariffs may only partially hamper Chinese exporters. U.S. consumers and businesses appear to still be using Chinese products, but pay a higher price as supply chains become longer and less efficient. One direct implication for business leaders is that Chinese goods are likely still accessing the U.S. market, and the trade war is not decreasing competitive pressure as much as Washington lawmakers might have hoped.

In sum, our findings reveal that rerouting levels were lower than many market analysts and journalists initially thought, although they did increase significantly due to the tariffs. Notably, nearly two-thirds of this increase involved rerouting through Chinese-owned Vietnamese firms.

Lessons for Business Leaders and Policymakers
For business leaders, our research indicates that tariffs based on a country of origin can reduce competitive pressures from those tariff-targeted countries, but not completely. For policymakers, our results suggest that rerouting is less common than believed. However, the level of rerouting we observed still means higher price increases for U.S. consumers. Additionally, our analysis indicates that origin-specific tariffs are a cumbersome tool for targeting Chinese companies, suggesting that ownership-based duties or firm-specific sanctions are likely more effective for this purpose.

As new, expanded trade wars heat up between the U.S. and other countries, our research signals that two things can be true at once: Overall levels of rerouting are lower than previously understood, but rerouting still increased dramatically during the most recent trade war with China. More importantly, the vast majority of rerouting through Vietnam was through Chinese-owned firms. This means that policymakers should reconsider crude, country-wide tariffs in favour of sanctioning specific firms that engage in tariff circumvention.

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