President Donald Trump sees the US balance of trade almost entirely in terms of the bilateral trade flows for goods. Since his first term in office, he has used a reduction of the merchandise trade deficit as a benchmark for US success. A low deficit is a sign that trade is working in favor of the United States.

Now his administration has moved this argument to a whole new level with the release of a paper called the “Great Transshipment Scam.”¹ It is a deeply flawed document that is likely to lead to even greater trade frictions and costs for anyone doing business with the United States.

There are two problems that the Office of Trade and Manufacturing Policy, a White House office directed by Peter Navarro that has existed only in Trump administrations, is trying to address by authoring this report. First, despite significant changes in trade policy since the first Trump administration, the US continues to have bilateral goods trade deficits with many partners. Second, the tariff policies applied and accelerated during Trump’s second term in office have forced firms to restructure supply chains, shifting trade flows and creating new trade imbalances.

There is a wide literature that shows that trade deficits in goods, particularly for bilateral trade in manufacturing, is simply a poor metric.² US trade deficits are the result of complex factors but are largely driven by macroeconomic conditions and fiscal policy. Put simply, the US spends more than it saves, and this sucks in goods from abroad. No matter how much trade and tariff policies shift, the basic fundamentals remain rooted in macroeconomic conditions and fiscal policy and the US will likely continue to face goods trade deficits with many partners on a bilateral basis unless those two underlying factors change.

The second challenge, however, is a problem that the Trump administration has made for itself. For decades before, say, 2015, the US generally applied one low tariff rate per good to all trade partners. The average effective US rate had been roughly 2%, with agricultural products generally receiving more protection and some tariff rate spikes for certain goods deemed important for other policy reasons.

This pre-2015(ish) tariff regime, with universally applied tariffs, was the result of eight rounds of trade deals negotiated with global partners under the auspices of the General Agreement on Tariffs and Trade (GATT), which later became the World Trade Organization (WTO).

The whole point, in fact, of these talks was to reduce the frictions created by having different tariff rates in effect with other global partners. By having one rate, say 5% on onions, the US was saved from having to go separately to as many as 165 parties (the WTO now has 166 members) and negotiate onion tariffs. Farmers and firms could plan production knowing that the tariff rate for onions entering the US, called the “most-favoured-nation” (MFN) rate, would be capped at 5%.³

The US spearheaded these rounds of negotiations, which helped create globally competitive firms and supply chains.

Trump is now much more interested in what he believes are unfair trade practices. His so-called “Liberation Day” policy shift on 2 April 2025 saw tariffs of up to 50% imposed on countries around the globe and even applied to trade with uninhabited islands. Crucially, these tariff rates differed from one another.⁴ They have also see-sawed wildly, with changes on more than 50 occasions after “Liberation Day,” according to analysis by the Tax Foundation.⁵

The exact same good from one market, like an onion, might be imported into the US with a 10% tariff while a neighboring market’s onion would attract a rate of 45%. It should not surprise anyone that companies with options started switching orders and manufacturing away from countries that faced suddenly high US tariffs into markets where Trump had imposed much lower tariffs.

This situation, in fact, is exactly what prompted the global efforts to reduce and better align tariffs starting from the late 1940s and 1950s. It was a way to lower high global tariffs originating in the 1930s that were damaging to global growth. These globally coordinated, US-led tariff reductions also ensured that countries involved in the negotiations had a way to get more consistent trade policy outcomes quickly.

Negotiating globally is now not in the cards, as Trump prefers to manage relations on a bilateral basis. Differential tariffs were seen as one method to force countries to agree to often painful concessions in exchange for the US lowering headline tariff rates for these countries’ goods to enter the US market. The rush of “napkin deals” signed in the wake of "Liberation Day" showed the relative effectiveness of Trump’s approach.⁶

But were they effective? Tariff rates thereafter remain uneven across trade partners. Even if the overall rates are lower than, say, the originally proposed rates of up to 50%, firms might still face higher tariffs than those in neighboring countries. Onion farmers in one country could have a new advantage over onion farmers elsewhere.

To solve this problem of differential tariff rates, the administration is now claiming that trade has become a great “scam.” The scam takes several forms which are all lumped under the heading of “transshipment.”

The first use of the term transshipment barely appears in the Trump document. It is the traditional language of supply chains and logistics providers. It means, in its apolitical provenance, simply that a container coming off one ship is unloaded and reloaded onto another ship headed for a different destination. Nothing happens to the goods in the container other than rerouting.

A second use of the term transshipment refers to illegal transshipment. This is when a company tries to argue that a good actually made in Country A was instead made in Country B before shipping to Country C. This is typically done by relabeling the package or fraudulently filling out customs documentation to falsify the country of origin.

Note that illegal transshipment is generally not done if trade is taking place with consistent MFN tariff rates. If all onions into the US are assessed 5%, there is nothing to be gained from moving them from Country A into Country B for onward shipment to the US.

If, however, tariff differentials are in place, there can be strong incentives for doing so. Onions at 40% in Country A are not competitive while those in a 10% jurisdiction can still be exported to the US. There is clearly money to be made from trying to illegally evade these higher tariffs by simply routing through Country B. The US has, thus, created a problem for itself by allowing tariffs to be applied differently across markets.

Illegal transshipment is still, as the name suggests, illegal. Even Country A may be wary of engaging in the practice, as it can damage the reputation of all trade with Country A. The fines and penalties for getting caught illegally transhipping goods can be high. If the US were simply urging trade partners to crack down on fraudulent maneuvers, there would be relatively broad agreement.

But the Trump administration is not content to focus on eliminating illegal transshipment. Instead, the report also suggests, with very, very limited evidence, that all trade is basically transshipment. That is, any firm that decides not to send onions from Country A but instead ships onions from Country B (even when they are clearly identified as originating in B) is engaging in transshipment. Any US importer that buys onions from Country B could also be guilty of transshipment.

Firms that have examined the tariff landscape carefully and decided to adjust their existing supply chains are suddenly part of the problem. Companies should not, claims the administration, decide to change onion sourcing, shift production to new markets, or expand production in any market outside of the US in the wake of tariff changes. That simply subverts the problems America was trying to solve with its tariff and trade policies.

In addition to potentially all trade getting lumped into a “transshipment” category, the US appears to want to go further still and label all trade that includes any Chinese content as “transshipment” by definition. In other words, no evidence is even needed that the firms involved have a specific intention to avoid higher tariffs from one market or have added substantial value to the product. The mere presence of Chinese content or perhaps even Chinese investment is sufficient to claim “transshipment.”

This flies in the face of existing US policy, where officials have spent decades developing specific rules for “substantial transformation.” While most of these rules have been created in the context of free trade agreements (FTAs) that require firms claiming the benefits of an FTA to clearly demonstrate transformation from raw materials, parts, and components into new goods. US Customs and Border Protection (CBP) has also issued thousands of rulings to clarify non-preferential rules of origin as well.

In brief, to qualify as legitimate trade, firms must effect a change in “name, character and use” for a good. If this hurdle is passed, it does not matter where the inputs are sourced. The product in question has undergone a change in essential character and now enters the US legally. But, given the thrust of US policy changes signaled again in this report, the obvious logic of having clear, unchanging non-preferential rules of origin is now an urgent priority to help firms globally, instead of letting them face the challenges of the inconsistent application and/or broadbrush identification of all Chinese content as “transshipment.”

It is likely that US customs officials will claim, on the basis of this report, that all trade or at least all trade that might have anything related to China is, by definition, both fraud and a scam transaction. The White House has already taken steps to strengthen customs enforcement.⁷

The Executive Order (EO) issued by Trump on 31 July 2025 on “Further Modifying the Reciprocal Tariff Rates” further revised global tariff rates to include an entire section devoted to “transshipment” which included the following language: “(a) An article determined by CBP to have been transshipped to evade applicable duties under section 2 of this order shall be subject to (i) an additional ad valorem rate of duty of 40 percent, in lieu of the additional ad valorem rate of duty applicable under section 2 of this order to goods of the country of origin…”⁸

Worries about the application of this EO section led to discussions with US trade partners during the course of negotiations over what the US calls Agreements on Reciprocal Trade (ARTs) which include provisions on “transshipment” or trigger negotiations if “benefits of this Agreement are accruing substantially to third countries or third country nationals, a Party may establish rules of origin necessary to achieve the Parties’ intention for this Agreement.”⁹

These discussions have not yet happened, nor has a 40% transshipment tariff been applied. However, this report from Navarro’s Office now suggests that such an application may be pending, with wide swaths of goods at risk of new, much higher tariff rates.

Such actions fit within the allegations of the report that the total cost of all this transshipment action coming from 40 different US trade partners is allegedly extremely high and very damaging to US producers, claiming that “every dollar lost to this Great Transshipment Scam is a dollar stolen from American workers, manufacturers, and taxpayers.”

The effort to clamp down on this supposed theft of US money by unscrupulous foreign firms will surely lead to higher costs and a much greater scrutiny of supply chain transactions and documentation ahead. The report calls for an “AI-enabled ‘Detective Border’” that would support CBP by integrating shipment data, routing histories, product classifications, ownership relationships, production-capacity indicators, anomaly detection, computer vision, and other analytical tools.

Ironically, such actions will surely lead to further diversification of supply chains and adjustments to shipping patterns that will just as surely trigger new anxiety and more policy changes from the White House. What started off as an effort to reduce bilateral trade deficits is leading to a whole new map filled with rogue trading partners, ceaseless alleged thieving, new US responses, and scams in every direction.