Supply Chain Rerouting

History

The intellectual precursor is trade diversion, coined by Jacob Viner in The Customs Union Issue (1950): after a customs union or free trade agreement, imports shift from a more efficient external supplier to a less efficient partner inside the bloc, redistributing a bloc's imports. Later work added trade deflection, the mirror image in which exporters respond to barriers by redirecting shipments to alternative markets. Both were developed to explain preferential liberalization, but Rhodium argues they apply to a trade war as well. Viner's concept addressed the welfare effects of customs unions, not tariff evasion, so it belongs as the precursor rather than the same phenomenon.

In 2018 the United States imposed tariffs of 7.5% to 25% on roughly two-thirds of its imports from China. Between 2017 and 2024 China's share of US imports fell from 21.9% to 13.8%; US imports of tariffed Chinese goods ran 28% below 2017 levels while imports of all other goods rose 21%. Even so US direct imports from China stood at $439 billion in 2024, second only to Mexico. Official bilateral data also diverge: between 2018 and 2024 US records show imports from China falling 18% while Chinese records show exports to the US growing 9%, with third-country routing sustaining reliance on Chinese goods. China's share of global manufacturing value added rose 3.3 percentage points, while the five countries that gained the most US import share (Vietnam, Mexico, India, Thailand, South Korea) lost 0.1 percentage point collectively. Rhodium cautions that pandemic-era disruptions and overcapacity also contributed, so causal attribution is not one-directional.

The dispute began in January 2018 with tariffs under the first Trump administration; the Biden administration kept them and added levies on electric vehicles and solar panels; 2025 brought escalation under the second Trump administration, with a 145% US tariff on Chinese goods and a 125% Chinese response. In April 2025 IMF estimates put the US effective tariff rate on Chinese goods at 115%, and Rhodium expected a deeper and faster decline in direct US sourcing than in 2018. These are dated 2025 estimates, not stable figures.

Distinctions

Transshipment is the shipment of goods to an intermediate destination and on to another; it is normally fully legal and an everyday part of world trade, used to change transport mode, consolidate or deconsolidate shipments, or use designated customs areas. Rerouting is one possible use of transshipment, distinguished by intent, origin labelling and value added rather than by physical routing. Vinerian trade diversion is a welfare concept about customs unions, trade deflection is an exporter's shift of markets, and rerouting disguises origin through a third country to defeat an origin-specific measure. Researchers also warn that results depend heavily on the unit of measurement: country-level aggregates overstate rerouting relative to firm-level measures, so any single figure must state the level being used.

Examples

Vietnam is the best-documented single case. In April 2025 its exports to the US and imports from China both hit post-pandemic records: shipments to the US exceeded $12 billion, up 34% year-on-year, while imports from China exceeded $15 billion, up nearly 31%, mostly components and raw materials for Vietnamese factories. White House officials accused Vietnam of being a mere waypoint whose value added did not justify 'Made in Vietnam' labels, and Hanoi began a crackdown on illegal transshipment in April. Vietnam's surplus with the US grew nearly 25% in the four months to April 2025 and exceeded $13.5 billion in March alone, the highest monthly figure on US data. Such figures are 2025 facts contingent on tariff decisions, and Vietnam faced the risk of 46% duties had the rate been confirmed when the July pause ended.

Estimates of the scale of rerouting vary sharply by measurement level. In 2021, 16.5% of Vietnamese exports to the US were classified as rerouting at country level (about $15.9 billion), 6.5% at province level ($6.3 billion) and 1.7% at firm level ($1.6 billion). For the average product-level tariff increase, rerouting rose 3.6 percentage points at country level, 2.5 at province level and 1.4 at firm level. Chinese-owned firms in Vietnam accounted for 61.4% of the increase in trade-war rerouting. Nomura's March 2025 analysis identifies Vietnam, Thailand and Cambodia as most at risk of third-country circumvention, using rising imports from China and exports to the US, deviation from export trend after 2018, and Chinese value added. In 2024 Cambodia gained the most from higher tariffs on China (18.6% of its total exports), followed by Vietnam (9.2%), Thailand (6.5%) and Malaysia (6.4%). Nomura also estimates that, adjusted for circumvention, China's direct and indirect exports to the US fell from 20.6% of its total exports in 2017 to 18.5% in 2023, less than the fall in direct exports alone would suggest.

Relations

The phenomenon is bound to rules of origin, customs enforcement and anti-dumping and countervailing duty practice. An April 2025 report to the president highlighted revising rules of origin to limit Chinese value added in foreign production, and rules of origin were reportedly under negotiation with key trading partners, with Washington potentially pressing ASEAN partners to cut Chinese content. In 2024 overcapacity spillovers prompted 198 anti-dumping and countervailing duty investigations worldwide, including a record 20 EU cases. Nomura lists stricter rules of origin, more stringent border enforcement, amended trade agreements and applying similar tariff rates across countries as enforcement options, while noting that firms find workarounds and loopholes, making closure a dynamic challenge. Chinese firms' links to third-country exports are deepening through intermediate inputs and direct investment in foreign manufacturing, raising Chinese value added in US imports from ASEAN and Mexico. Nomura expects the next supply-chain shifts to follow geopolitical alignments, with India attracting the most interest in relocation, followed by Vietnam, Mexico, Thailand and Malaysia. The working-paper authors argue that policymakers should reconsider crude, country-wide tariffs in favour of sanctioning specific firms; this is a contested assessment, not settled fact.