Input Stories

Since the start of President Trump’s tariffs, U.S. companies have started getting solicitations from shipping firms—many of them based in China—to avoid the taxes (The New York Times, subscription).

What’s going on: “The Chinese firms advertising these services describe their methods as valid solutions. For a fee, they find ways to bring products to the United States with much lower tariffs. But experts say these practices are methods of customs fraud.”

• The businesses may be avoiding taxes by changing shipment information they give the U.S. government so they can qualify for a lower shipping rate, or they may first move the goods to another country with a lower rate before transferring them to the U.S.
• The administration said in May it would focus on combating trade fraud, including tariff evasion.

Why it’s important: Schemes like these are costing the U.S. billions of dollars a year in tariff revenue—and potentially giving an unfair edge to dishonest companies that buy into the schemes. 

Not new, but worse: Though this sort of fraud has been happening as long as there have been tariffs, President Trump’s new “taxes seem to have … prompted a wave of fraud emanating from China” and “companies say customs fraud is also reaching new heights.”

How they’re doing it: There are several schemes at play.
 

• One involves reporting a lower value for a product than the actual worth, lowering the fee because the tariff is charged as a percentage of the item’s import price.
• Another scheme misclassifies items, for example by reporting that shirts in a shipment are made with a lower-tariffed material than they really are.
• A third fraud—which “became far more profitable this year, as Mr. Trump raised tariffs on Chinese imports to a minimum of 145% but left taxes on goods from neighboring countries, like Vietnam, Malaysia and Cambodia, at just 10%”—involves transshipment, sending goods to countries with lower tariffs before sending them on to the U.S.

The Mexico problem: Mexico, where thousands of companies depend on Chinese shipments for the bulk of their supply chain, is being used increasingly as a funnel to get goods to the U.S. more cheaply.

DDP: Chinese firms are also trying out a new scheme, called “delivered duty paid,” or DDP, in which the seller of goods takes responsibility for the full shipping process, “ostensibly reduc[ing] the U.S. importers’ legal liability for tariff fraud.”

• “With this method … if the U.S. government tries to pursue legal action against the Chinese firm, it may find it is just a shell company with no one to pay the bill.”

Less than ideal: Brad Muller, vice president of marketing and government affairs for North Carolina–based pipe manufacturer Charlotte Pipe and Foundry, said the company won several trade cases against China during President Trump’s first term—but the Chinese companies involved immediately began transshipping goods, and the U.S. wasn’t able to stop them. 

• “Customs, they will run down these companies and shut them down, and then they just pop up right across the street with a new shell company,” Muller said. “It becomes a game of Whac-a-Mole.”
• While Charlotte Pipe and Foundry supports the tariffs, they are working “less than ideally,” Muller said, as the system created is ripe for cheating.