US trans-shipment tariff to create compliance issues for firms: Moody's

The 40 per cent trans-shipment tariff by the US will create major compliance issues for companies in India and the Asean region, with high risks for sectors like machinery, electrical equipment and semiconductors, Moody's Ratings said on Tuesday.

In July 31, US President Donald Trump announced a 40 per cent tariff on goods deemed to have been transshipped, beyond the broader country-level tariffs.

Moody's, in its 'Trade Asia-Pacific' report, said it remains unclear how the Trump administration defines trans-shipment, but the measures appear to target products originating in China and shipping through third countries with lower tariffs.

Stating that lack of clarity around trans-shipment tariff poses risks to Asean economies, Moody's said if the US maintains a narrow interpretation targeting only goods imported from China, minimally processed or re-labelled and re-exported to the US the economic impact on regional economies may be limited.

However, a broader and more punitive interpretation where goods with any significant Chinese input are also deemed in violation could prove economically damaging for the Asia-Pacific (APAC) supply chain, Moody's said.

The trans-shipment tariff will likely create major compliance issues for Asean's private sector. For example, there will likely be increased due diligence and certification requirements, with exporters needing to prove "substantial transformation" to avoid US penalties, it added.

Moody's said its analysis suggests that the sectors most likely to face trans-shipment risks across Asean, India and Mexico include machinery, electrical equipment and consumer optical products, including semiconductors.

Trans-shipped products are concentrated in intermediate inputs instead of final consumer goods.

Trans-shipment refers to the legal practice where goods are transferred between vehicles, like ships and trains, at hubs when no direct route exists between export and import locations.

The practice can enhance logistical planning, reduce costs, and support global supply chain flexibility. However, it can also be used to disguise the origin of goods to evade tariffs, particularly in response to US-China trade tensions.

Trans-shipment has also been mentioned explicitly in recent trade agreements entered into by the US.