Beware the Tariff Police State

By Dominic Pino

Friday, August 01, 2025

 

One underdiscussed part of President Trump’s tariff executive order from Thursday is that it creates a new effort to punish what the order calls “transshipment” to avoid the tariffs.

 

Section 3 of the order says:

 

Transshipment.  (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, (ii) any other applicable or appropriate fine or penalty, including those assessed under 19 U.S.C. 1592, and (iii) any other United States duties, fees, taxes, exactions, or charges applicable to goods of the country of origin.  CBP shall not allow, consistent with applicable law, for mitigation or remission of the penalties assessed on imports found to be transshipped to evade applicable duties.

 

(b)  The Secretary of Commerce and the Secretary of Homeland Security, acting through the Commissioner of CBP, in consultation with the United States Trade Representative, shall publish every 6 months a list of countries and specific facilities used in circumvention schemes, to inform public procurement, national security reviews, and commercial due diligence.

 

Transshipment itself is not illegal, which is why I put it in scare quotes in the first sentence. The U.S. can’t do anything to stop transshipment in general. It’s very normal, for example, for a container to be picked up in one place, taken to a hub, and then loaded onto another vessel to get to its destination. That’s transshipment, and it’s fine.

 

What the order is saying is that if transshipment is done to reduce the tariff burden, the U.S. is going to punish that somehow. But it’s not even clear how transshipment could reduce a tariff burden, because transshipment does not change a good’s country of origin for legal purposes. If, for example, a finished good coming from India to the U.S. gets transshipped through Singapore, the country of origin for the good is still India, not Singapore, and it would still be subject to U.S. tariffs on Indian goods.

 

What businesses can do to lower their tariff burden is to ship partially completed goods to a third country where they are “substantially transformed” (that’s the technical term). Then, the country of origin can change to the country where the substantial transformation happened.

 

This opens up all kinds of legalistic hair-splitting about what counts as substantial transformation. And that’s probably what the administration means by “transshipment” in this context. They don’t want businesses to avoid higher tariffs by moving parts of their production process to lower-tariff countries.

 

The desire is understandable from the administration’s point of view, but there are 200 countries in the world, and companies absolutely are going to use that to their advantage. There are all kinds of perfectly legal ways to do this. So the question becomes: What is the administration going to consider punishable under this order?

 

In a system where basically everyone is guilty, punishment gets decided based on favoritism, or lack thereof. What this will probably amount to is yet another way for Trump to target countries and leaders he doesn’t like. The administration could find examples of tariff evasion in that country and then Trump could publish an all-caps Truth Social post about how Prime Minister So-and-So hates him and will now face a tariff 40 percentage points higher.

 

That aside, if the administration is actually serious about enforcing this, it will require the creation of a global tariff police state. The U.S. is going to have to deploy investigators around the world to find out what businesses may or may not be doing to reduce their tariff burden. And because much of this activity will be completely legal, it will amount to snooping on ordinary business practices for perceived wrongdoing determined at the whims of the president.

 

That’s bad for business and for the rule of law. So at least it’s consistent with the president’s overall trade agenda, I guess.