Asia Economic Monthly: Third Country Circumvention

What is third country circumvention?

The imposition of tariffs on China in 2018 during President Donald Trump’s first term led to a decline in China’s share of US imports but a rise in third countries’ share. Between 2017 and 2024, China’s share of US imports fell by 8.1 percentage points, while Vietnam and Mexico gained slightly more than 2 percentage points each, followed by Korea, Thailand and India. The US trade deficit with China improved marginally, but this was offset by a significant deterioration with the rest of the world.

A portion of the gain by third countries is likely due to attempts to circumvent US tariffs on China. Mexico and Vietnam are likely behind China’s hidden trade with the US, according to Nomura economists. After adjusting for circumvention through third countries in Southeast Asia and Mexico, Nomura’s China economics team estimates that China’s direct and indirect exports to the US comprised 18.5% of its total exports in 2023, down from 20.6% in 2017, but not as low as the direct export share fall would suggest.

The current Trump administration intends to close these loopholes.

Who’s at risk if existing loopholes are closed?

To identify the economies at risk, we use the following criteria:

1. A rise in imports from China and exports to the US

A strong correlation between the compounded annual growth rate of China’s exports to various economies and their exports to the US during 2017-2024 could be a sign of potential tariff circumvention. Cambodia, Vietnam, Thailand, Mexico and Malaysia stand out on this count, according to Nomura analysis.

2. A significant deviation from trend in a third country’s exports to the US after 2018, when tariffs on China were imposed

The shift in US imports from China to third countries could be genuine (e.g., from new supply chains) or for tariff circumvention. The extent of this shift can be estimated by comparing these countries’ exports to the US before and after tariffs on China were imposed. As a share of their exports to the US, our estimates show that Cambodia has gained the most from higher tariffs on China (18.6% of its total exports in 2024), followed by Vietnam (9.2%), Thailand (6.5%) and Malaysia (6.4%).

3. Higher China value added in a third country’s exports to the US.

The US could decide to impose tariffs on third countries if there is higher value added from China in US imports from those countries. According to Nomura analysis, China’s value added accounts for as much as 28.7% of Cambodia’s total goods exports to the US, mainly concentrated in textiles, wood products, metals and other manufactures. China’s value added to exports to the US from Vietnam, Malaysia, Thailand, and Mexico is also high.

Based on the three criteria, Vietnam, Thailand and Cambodia appear most at risk of third country circumvention in Asia.

Implications and complications for Asia

Firms can find workarounds and loopholes to bypass rules, so enforcement and closing loopholes will be a dynamic challenge for the US. To ensure enforcement, the US can impose stricter rules of origin, more stringent enforcement at borders and amend trade agreements to prevent exploitation of regional loopholes, for example, via Mexico. Another way to disincentivize rerouting is for the US to apply similar tariff rates on strategic products across countries. Asian economies can prepare by strengthening compliance with rules of origin, conducting more local sourcing, diversifying trade and investment sources, and aligning more closely with US supply chains.

China remains an important supplier of intermediate products, and the US goal of a strategic decoupling from China will take years until alternate supply chains are built. Most ASEAN economies have taken a neutral stance during this period of US-China tensions. Managing this neutrality could become more challenging, if access to the US market is made conditional on supply chains having fewer inputs from China. Asia also has to balance the economic risks from China’s overcapacity with its domestic goal of creating jobs and boosting local manufacturing, all while maintaining a healthy relationship with China.

As the US seeks to decouple from China-centric supply chains, the next round of supply chain shifts will likely be based on geopolitical alignments. India is attracting the most interest in supply-chain relocation, followed by Vietnam, Mexico, Thailand and Malaysia.

Overall, plugging third country circumvention is a small change in the grand scheme of Trump’s America First policies, but its ripple effects in reshaping global supply chains, and across Asian economies, could still be very significant.

For more on our growth projections, read our full report.