India faces high risk from new US transshipment tariffs: Moody

India’s manufacturing and export sectors are facing high alert following a new US crackdown on tariff evasion, which identifies India as one of the countries most likely to face transshipment risk.

The US, in a move to tackle trade rerouting primarily by Chinese exporters, announced a 40% tariff on July 31 for any goods deemed to have been transshipped.

According to a rating analysis by Moody's, this tariff is credit negative for various sectors globally, with India, Mexico, and ASEAN countries bearing the brunt of the risk.

The situation escalated after President Donald Trump announced on October 10 that the US will impose an additional 100% tariff on imports from China starting November 1. According to the news reports, the surcharge on re-routed Chinese products, including those passing through India, could logically exceed 130%, potentially surpassing the declared value of the goods themselves.

For India, which relies on Chinese inputs for many key industries, the tariffs pose a threat. Moody's identified sectors like machinery, electrical equipment, consumer optical products, and semiconductors as facing the highest risk.

While Moody's report focused heavily on the exposure of Vietnam, Malaysia, and Thailand due to their deep integration with Chinese supply chains, the inclusion of India highlights the growing concern over its role as a manufacturing hub that also depends on Chinese components.

Several ASEAN nations secured reductions in their basic tariff rates, bringing them all below April levels. Vietnam's rate was reduced to 20%, while Malaysia, Indonesia, Thailand, and Cambodia all secured 19% tariffs.

In contrast, other countries in the region faced different outcomes. The Philippines experienced a tariff increase, with its rate rising from an initial 17% to 19%. Brunei was subjected to a 25% tariff.

Washington imposed significantly higher 40% tariffs on Myanmar and Laos, which rank among the highest reciprocal tariffs worldwide, although this was less than what had been previously announced.

Only Singapore maintained its 10% baseline rate, which was continued on Liberation Day.

 As per Moody rating, “it is not yet clear how the US defines transshipped goods, the tariff is credit negative for various sectors globally; in particular South and South-East Asia (S&SEA), given the region's high dependence on Chinese inputs.

The reports further said that the move has the potential to reconfigure supply chains in the region, introducing more operational challenges for exporters and increasing the cost of compliance. In turn, customers also face the risk of higher prices if higher operating costs are passed on to end-users.

Transshipment 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.

The new policy threatens to create operational hurdles for Indian exporters. Moody's noted that it is not yet clear how the US defines transshipped goods.

Companies will be required to prove substantial transformation of goods imported from China to avoid the severe penalties, a process that Moody's warns will increase the cost of compliance.

This development adds new pressure to the China+1 strategy, a global trend of supply chain diversification away from China, which India has been actively trying to capitalise on. Despite the new tariffs complicating this diversification, Moody's stated that it expects the China+1 strategy to remain largely intact.