by Our Correspondent in Washington DC
Sri Lanka has been named alongside Bangladesh, Cambodia, Laos and the Philippines as a Southeast Asian “microhub” within what a US report describes as China’s global “Shadow Transshipment Network”, a system through which China-linked goods can be subjected to light assembly, relabelling, packaging or re-export before entering the United States. The report does not establish that Sri Lanka itself has illegally transshipped Chinese goods, but identifies the country as a jurisdiction that could be used for such activity and places it among smaller economies considered vulnerable to China-linked rerouting.
The report, The Great Transshipment Scam, says the United States is confronting a growing problem in which goods from higher-tariff countries are routed through countries facing lower US tariffs. Such operations can involve relabelling, repackaging, re-invoicing, minor processing, false country-of-origin claims or other changes intended to secure tariff treatment that would not apply if the goods’ true economic origin were declared.
China is presented as the central historical example. After President Trump imposed Section 301 tariffs in 2018, the report says Chinese exporters increasingly shifted goods through third countries. Products that had previously travelled directly from Chinese ports to the United States were instead routed through jurisdictions where limited assembly, finishing, repackaging, relabelling or documentation changes could create the appearance of a different national origin. The report argues that what began as smaller-scale tariff evasion developed into industrial-scale customs fraud and a global business model.
Sri Lanka appears in the report’s third tier of countries, described as “Small, Opportunistic Chinese Targets”. This category consists of smaller economies that, according to the report, may have particular advantages for China-linked rerouting, including low-cost labour, free zones, port or border access, bonded warehousing, niche assembly capacity, preferential access to the US market or limited customs enforcement capacity. The report stresses that Tier 3 countries do not individually account for the largest illegal transshipment volumes, but may nevertheless become useful nodes because of these “weak-link advantages” and their dependence on China-linked trade.
The report separately places Sri Lanka within its “Southeast Asian Microhubs” functional category. These microhubs are described as locations associated with light assembly, export-processing zones, relabelling and re-export of China-linked goods. In this framework, Sri Lanka is listed with Bangladesh, Cambodia, Laos and the Philippines. The report says China-linked exporters may use such jurisdictions for both limited production activity and logistics-side routing, potentially allowing goods with substantial Chinese economic origin, control or content to reach the US market under a different declared identity.
That distinction is central to the report’s argument. It defines “China-linked goods” not simply as products declared to be Chinese-origin, but as goods carrying substantial indications of Chinese economic origin, control or content. These may include Chinese components, Chinese ownership or financing, relationships with Chinese manufacturers or suppliers, China-based production steps, China-origin routing histories or other trade-flow evidence.
The report does not, however, equate every increase in exports from a third country with illegal transshipment. It acknowledges that the decline in China’s direct share of US goods imports since the 2018 tariffs has coincided with an increase in the combined share supplied by more than 40 identified transshipment-risk countries. But it explicitly states that this does not establish that all displaced Chinese trade was illegally transshipped. Some of the shift, it says, reflects legitimate changes in production, investment and sourcing.
The scale of the alleged wider problem is substantial. The report reviews five estimates of potential illegal transshipment or related trade-transfer exposure. They range from approximately $40 billion annually in a Goldman Sachs estimate to $303 billion in Altana’s broad upper-bound exposure measure. The White House Council of Economic Advisers provides a range of $34.2 billion to $89.6 billion, with the report using a rounded midpoint of $60 billion, while Exiger estimates approximately $75 billion and the Department of Commerce identifies a broader $109 billion trade-transfer benchmark. The report stresses that these estimates are not additive and use different methodologies and definitions.
At the central estimate of $75 billion in annual illegal transshipment, the report calculates approximately 450,000 US jobs could be displaced, with annual GDP losses of between $113 billion and $150 billion and associated federal revenue losses of $19 billion to $26 billion. These are model-based estimates rather than observed job counts, and the report says they are intended to illustrate the potential scale of the exposure.
The mechanism is described as tariff arbitrage. When goods facing high tariffs in China are routed through a lower-tariff jurisdiction and falsely declared as originating there, the difference can become a substantial profit. The report argues that these savings can finance light-assembly plants, logistics infrastructure, repackaging operations and other facilities designed to shift the apparent origin of goods rather than undertake substantial manufacturing.
For countries serving as transshipment locations, the report says the financial incentives can also include assembly fees, warehousing revenue, logistics margins, port charges, customs brokerage income, land rents and export-processing-zone investment. Governments may benefit from jobs, tax receipts, foreign investment and trade growth, while China-linked exporters preserve indirect access to the US market.
The report’s concern therefore extends beyond individual shipments. It portrays the network as a global system of production-side nodes and logistics-side nodes, including processing zones, maritime gateways, bonded warehouses, re-invoicing systems and re-export centres. Its stated objective is to help US Customs and Border Protection distinguish legitimate manufacturing and foreign investment from pass-through trade and origin shifting.
The proposed response is an AI-enabled “Detective Border”, designed to analyse global trade data, routing histories, ownership relationships, production capacity and shipment anomalies. The report also points to Executive Order 14411, which it says strengthens customs enforcement through measures involving importer accountability, bonding, ownership disclosure, business affiliations, penalties and trade transparency.
For Sri Lanka, the significance of the report lies in its identification as a potential node rather than a finding of established wrongdoing. The report’s classification places the country within a much larger global network that includes major economies, manufacturing centres, logistics platforms and smaller jurisdictions. Its central warning is that the same infrastructure that facilitates legitimate international commerce can also be exploited to disguise the origin of goods.
The report says the effectiveness of the US response cannot yet be measured rigorously. Trade and customs data become available with a lag, while several enforcement provisions remain under implementation. Whether the measures reduce illegal transshipment, tariff losses and associated economic costs will depend on future evidence. For Sri Lanka and the other jurisdictions identified, the report’s classification puts the question of how China-linked trade moves through their ports, production facilities and logistics networks firmly within the scrutiny of US trade enforcement.
