The key sectors in the firing line are ones with labour-intensive industries — textiles, apparel, footwear, accessories, shrimps, and gems and jewellery, each of which has a significant share in the US market. The damage will be severe, as India’s competitor countries in Southeast and South Asia face reciprocal tariffs in the 19-20 per cent range. While a 25 per cent tariff makes Indian goods uncompetitive in the US market, a 50 per cent tariff would devastate market share, jeopardising thousands of jobs and export earnings.
Amidst these concerns, one provision in US President Donald Trump’s reciprocal tariff order could significantly upend calculations: The “transshipment” clause. This measure imposes a much higher 40 per cent tariff on “transshipped” goods, with US Customs given the task of “determining” which goods have been “transhipped to evade applicable duties.”
“Transshipment” usually refers to a simple transfer of cargo, but in trade terms, it has come to denote a practice of obscuring the country of origin of a particular good. This is done to evade higher duties, typically when the country of manufacture is subject to a higher duty in the destination market than the country of export. Indeed, the significant jump in Southeast Asian exports to the US in the last decade, since the advent of the US-China trade war, started by Trump in his first term, has led to allegations that much of this expanded trade is actually Chinese goods that are being illegally routed through these countries to evade the higher US tariffs on China.
Why is this important? Because the Trump Administration wants “transshipment” to cover not just illegally-routed goods (the traditional understanding of “transshipment”) but in fact any goods that contain a significant proportion of value or content added in a different country, basically targeted at China. The intention is to penalise exports that rely heavily on Chinese inputs in order to curb China’s indirect access to the US through other countries.
On August 7, US Secretary of Commerce Howard Lutnick said that the transshipment threshold could be as low as 30 per cent. That would mean that goods destined for the US market, manufactured in Vietnam, with a significant share of inputs from China, could face the higher 40 per cent tariff as opposed to the 20 per cent tariff from Vietnam. Of course, there are a number of questions related to how the US will enforce the transshipment clause. Any enforcement initiatives will also be subject to litigation, as have all of Trump’s tariff initiatives.
For India, the transshipment clause could prove to be a hidden saviour. India’s exposure to China in several key supply chains, such as textiles, apparel, footwear, and accessories, is significantly lower than many Southeast and South Asian competitors, which are all deeply dependent on Chinese materials and components. Consequently, if the transshipment threshold for Chinese content is set at 30 per cent, or maybe even 50 per cent, many of these countries’ exports to the US could be subjected to the 40 per cent tariff.
In apparel, for example, Bangladesh sources much of the fabric for its garment industry from China; it remains to be seen how much of its apparel exports will be subject to the 40 per cent rate as opposed to the lower 20 per cent rate for Bangladeshi goods. Similarly, in footwear, China dominates global material production, and Vietnam’s export success depends heavily on Chinese components.
This dynamic can limit the overall damage for Indian exporters due to the higher US tariffs. The loss of US market share due to a 25 per cent reciprocal tariff may be less if a significant share of exports from Southeast and South Asian competitors are subject to the higher 40 per cent tariff rate. This will likely reduce the number of orders lost and preserve some amount of export earnings that would otherwise have been lost. In essence, India’s vulnerability is real, but the blow could be softened if the transshipment clause ends up rebalancing competitiveness in its favour against major rivals.
The broader implications for the US-India trade conflict are significant. A key reason for the current standoff is Indian resistance to US demands to open the politically sensitive dairy and agriculture sectors in exchange for tariff relief as part of a trade deal. These areas remain red lines for New Delhi given their deep social and livelihood implications.
The transshipment clause can therefore help provide a bit of breathing space, lessening the urgency to strike a compromise to avert damage to the aforementioned industries that have significant exposure to the US market. India may be able to “hold the line” in negotiations, resisting concessions in dairy and agriculture while pursuing a more balanced outcome. More importantly, this will allow India to hold off on any potential retaliatory actions against the US, as the government has signalled at the World Trade Organisation. This approach not only protects domestic constituencies but also demonstrates to Washington that India cannot and will not be pressured to concede on its core interests.
It is important, however, to note a critical caveat. The potential relief from the transshipment clause applies only so long as India’s effective tariff exposure remains at or below 40 per cent. If the additional 25 per cent duty tied to Russian oil purchases comes into effect on August 27 as scheduled, India’s exporters will face a prohibitive 50 per cent rate. At that point, any advantage created by the transshipment clause would likely be very limited, since India would still face a 10 per cent differential. In such a scenario, New Delhi would potentially need to also consider retaliation, if only to create leverage in negotiations.
Most importantly, this does not obviate the urgency of domestic reforms; if anything, it demands even more. The government needs to accelerate efforts to reduce factors of production. The progress made in infrastructure and ports in the last few years is heartening, and Roads and Highways Minister Nitin Gadkari’s commitment to reduce the share of logistics cost to single figures is welcome. Yet more needs to be done in terms of labour reforms and regulatory/bureaucratic overreach. Simultaneously, diversification of export markets by striking trade accords with countries in Europe, the Middle East, South America, and Africa is also critical.
Taken together, these dynamics suggest that while Indian exporters will face considerable strain in the coming weeks, the situation may not be as devastating as the headlines imply. The reciprocal tariff does pose challenges, but the overlooked transshipment clause alters the competitive landscape, blunting some of the damage and might even create opportunities in some areas — so long as India’s effective tariff burden remains capped at 40 per cent. The risks are undeniable, but so too are the opportunities hidden within the fine print of US tariff policy.
The writer is Senior Advisor, Sustainability and Traceability at Neville Peterson.
The reciprocal tariff does pose challenges, but the overlooked transshipment clause alters the competitive landscape, blunting some of the damage and might even create opportunities in some areas (Photo/AP) 
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