Asia-Pacific supply chains face upheaval from new US tariffs, Moody’s warns

New Delhi: America's new tariffs on transshipped goods could disrupt Asia-Pacific supply chains, including India's, jolting production networks deeply linked to China and worsening export compliance challenges for South-East Asian nations, Moody's Ratings cautioned on Tuesday.

In a report titled ‘Trade: Asia-Pacific’, the US focus on origin of imports increases risks for Asia-Pacific supply chains, the New York-headquartered organization said. The reciprocal tariffs announced by US President Donald Trump apply to goods deemed to have been rerouted through third countries to evade country-specific duties, effectively introducing a two-tier trade regime.

While Washington has not clearly defined “transshipment,” the measure appears aimed at Chinese products shipped through lower-tariff economies, Moody’s said in the report.

“The tariff will be credit negative for various sectors globally, particularly in South and South-East Asia (S&SEA), given the region's high dependence on Chinese inputs. Vietnam (Ba2 stable), Malaysia (A3 stable), and Thailand (Baa1 negative) are among the countries most exposed because of their deep integration with Chinese supply chains, while the main exposed sectors include electronics, electrical equipment, solar energy, machinery, automotive, and semiconductors,” it said.

“While these developments could add pressure to supply chain diversification efforts away from China, we expect the China+1 strategy to remain largely intact,” it added.

Under the China+1 strategy, sparked by the Washington-Beijing trade tensions, and accelerated by the pandemic, companies retain some of their manufacturing in China while shifting the rest to other countries to minimise risks.

Transshipment typically refers to transferring cargo between different modes of transport and routes when no direct route to the final destination exists.

South-east Asia’s export-led economies, especially the 10-nation Asean (Association of Southeast Asian Nations) bloc, are facing fresh uncertainty from Trump’s escalating trade war, as Washington moves to penalize goods routed through third countries to sidestep tariffs on China.

When the Trump administration first imposed a 30% tariff on Chinese goods earlier this year, it also announced a 40% duty on “transshipped” products, items rerouted through third countries to evade US tariffs, as the logic was clear: penalties for circumvention must exceed the base tariff to act as a deterrent, said Ajay Srivastava, founder of Global Trade Research Initiative (GTRI), a think tank.

Now, with president Trump declaring on 10 October that the US will impose an additional 100% tariff on imports from China starting 1 November, the implications for transshipped goods are far more severe, he said, adding that if implemented, the surcharge on re-routed Chinese products could logically exceed 130%, maintaining parity with or surpassing the direct tariff.

In effect, Chinese-origin goods re-exported through hubs such as Vietnam, Malaysia, or Mexico could face prohibitive tariffs, possibly exceeding their declared value, severely straining global supply chains.

Under an executive order issued in August, imports deemed to have been “transshipped” will attract a punitive 40% tariff, along with penalties and applicable country-of-origin duties, if flagged by US Customs and Border Protection.

However, the lack of clarity around what qualifies as transshipment poses significant risks for Asean economies, the Moody’s Ratings report said.

“If the US maintains a narrow interpretation—targeting only goods imported from China, minimally processed or relabeled and re-exported to the US—the economic impact on regional economies may be limited,” it said.

“However, a broader and more punitive interpretation—where goods with any significant Chinese input are also deemed in violation—could prove economically damaging for the Asia-Pacific (APAC) supply chain,” it added.

The report said that determining the origin of goods is already complex, and the US’s ambiguous criteria could further complicate supply chains that depend on Chinese components.

Exporters may now need to demonstrate “substantial transformation” in production to avoid penalties—a process that demands greater documentation and due diligence, it said.

“The transshipment tariff will likely create major compliance issues for ASEAN's private sector,” Moody’s said, adding that exporters would face higher costs from stricter certification and verification requirements.

Deep exposure across Asean

Moody’s estimated that transshipped goods accounted for around 13% of Asean’s total exports to the US in 2024, with Vietnam, Malaysia, and Thailand emerging as key “connector economies.”

If these goods had been shipped directly from China, they would represent roughly 9% of China’s total exports to the US, suggesting that much of the apparent diversification away from China may in fact reflect trade rerouting, it said.

Vietnam, Malaysia, and Thailand are particularly vulnerable because of their high integration with Chinese supply chains, and relatively low domestic value-added in exports.

By contrast, India and Singapore, with higher value-added shares, are better positioned to withstand scrutiny, it added.

Moody’s noted that the sectors most exposed to transshipment scrutiny by the US are machinery, electrical equipment, and optical products.

These sectors are also those with the lowest domestic value-added, heightening the risk of punitive US tariffs and reputational damage.

“In price-sensitive industries such as consumer opticals, motor vehicles, and textiles, the ability to pass on higher costs is limited, leading to margin compression and demand volatility,” the report added.

Limited near-term impact on competitiveness

Despite the heightened uncertainty, Moody’s said Asean’s manufacturing competitiveness remains largely intact. Lower labour costs compared to China, coupled with a widening tariff differential between the US rates on China and those on most Asean economies, continue to make the region attractive for investment.

“While these developments add pressure to supply chain diversification efforts, we expect the China+1 strategy to remain largely intact,” Moody’s Ratings said.

Governments across the region have begun tightening export verification regimes in response. Singapore has imposed stricter disclosure rules and monitoring of shell companies, while Malaysia, Thailand, and Vietnam have stepped up scrutiny of high-risk export categories and certificates of origin.

In the near term, Moody’s expects the Asean region’s dense manufacturing ecosystem centered around China to remain resilient.

But in the medium term, Asean’s ability to shift toward higher value-added production and reduce dependence on Chinese inputs “will hinge on strategic sectoral shifts and accelerated regional integration efforts,” it added.