President Donald Trump’s onslaught of tariffs was initially meant to grow government revenue. However, they may have inadvertently enabled a multi-billion dollar tax scheme for the U.S. economy: Companies have found tactics to evade the sky-high tariffs and are engaging in fraud that could have dire consequences for the country, including lowered federal tax revenues and reduced GDP.
The White House is now cracking down on these tariff dodgers. In a report on Tuesday, the administration chronicled the magnitude of the problem and outlined how it’s trying to curb it. It claimed the U.S. is losing between $19 billion to $26 billion in tax revenue annually as a result of countries routing exports through other countries in order to evade levies, in a process called transshipment.
But the true extent of the tariff fraud may be even greater than that. Last year, data from China’s General Administration of Customs and U.S. Census Bureau showed a $112 billion gap between what China reported shipping to the States and what the U.S. reported receiving—suggesting efforts to evade these taxes are ballooning even beyond the tens of billions of dollars outlined by the Trump administration.
China appears to be the main culprit behind the tariff dodging, processing exports through more than 40 other countries, according to the report. But it’s not the only one to receive the White House’s attention: The report also pointed to dozens of other nations turning a blind eye to shell importers and foreign importers behind tariff fraud.
“While the future may be murky, the past is not,” read the report, which came from the White House’s Office of Trade and Manufacturing Policy (OTMP). “The second Trump Administration inherited a Great Transshipment Scam—a witch’s brew of economic incentives, bad actors, and lax enforcement that had been allowed to simmer and grow more toxic over time.”
While previous trade policy has empowered bad actors to find ways to dodge levies, trade experts say there’s still one obvious reason why tariff fraud has increased, and that responsibility rests of the shoulders of the current president: The existence of the import taxes in the first place, exacerbated by Trump’s Liberation Day tariffs last year, have jumpstarted the practice of dodging them.
“The tariffs have created a huge incentive,” Ryan Peterson, CEO of supply chain management platform Flexport, told Fortune. “If your tariff was 0% there’s no need to commit fraud; there’s no tariffs to evade. As those tariffs have gone way up, it’s just created a huge incentive to change your terms of trade, to lie about the valuation or the classification or the country of origin of the goods.”
The rise of tariffs—and tariff dodging
Tariffs have been a cornerstone of Trump’s second administration. The president’s “Liberation Day” tariffs have imposed levies against China of up to 145%. Even after the Supreme Court struck down the lion’s share of tariffs, which were imposed under the International Emergency Economic Powers Act (IEEPA), the White House has tried to replicate high tariff levels through duties imposed under the 1974 Trade Act.
As of earlier this month, U.S. tariffs on China were around 23%, according to the Penn Wharton Budget Model, more than double the about 11% import tax on the country prior to the start of Trump’s second term.
“Why we’re seeing transshipment as a much bigger issue now is because the tariffs are higher across the board,” Carrie Owens, a partner at law firm Kelley Drye & Warren and former head of the Enforcement Operations Division at U.S. Customs and Border Protection (CBP), told Fortune.
While transhipment has been around for decades, the practice ramped up in 2018, when the president in his first term imposed tariffs on more than $250 billion worth of Chinese goods. The trade war incited a wave of rerouting goods through third-party countries, as well as led to companies under-reporting the value of goods or mislabeling products as alternative goods not subject to as high of import taxes. Goldman Sachs calculated that the U.S. previously lost between $110 billion to $130 billion in revenue from tariff dodgers during Trump’s first term.
Today, Peterson—a vocal critic of the current tariff policy and advocate for interventions against tariff evasion—warned the magnitude of tariff dodging is “massive,” and the Trump administration would agree. The report cited a 2020 study by the Economic Policy Institute, which estimated 3.7 million jobs were displaced between 2001 and 2018 as a result of the U.S.-China trade deficit. Author Robert Scott said the deficit increased by $336.5 billion in that period, and this could eventually cost the U.S. between $60 billion and $606 billion in annual GDP losses, the White House claimed.
More concretely, Owens argued, tariff dodgers are squeezing the companies paying their fair share of tariffs, leaving them to compete with businesses who aren’t burdened by the levies in the same way they are.
“The good actors that are doing what they’re supposed to and paying their revenue, foreign companies that are importing the United States that are following the rules—they’re being hurt as well,” she said. “So it’s not even just U.S. businesses. Any company that is following the rules is being damaged and harmed by these goods that are coming in.”
Enabling and curbing tariff dodging
If Trump’s raft of tariffs precipitated an onslaught of tariff dodging, preexisting U.S. trade policy laid the groundwork for it.
The U.S. allows for foreign importers of record, or non-American business entities, to take responsibility for shipment and customs entries. While this allowance was likely made in the name of free trade and limiting regulatory burden, it also gave power to companies looking to avoid tariffs. These entities can effectively act as shell companies to funnel goods between point A and point B, disappearing quickly when regulators grow suspicious of evasion, but also leaving U.S. custom authorities with little to do because they are outside of their regulatory jurisdiction.
“The owners are foreign,” Owens said. “So we don’t have the tools in the United States to get at, to address and penalize those foreign owners when there’s no U.S. assets.”
The Trump administration has worked to crack down on these foreign importers of record. A June 3 executive order restricted these foreign entities from using continuous customs bonds and required them to use a formal entry procedure requiring more detailed documentation. CBP is also deploying AI to scan shipment data, check routing histories, and flag inconsistencies in documentation.
Owens said results from these crackdowns will be felt swiftly, as early as October. But she warned that until tariff evasion is curbed, there’s the risk of a vicious cycle of the Trump administration hiking import taxes to try to make up for revenue lost from dodgers.
“If everybody paid the tariffs they’re supposed to, I personally don’t think the tariffs will be as high as they currently are,” Owens said. “Part of having those high numbers is because there isn’t the enforcement that there’s the tariff evasion that’s happening.”
