Cambodia At Heart Of Trump's Proxy Trade War On China

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Trump 2.0's trade war, according to this narrative, has expanded that test by imposing tariffs on nearly every country, with the aim of curbing“transshipment” and preventing Chinese goods from entering the US market through the proverbial back door. Think of tariffs as third-party sanctions against the Chinese economy.

As the Wall Street Journal reported last week, the Trump administration plans“to use negotiations with more than 70 nations to ask them to disallow China to ship goods through their countries, prevent Chinese firms from locating in their territories to avoid US tariffs, and not absorb China's cheap industrial goods into their economies.”

Take, for instance, this week's news that the US Commerce Department-after a long-running case that saw Washington impose anti-dumping and countervailing duties on solar goods from four Southeast Asian states last year-will impose tariffs as high as 3,403% on solar cells and panels imported from Southeast Asia but predominantly made in Chinese-owned factories. The highest rate will be applied for solar imports from some Chinese companies in Cambodia.

Reuters reported that Vietnam's trade ministry issued a directive on April 15-although it was apparently decided just hours after Trump's tariff announcements on April 2-to crack down on the transshipment of goods to the US as part of its tariff-avoidance strategy.

Because America has raised tariffs on China to as high as 145%, and Beijing has retaliated by imposing duties of 125% on US goods, transshipment rates are likely to increase as China dumps more goods in Southeast Asia.

It thus seems like we're descending into a proxy trade war, in which Washington and potentially Beijing will punish other countries for their economic ties with the other. Cambodia is at the center of this fight in Southeast Asia but without any room to move.

Phnom Penh could curb outright transshipment. As noted, Vietnam has already signaled that it will strengthen supervision and inspection on imported goods to establish their origin.

In addition to its promises to cut tariffs on US imports, Phnom Penh could also offer a similar commitment, publicly stating that it, too, will enhance inspections of goods coming from China. Whether Washington would trust the government's pledges, after years of grand promises that never materialize, is another matter.

However, most problematic is that Cambodia's entire garment manufacturing supply chain-and, thus, the economy's foundation-is transshipment-adjacent. Essentially, almost all the cloth or cotton is imported from China, stitched together in Cambodian factories and then sold to Western (mostly American) consumers. And a significant percentage of garment factories are Chinese-owned.

This is, of course, what many modern supply chains look like. However, these things will appear to be transshipment in the eyes of those who want them to. If it looks like transshipment, Washington may declare it to be.

Give ear to Trump's bellicose trade advisor and trade war architect Peter Navarro.“Let's take Vietnam. When they come to us and say 'we'll go to zero tariffs,' that means nothing to us because it's the nontariff cheating that matters...They sell us $15 for every $1 we sell them. About $5 of that 15 is China transshipping to Vietnam to evade their tariffs,” he said earlier this month. For this, Navarro called Vietnam“a colony of communist China.”

US Treasury Secretary Scott Bessent was a little more to the point in a conversation with Bloomberg last week, seemingly speaking about Southeast Asia:“On our side, we want to avoid transshipment, which has been a big problem. And then on their side, I think they want to avoid dumping. Because these Chinese goods are going to end up somewhere. I don't think it's gonna take much prodding if their biggest export market's cut off.”

The problem for Phnom Penh is that it can do nothing about this. Decoupling from China is simply impossible. Its entire export industry is built on Chinese imports and Chinese investments. Why seek zero tariffs on exports if you've got nothing to export? So if this is a proxy trade war, the question is how long the two main combatants can endure.

As stated, Trump's entire tariff policy is deeply flawed: It simply won't achieve what he thinks it will. What it will achieve is inflation and higher prices for American consumers-one of the two issues that earned Trump a narrow victory in November, the other being immigration.