Like the already established global practice of “treaty shopping” to bring down income tax liability, the world is entering the new phase of “tariff shopping” as trade between the two biggest traders US and China is now subject to abnormally high import duties, according to a study. This is forcing buyers to look at alternate production and sourcing bases, it added.
Given the uncertainty surrounding the duration of the US tariffs, most companies are looking for quick wins: setting up assembly lines, contract manufacturing units, or joint ventures that offer substantial transformation without requiring full-scale industrial ecosystems from scratch, the study by GTRI said.
Businesses all over the world including in India are informally reporting increased interest from global buyers looking to shift production or establish new outsourcing relationships to take the best advantage of tariff differential between China and other major exporters in the US markets. The additional tariffs on Chinese goods in the US market stands at up to 145% as against 10% for other countries. “A senior White House official said on Wednesday tariffs on China could be reduced to around 50–65)..
The manufacturing bases that do substantial value addition are important otherwise the products would not meet the criteria of US non-preferential rules of origin. If a product contains high Chinese content and fails to meet the “substantial transformation” test, it may still be classified as Chinese—regardless of where it was assembled—and subjected to punitive tariffs, the report added.
To ensure compliance with the US rules of origin, firms must map and audit the supply chain to identify foreign content, redesign manufacturing processes to ensure domestic transformation of key inputs and maintain meticulous documentation, including invoices, production steps, and origin declarations, the report said.
Rerouting Chinese products from India are likely to invite scrutiny from the US Customs and Border Protection (CBP) and can lead to steep penalties or long-term reputational damage.
By complying with origin rules and performing genuine transformation—through assembly, integration, programming, or design—firms can access the US market legally and competitively. This model is already gaining traction in sectors such as garments, toys, steel products, and electronics, furniture, kitchenware, and auto parts.
In textiles and apparel the country where fabric is made decides the origin and not where it is cut or sewn. Similarly in smartphones and laptops origin depends on where key parts like motherboards or logic boards are assembled and programmed. Just assembling the phone or laptop in a country may not be enough if the programming is done elsewhere.
In pharma and chemicals changing the chemical structure counts as origin. But turning an imported API into tablets does not count if the core chemical doesn’t change. In automobiles building the full vehicle qualifies as transformation. But adding parts to an already-made car would not work.
Even if a solar panel is assembled in a country, if the cell is made in another country, the product’s origin is still that country. Many panels assembled in one country fail this test because they use imported cells.