Why In News?

The White House report titled 'The Great Transshipment Scam' named India among 40+ countries accused of routing third-country goods with minimal processing, threatening punitive anti-dumping duties against Indian textiles, chemicals, and electronics.

India - United States Bilateral Trade 

Total Bilateral Merchandise Trade: The United States remains India's largest trading partner, with bilateral goods trade valued at $131.84 billion in FY 2024–25 (and total trade in goods and services exceeding $190 billion). 

India's Exports to the U.S.: Reached $86.51 billion (accounting for nearly 20% of India's total merchandise exports), growing 11.6% year-on-year.

 India's Imports from the U.S.: Totaled $45.33 billion, resulting in a healthy trade surplus of $41.18 billion in India's favor. 

Major Commodities Exported by India: Generic pharmaceuticals, assembled smartphones & telecom equipment, ready-made cotton garments (RMG), cut & polished diamonds, organic specialty chemicals, and automotive components.

 Major Commodities Imported by India: Crude petroleum, Liquefied Natural Gas (LNG), coking coal, commercial aircraft & defense avionics, and semiconductor fabrication equipment.

 Bilateral Trade Target ('Mission 500'): Both nations have officially set a joint bilateral target to scale annual two-way goods and services trade to $500 billion by 2030. 

Trade Tensions Rising over Transshipment Allegations 

The U.S. administration alleged that Chinese manufacturers reroute intermediate goods through third-country hubs, including India, using superficial repackaging or minor assembly to avoid 25% to 50% Section 301 tariffs. 

Indian industrial manufacturing heavily integrates imported Chinese raw materials, chemical precursors, and active pharmaceutical ingredients (APIs), creating complex supply chains vulnerable to external origin scrutiny.

U.S. authorities flagged potential anti-circumvention investigations that could impose retroactive duties on Indian exports, risking immediate cargo holds and commercial friction. 

About Transshipment

Transshipment is the shipping of goods to an intermediate destination or hub, where they are unloaded and transferred to another vessel or mode of transport to complete their journey to the final destination. It is widely used to cut costs, combine or split cargo, and bridge gaps when direct routes are missing.

Why Transshipment Is Used

  • No direct path: Connects places that do not have direct routes.

  • Cost savings: Uses large ships for long legs and smaller regional carriers for local delivery.

  • Sorting cargo: Combines small loads into big groups or breaks big loads into smaller parts.

  • Changing rides: Shifts goods from ships to trains, trucks, or planes.

Common Types

  • Direct: Cargo moves straight from one ship to another at a meeting point.

  • Indirect: Cargo rests in a port warehouse or yard before loading onto the next carrier.

Core Legal Issues: Rules of Origin (ROO) Mechanics

Under the WTO Agreement on Rules of Origin (ARO), a product manufactured from imported raw materials acquires domestic origin only if it undergoes a fundamental manufacturing transformation creating a new commercial article. 

Origin criteria require imported inputs to change their Harmonized System (HS) classification at the 2-digit Chapter level (CC), 4-digit Heading level (CTH), or 6-digit Sub-Heading level (CTSH). 

Export rules mandate a verifiable minimum domestic value addition (typically 35% to 40% calculated on Free On Board (FOB) price) within the exporting nation. 

Simple repackaging, labeling, assembly of knocked-down kits, and minor solvent dilution are legally classified as non-qualifying operations that cannot confer Indian origin.

USA Strict Regulation Impact on Indian Economy

Vulnerability of High-Volume Export Sectors: Heightened U.S. customs audits directly threaten India's key export drivers—textiles ($10B+), generic pharmaceuticals ($9B+), organic chemicals, and consumer electronics.

Escalating Compliance Costs for MSMEs: Small exporters face severe administrative burdens, hiring specialized auditors to provide forensic multi-tier bill-of-materials documentation. 

Disruption of the 'China+1' Manufacturing Shift: Arbitrary transshipment penalties risk dampening foreign direct investment into Indian electronics and automotive supply chains by creating regulatory unpredictability. 

Indian Government Regulatory & Compliance Initiatives

Electronic Certificate of Origin (e-CoO) Portal: Administered by the Directorate General of Foreign Trade (DGFT) under the Foreign Trade (Development and Regulation) Act, 1992, issuing tamper-proof, QR-coded origin certificates . 

Enforcement of CAROTAR, 2020 Rules: The Customs (Administration of Rules of Origin under Trade Agreements) Rules, 2020, backed by Section 28DA of the Customs Act, 1962, places statutory responsibility on traders to verify origin cost break-downs and value addition before claiming trade benefits. 

ICEGATE & Turant Customs Faceless Clearances: Automated digital risk management systems cross-verify raw material import declarations against export shipping bills to eliminate circular trade and illicit re-invoicing. 

Production-Linked Incentive (PLI) Schemes: Government funds ₹1.97 lakh crore across 14 strategic sectors to drive upstream domestic value addition in bulk drugs, electronic components, and technical textiles.

Key Challenges in Supply Chain Verification

Deep Upstream GVC Dependency on Imported Intermediates: Indian exporters rely on imported Chinese Active Pharmaceutical Ingredients (APIs), chemical precursors, and electronic surface-mount components, complicating origin calculations.

Divergent National Standards of 'Substantial Transformation': U.S. Customs and Border Protection (CBP) applies subjective "essential character" tests that frequently conflict with India's mathematical 35% value-addition formula.

Heavy Audit & Compliance Costs for MSME Exporters: Small enterprise exporters lack specialized ERP accounting software to maintain multi-tier bills of materials across informal supply chains. 

Absence of Automated Multi-Tier Supplier Tracking: Domestic manufacturers struggle to trace the original source of raw materials procured through secondary and tertiary local vendors. 

Threat of Unilateral Tariff Retaliation: Bypassing WTO dispute panels with unilateral Section 301 executive tariffs creates severe price volatility and contract cancellations for Indian shippers.

Illicit Re-Invoicing by Rogue Operators: A small minority of fly-by-night trading intermediaries exploit Free Trade Warehousing Zones (FTWZs) to switch shipping labels, damaging the reputation of genuine domestic manufacturers.

 Way Forward

Formalize a Bilateral Customs Mutual Assistance Agreement (CMAA): Institutionalize joint verification and real-time customs data exchange between CBIC and U.S. CBP to resolve origin inquiries cooperatively. 

Deploy Blockchain-Backed Digital Product Passports (DPP): Implement blockchain provenance tracking across export clusters in Tiruppur (textiles), Surat (diamonds), and Baddi (pharma) to provide immutable raw material audit trails.

 Accelerate Upstream Domestic Value Addition via PLI Schemes: Deepen backward integration under Production-Linked Incentive (PLI) schemes for bulk drugs, electronic components, and synthetic textiles to reduce foreign intermediate reliance. 

Rigorous Enforcement of CAROTAR 2020 Rules: Intensify physical and document audits on high-risk bonded warehouses and free trade zones to eliminate fraudulent transshipment entities.

 Establish an Institutional Early Warning Trade Mechanism: Utilize the India-US Trade Policy Forum (TPF) to flag transshipment concerns through bilateral technical working groups before unilateral tariffs are enacted. 

Subsidize Export Compliance Desks for MSMEs: Partner with export promotion councils (EEPC, Pharmexcil, AEPC) to provide free origin certification audits and legal defense funds for small exporters.

 Champion Multilateral Harmonization of Non-Preferential Rules of Origin: Lead multilateral negotiations at the WTO to establish standardized, objective rules of origin criteria across global trading partners.

Conclusion

Strengthening domestic supply chain traceability through digital verification and bilateral customs cooperation will protect India's $86.5-billion export footprint while cementing its position as a reliable global manufacturing powerhouse.

Source: THEHINDU

PRACTICE QUESTION

Q. With reference to international trade and Rules of Origin (ROO), consider the following statements:

1. Under the Change in Tariff Classification (CTC) rule, imported raw materials must change their Harmonized System (HS) code during manufacturing to qualify for domestic origin.

2. In India, the CAROTAR 2020 rules place the statutory burden of proof on the importer to substantiate the origin of imported goods.

3. The WTO Agreement on Rules of Origin permits member countries to use non-preferential rules of origin as direct instruments of protective trade policy.

Which of the statements given above are correct?

(a) 1 and 2 only

(b) 2 and 3 only

(c) 1 and 3 only

(d) 1, 2, and 3

Answer: (a) 1 and 2 only

Explanation: 

Statement 1 is correct: Under the Change in Tariff Classification (CTC) rule (such as Change in Tariff Heading or Chapter), non-originating or imported raw materials must undergo sufficient processing so that the final manufactured product changes its Harmonized System (HS) classification code at a specified level (e.g., chapter or heading) to qualify as originating.

Statement 2 is correct: India's CAROTAR 2020 rules (Customs Administration of Rules of Origin under Trade Agreements Rules) legally require the importer to conduct due diligence and place the statutory burden of proof and operational responsibility on them to substantiate the origin criteria when claiming preferential tariff benefits.

Statement 3 is incorrect: The WTO Agreement on Rules of Origin explicitly states that rules of origin must not be used as direct instruments to pursue trade protectionist policies or create disruptive, restrictive effects on international trade.