The White House put a $303B number on tariff evasion. Read it as an audit notice

The White House Office of Trade and Manufacturing Policy released a 25-page report titled "The Great Transshipment Scam" on the 13th, local time, saying China has built a shadow transshipment network exporting to the US through some 40 countries, including Korea, where products undergo relabelling, repackaging, reinvoicing and simple assembly before re-export.

The report estimated illegal transshipment amounts to as much as $303 billion a year.

The administration claimed the US is losing between $19 billion and $26 billion in tax revenue annually as a result of transshipment.

Drones and components from the European Union, Japan, Liechtenstein, South Korea, Switzerland and Taiwan face a 15% duty provided that substantially all of the hardware, software and technology originates in those countries or the United States; UK imports face 10%.

Goldman Sachs calculated that the US previously lost between $110 billion and $130 billion in revenue from tariff dodgers during Trump's first term.

Transshipment ramped up in 2018, when Trump in his first term imposed tariffs on more than $250 billion worth of Chinese goods, prompting rerouting through third countries, under-reporting of value and mislabelling of products.

In Mexico's case the report identified the central Guanajuato-Queretaro corridor as a forward base for evading tariffs on electric motors, generators and transformers, and assessed that this harmed US companies in Detroit and Grand Rapids, Michigan, and Indianapolis, Indiana.

The report named the European Union, India, Canada, Mexico, Taiwan and Southeast Asia as tariff-evasion routes, citing electrical switching, protection and connection devices exported from around Ho Chi Minh City in Vietnam and a pumps and compressors production belt in Pune and Gujarat.

The report's revenue-loss range implies an effective evaded duty rate of about 6.3% to 8.6% on the transshipped volume it cites.

Applying the roughly 23% average tariff on Chinese goods to $303 billion of transshipped volume implies about $70 billion of lost duty, close to triple the top of the administration's $26 billion estimate.

Last year, data from China's General Administration of Customs and the US Census Bureau showed a $112 billion gap between what China reported shipping to the United States and what the US reported receiving.

The gap between the 100% top drone rate and the 15% allied rate is 85 percentage points.

The report singled out the semiconductor belt in Gyeonggi Province - Pyeongtaek, Yongin and Icheon - as a route for evading tariffs on Chinese chips, and said US semiconductor industry in Phoenix, Austin, Portland and San Jose had been hurt because Chinese chips were entering via Korea.

Ryan Peterson, CEO of 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."

Carrie Owens, a partner at Kelley Drye & Warren and former head of the Enforcement Operations Division at US Customs and Border Protection, told Fortune that transshipment is a much bigger issue now because tariffs are higher across the board.

Korean exports of "other integrated circuits" to the United States in the first half of this year came to $41.402 million, or 2.8% of total semiconductor exports to the United States of $1.479 billion, according to the Korea International Trade Association.

Kim Tae-hwang, professor of international trade at Myongji University, said it will not be easy to impose additional tariffs on all semiconductors on this basis alone, but that if the US begins requiring proof of origin for various goods and intermediate products containing semiconductors, the burden on companies will grow.

As of last year, China's DJI Technology held a 70% share of the US commercial drone market.

After the Supreme Court struck down the lion's share of tariffs imposed under the International Emergency Economic Powers Act, the White House has tried to replicate high tariff levels through duties imposed under the 1974 Trade Act.

A joint fact sheet from last year's Korea-US summit included language stating the two countries would work when necessary to prevent tariff evasion.

The report's claimed GDP damage is 4.3 to 7.9 times its claimed federal revenue loss.

The report said the average US tariff on Chinese products is currently about 50%.

As of earlier this month, US tariffs on China were around 23%, according to the Penn Wharton Budget Model, more than double the roughly 11% import tax on the country before the start of Trump's second term.