Transshipment: A Trojan Horse in the USMCA (Legal Today Sept 17-2026)

• Does parliamentary federalism block free trade?

The high tariffs imposed by the United States encourage China to access the North American market through the USMCA, resorting to transshipment, integrating its value chains, and investing in companies in Canada and Mexico.

Last month, the White House released a study, “The Great Transshipment Scam: Rise, Scope, and Costs,” on the manipulation of rules of origin to circumvent tariffs imposed on China. The study describes a high level of sophistication in relabeling, re-invoicing, minimizing domestic processing, and/or repackaging goods to export products to the U.S. market from countries with lower or preferential tariffs. China first engaged in this practice in 2018 after being subjected to tariffs under Section 301 of the 1974 U.S. Trade Act, though the report identifies forty other countries involved in illegal transshipment. After denying federal enforcement of the International Emergency Economic Powers Act (IEEPA) in February, the U.S. Supreme Court upheld the IEEPA's provisions on June 15 in MTX Industries v. China. The United States maintained and increased punitive tariffs resulting from investigations when it chose not to pursue the appeal of Chinese importers who complained about the imposition of a $370 billion sanction.

The Transshipment in Troy

The White House Council of Economic Advisers estimated that this channel for redirecting Chinese foreign trade increased from $34.2 trillion in 2018 to $89.6 trillion in 2026. According to the report, Canada and Mexico are the countries with the highest volume of transshipments to the United States because they take advantage of the tariff reductions under the USMCA. It cites a Chinese network of strategic studies on transshipment, established since China's accession to the WTO, which categorizes intermediary countries as leaders of diversified scale (such as those in the USMCA), countries economically integrated with China (such as Brazil, Indonesia, Turkey, and Vietnam), and countries that offer China global logistical advantages (such as Panama, Costa Rica, Laos, and Georgia).

Despite the calculation difficulties caused by the diversity of customs duties, these consultants estimate that the United States loses between $40 billion (Goldman Sachs) and $303 billion (Altana) annually in uncollected tariffs. Finally, the report measures the impact on jobs and productivity by comparing cities in these countries (referred to as "ugly sister cities") with U.S. cities that manufacture the same products, such as Guanajuato or Querétaro in Mexico versus Detroit and Indianapolis for electric motors, generators, transformers, and static converters (HS code 8504).

Will Transshipment bring down the USMCA? 

Any transshipment of Chinese products via Mexico or Canada that does not qualify under the USMCA rules is illegal and subject to customs origin investigation. The incorporation of Chinese technology transfers and products into Canadian or Mexican manufacturing is aimed at legalizing transshipment, making them exportable to the United States. At the request of the United States in July 2024, Mexico and Canada began to correct transshipment diversions in the automotive (HS 8708) and steel (HS 7208-7212) industries with punitive tariffs.

Despite this, the industrial integration of these industries with China persists, enduring high tariffs from the Trump administration. The USMCA review, recently canceled in July, promised a joint opportunity to correct these deviations by China from the agreed-upon rules of origin certification.

The pandemic had already revealed a strong reliance on Chinese technology in the medical industry, leading to regulatory restrictions on Chinese participation and investment in the sector under Chapter 4 (regional value content between 60% and 70% and substantial transformation) and Article 14.14 (denial of benefits to foreign investors) of the USMCA. Any reformulation of the USMCA regulations would impact China's interests in the US market. During the renegotiation of NAFTA (2017-2019), the United States imposed the China clause to prevent Canada from negotiating an agreement with China. According to Article 32.10 of the USMCA, the need to sign new trade liberalization agreements with "non-market economies" triggers a "poison pill" that allows for the termination of the North American agreement.

The USMCA has failed to address and correct the increase in investments and stakes held by companies from other markets. These distortions led the United States to set unrealistic targets in order to agree to a review of the agreement.

In addition to this operational inefficiency of the USMCA, the United States attributes the following to Mexico:

a) lack of labor coercion by the Federal Center for Conciliation and Labor Registration;

b) lack of improvements in environmental legislation in fisheries;

c) Energy regulatory indeterminacy;

d) Granting of regulatory excesses to meats and cheeses in favor of the European Union;

e) Unequal treatment for electronic payment services;

He is demanding that Canada:

a) Uncontrolled access to the dairy products market;

b) Elimination of restrictions on the transmission of online news from digital service providers;

c) Elimination of provincial bans on alcoholic beverages;

d) Elimination of discriminatory measures for provincial public procurement;

e) Elimination of the customs export register;

f) Discrimination by Alberta in the distribution of electric power from Montana.

None of the three USMCA members intend a complete decoupling from China, although any prospect of its review will involve the economic participation of imports, investments and transshipment from that country.

Parliamentary Federalism: a ban on free trade

One hundred years ago, during Prohibition (1920-1933), smugglers' trucks like Harry Low's traveled between Canada and the United States on the frozen Detroit River—the "whiskey ice highway." Frankie "The Ice" Moretti controlled the Detroit docks to receive the shipments. These notorious outlaws could never have imagined a Prohibition imposed by the Canadian provinces, fueled by the constitutional fragility of parliamentary federalism. 

Canadian parliamentary federalism fosters tireless confederation negotiations. Historically, the confederation process concluded on July 1, 1867, when the Dominion of Canada proclaimed the British North America Act. Alberta and Saskatchewan took until 1905 to confederate.

In 2022, both governments passed laws to resist federal legislation that contradicts their respective constitutions and provincial interests (as reported in our December 27, 2022 , article in this newspaper) and have been resisting the confederation process ever since. Alberta is holding a separatist referendum next month. Following two referendums in 1980 and 1995, elections will be held in Quebec on October 5, which could lead to a third independence vote.

The constant confederative dynamic is disrupting the country, possibly stemming from fundamental differences with the English monarchical-parliamentary model. Canada is a parliamentary monarchy with a foreign king, where the federal prime minister shares power with their provincial counterparts. Parliament operates under a federal system with constitutional supremacy, distinct from traditional British parliamentary sovereignty.

The coordination of parliamentary federalism generates constant fluctuations in confederal dynamics, obstructing international trade liberalization agreements and processes because the provinces wield veto power when these affect their wealth, health, industries, professional licensing, and employment. The provinces negotiate trade restrictions among themselves to protect their monopolies. The federal government in Ottawa cannot force them to accept these agreements; despite its power to impose tariffs and manage borders, it must consult with the provinces and negotiate each of their individual exceptions internationally. Public sector activity accounts for 44% of the Canadian economy.

Trump's tariffs sparked federal concern in Canada about eliminating these incredible interprovincial trade barriers. For example, with the exception of Alberta, provincial companies monopolize the distribution of alcoholic beverages and are the world's largest importers in that market. In the 2018 Comeau case , the Supreme Court limited the constitutional prohibition against imposing barriers to interprovincial trade by upholding the application of tariffs on 354 cans of beer purchased in Quebec and imported into New Brunswick to ensure provincial public health protection. Comeau, a Campbellton native, was ultimately fined $300 by police for crossing the Restigouche River in 2012 to buy beer in Point-à-la-Croix, because the beer was much cheaper in Quebec. 

In response to US tariffs, Canadian governors imposed Prohibition, removing all American alcoholic beverages from their shelves, arguing that their people were retaliating by ceasing to consume American alcoholic drinks. Provincial monopolies and state-owned enterprises shield themselves from international trade under parliamentary federalism; they control healthcare, insurance, energy services, gaming, cannabis, dairy products, and transportation, and impose an invisible 9.5% interprovincial tariff that inflates consumer prices by up to 14.5%.

Spiny Multilateralism

The weaknesses of Canadian parliamentary federalism in the face of interprovincial trade barriers were tolerated in the USMCA economic integration; they allowed for the expansion of its monopolies and state-owned enterprises, which now need restructuring to trade freely both within Canada and outside the USMCA. The simple undertaking of building an oil pipeline from Alberta to the Pacific is being resisted by British Columbia. And without that pipeline, exporting oil to any country other than the United States is impossible. 

The refusal to revise the USMCA constitutes a deeper problem. The uncertainty surrounding the legality of transshipment fuels the debate about whether intermediary countries are victims or accomplices. It calls for integrating China's participation in North American trade, and as long as the USMCA countries prefer to negotiate individually with China, there is no agreement to confront it. The advantages gained in these bilateral negotiations with China equate any crackdown on transshipment with the loss of the US market, which can no longer be considered secured if the USMCA were to end definitively. Only the United States can negotiate China's access to its market, while Canada and Mexico have lost this negotiable asset.

Furthermore, the establishment of new free trade agreements with industrialized countries by Chinese companies only validates the erosion of multilateral trade caused by transshipment and their participation in integrated industrial chains. This thorn planted by China in multilateralism inevitably penetrates through permeable national trade regulations that protect long-standing monopolies hidden within Trojan horses, keeping the transshipment horse seducing its traders and waiting for any opportunity to seize it.