Finance & economics | Trash talk The White House’s absurd claim of a Chinese transshipment “scam” High tariffs on Chinese goods have had predictable effects Aug 20th 2026 IN G.K. CHESTERTON’S parable of the fence, those eager to tear down seemingly useless structures are urged to understand why they were built in the first place. Chesterton’s fence has long been received wisdom among American conservatives of a certain age, but Peter Navarro, Donald Trump’s chief trade ideologue, seems to have missed the memo. In a new paper published by Mr Navarro’s office in the White House, titled “The Great Transshipment Scam”, dozens of countries from Japan to Jordan stand accused of abetting a Chinese plot to dodge American tariffs. Absurd as this claim is, the paper is nevertheless a vivid exposition of the Trump administration’s muddled thinking on trade.

Start with the “great reallocation”, Mr Navarro’s term for the shifts that followed Mr Trump’s first wave of tariffs on Chinese goods in 2018. At the time, free-traders warned that a gap in tariff rates between China and the rest of the world would backfire. It would create an irresistible incentive to evade duties, legally or otherwise, while crimping growth. America understood this well when, in the 1940s, it was the primary author of a global trading system based on non-discrimination. Mr Trump charged ahead anyway. The average tariff-rate differential between China and the rest of the world widened from 0.9 percentage points at the start of 2018 to 29 points last year (see chart). The predictable happened: the share of American imports coming from China tumbled from 21% to 9%, while that from other countries soared. In “connector” economies such as Vietnam, Malaysia and Mexico, imports from China and exports to America rose in tandem. Messrs Trump and Navarro now face a problem of their own making. Mr Navarro calls the pursuit of lower tariffs the “financial engine behind the Great Transshipment Scam”, echoing Mr Trump’s threat last year to impose a 40% tariff on “transshipment” (a loosely defined term that usually refers to Chinese goods rerouted through third countries). Yet rejigging supply chains

to shift a shipment’s country of origin and reduce its tariff liability is no scam—unlike concealing its origin by simply slapping on a new label. The traditional legal test is “substantial transformation”, requiring a “fundamental change in form, appearance, nature or character”, according to American trade authorities. This is not a clean distinction. Most free-trade deals include painstakingly negotiated “rules of origin” (ROO) for each product line. Haggling over ROOs for the Trans-Pacific Partnership, a 12- country trade deal scuttled by Mr Trump in 2017, took the better part of a decade, notes Deborah Elms of the Hinrich Foundation, a think-tank in Singapore. Even Mr Navarro offers a cursory nod to the difference between “legitimate manufacturing and substantial transformation” on the one hand and “pass- through trade and origin shifting” on the other. Indeed, he collates five private- and public-sector estimates of “illegal transshipment flows”, amounting to as much as $303bn—an improbable 56% of America’s imports from China in 2018—each year. Yet even the most convincing of these, an analysis by Goldman Sachs finding that $40bn-worth of Chinese goods were “superficially re-exported” to America in 2023, does not claim that the flows are illegal. (Granted, some will be customs fraud, which America is within its rights to clamp down on. Mr Trump’s Trade Fraud Task Force claims to have recovered $1bn from tariff-dodgers since launching last year.) Were Mr Navarro exercised about illegality alone, third countries building factories making goods from Chinese components should pose no problem. Yet he rails against “goods that are not necessarily declared as Chinese” but which involve “China-origin inputs or components, Chinese ownership or financing, relationships with Chinese suppliers or manufacturers, China- based production steps [or] China-origin routing histories”. This is a staggeringly broad objection. Modern manufacturing is structured as a global network of value chains, distributing capacity across countries in each stage of production. But if proximity to Chinese inputs or firms is evidence of complicity in an anti-American scam, then America is at war with trade itself. It is a “redefinition of trade such that everything is transshipment”, says Ms Elms.

Mr Navarro’s paper describes the “functional architecture” of the “shadow transshipment network” that stretches across 43 countries, making up over 70% of America’s non-Chinese imports. From assembly hubs in South-East Asia to logistics centres in the United Arab Emirates and Canada, the supposed scam snakes through “production-side transformation claims, logistics-side routing channels, processing zones, maritime gateways, overland corridors, bonded warehouses and re-invoicing systems”. This is, more or less, the entire infrastructure of global trade; policing it would require a panopticon. Still, Mr Navarro is willing to try. He vaguely threatens setting up an AI-enabled “detective border” system. After all this, you may wonder whether Mr Navarro thinks imports to America should contain any Chinese content at all. If so, how much? An extreme (though coherent) answer would be to set a maximum threshold for Chinese content, and ban or tax all imports that breach it. Mr Trump’s 40% transshipment tariffs could then be used to strong-arm countries whose exports contain too much from China. That has not come to pass, presumably because doing so would drive up prices for an American public already enraged about the cost of living. Yet Mr Navarro’s extraordinary paper has performed a service. It is a further illustration of the mess his boss’s attack on the global trading order has brought about. ■ This article was downloaded by zlibrary from https://www.economist.com/finance-and-economics/2026/08/18/the-white-houses-absurd- claim-of-a-chinese-transshipment-scam

Finance & economics | Buttonwood Stock indices no longer reflect equity reality Lies, damned lies and stock markets Aug 20th 2026 STOCK MARKETS, Wall Street-wary politicians and like-minded commentators repeat ad nauseam, are not the real economy. The S&P 500 index of America’s biggest firms is up by 12% this year, setting one all-time high after another. Meanwhile, they note, though American GDP growth has been steady and unemployment is fairly low, consumers feel more downbeat than at just about any time since the University of Michigan started keeping track in 1952. All true—and nauseatingly familiar. Less remarked is the fact that the S&P 500 and the world’s other benchmark indices are no longer the real stock market, either. Rather than mirroring the universe of domestic equities, they increasingly reflect the fortunes of a few corporate giants, which in turn

mostly rise and fall with the unstable outlook for the artificial-intelligence revolution. This is making many benchmarks—and, by extension, the stock portfolios and pension pots of investors everywhere—considerably more volatile. Take the S&P 500. The biggest constituent, Nvidia, accounts for 8% of its value. Imagine the $5.3trn chip-designer’s share price moves up or down by 3% (as has happened 30 times this year) and the other 499 stocks are flat. The index then shifts by 0.25% in the same direction. No single name in the S&P 500’s history has packed a bigger punch. Yet in comparison with the index it is a featherweight next to TSMC, which manufactures Nvidia’s AI processors. The semiconductor hulk, whose market capitalisation has doubled to $2trn over the past year, accounts for over 40% of the Taiwan Stock Exchange’s TAIEX index. To let investors partake in TSMC’s success, last year the country’s markets regulator dropped the 20-year-old rule that index-tracking exchange-traded funds (ETFs) must hold no more than 30% of their assets in a single stock. As a result the TAIEX, which comprises just over 1,000 stocks, is behaving like an equal-weighted index of just six firms (or fewer if you consider that other big Taiwanese companies like MediaTek and Foxconn are on the same AI steroids as TSMC and their movements are therefore partly correlated). Things are only slightly less top-heavy in South Korea. The same bit of financial maths (which, for the curious, involves calculating the inverse of the Herfindahl-Hirschman index for component stocks) implies that the 830- strong KOSPI benchmark acts as if it contained just 11 firms besides the country’s two muscular memory-chip champions, Samsung Electronics and SK Hynix. The pair’s combined weight in the KOSPI briefly exceeded 40% in June, up from a quarter, give or take, in the preceding few years. (South Koreans’ love of leveraged ETFs, which use borrowed money to amplify gains but also losses, increases the KOSPI’s jumpiness.) Between May and July, as traders constantly repriced the size of global AI spending, including on memory chips, the KOSPI’s volatility was four times last year’s average. The index moved by 5% or more once every three sessions, on average. On July 28th it sank by 11%. Three days later it soared by 18%. In the first six months of 2026 the Korea Exchange had to suspend

trading five times and curb it on nearly 30 other occasions, more than in the whole of 2008, at the height of the global financial crisis. Concentration and volatility need not go hand in hand. Nearly half the value of the broad Swiss index, SPI, sits in five firms: Roche, Novartis, Nestlé, ABB and UBS. But their industries are varied, and representative of Switzerland’s listed firms. Almost one in two Swiss public companies makes drugs, food or drink, machinery or loans. In Taiwan and South Korea, by contrast, only one in six and one in 200, respectively, churn out chips or other technology hardware. The top three Swiss stocks are also stodgy ones with stable earnings and regular dividends—and so inherently less skittish than tech shares. AI will transform them, as it will all sectors. But their fortunes are not hitched to the vagaries of the AI capex cycle. Like a championship belt, dominance can be forfeited. Novo Nordisk took over the Danish bourse thanks to Ozempic, then shed its index weight as Eli Lilly’s better obesity drug ate its lunch. That serves as a reminder that the stock market aims to capture investors’ best collective guess at tomorrow’s equity reality. It mirrors today’s only when the future is likely to look much like the present. In the age of AI, and of abundant private capital that feeds a long roster of unlisted pretenders which benchmarks omit, that is increasingly not the case.■ This article was downloaded by zlibrary from https://www.economist.com/finance-and-economics/2026/08/18/stock-indices-no-longer- reflect-equity-reality