Hidden Costs Behind "Sweet Deals": Chinese Exporters Use Fraud Tactics to Evade U.S. Tariffs

China–U.S. Trade War

Economic

Summary:

As U.S. tariffs bite deeper under President Trump’s renewed trade policy, Chinese exporters are increasingly using under-invoicing, mislabeling, and shell companies to sidestep duties....

Tariff Pressure Drives Surge in Illicit Trade Practices

Chinese exporters are offering U.S. businesses deceptively attractive deals by absorbing all tariff costs under “delivered-duty-paid” terms. However, legal experts warn that behind many of these offers lies a growing web of customs fraud. Exporters are inflating compliance claims while systematically under-declaring shipment values and misclassifying products to minimize duties.

This strategy enables them to maintain near pre-tariff prices despite levies reaching up to 55%. In some cases, goods are routed through shell companies acting as “importers of record,” which vanish after defaulting on tariff payments—often covered initially by mandatory $50,000 customs bonds. Once bonds are exhausted, these entities dissolve and reemerge under new names, perpetuating the cycle.

A Known Scheme Gains Scale Amid New Tariff Wave

While underreporting value is not new, the practice has gained momentum since Trump’s second-term tariff hike. Legal and customs experts say a flood of freight-forwarding ads on Chinese platforms like Xiaohongshu openly offer “all-tax-inclusive” shipments, underscoring the normalization of illicit tactics. Furniture, electronics, and appliances are among the most common categories involved.

Industry insiders, including Guangzhou-based Imex Sourcing Services, confirm that U.S. buyers are increasingly encouraging Chinese suppliers to employ these evasive strategies. A Guangdong electronics manufacturer told CNBC anonymously that U.S. pressure to avoid tariffs is now routine in client conversations.

Legal Exposure for U.S. Firms: Ignorance Not a Defense

U.S. companies benefiting from underpriced imports, knowingly or not, face significant legal exposure. Dan Harris, a Seattle-based attorney specializing in trade law, stressed that being outside the importer-of-record designation does not protect businesses from liability under U.S. customs law and the False Claims Act.

He noted that many of his clients have seen shipments seized or received unexpected customs bills after foreign suppliers failed to pay duties. “There’s no way a company paying $20 suddenly pays only $25 after tariffs unless something is off,” he said, calling out firms using plausible deniability as a shield. He urged importers to demand full customs documentation from overseas partners.

The DOJ has now prioritized customs fraud for investigation and prosecution. Attorney Matthew Galeotti confirmed last week that tariff evasion will become a primary focus area going forward, potentially implicating U.S. firms that are complicit, even passively.

Undercutting Lawful Businesses and Market Fairness

The fraudulent pricing advantages granted by these schemes are putting legitimate businesses at a disadvantage. Cze-Chao Tam, CEO of Trinity International, noted that her U.S.-based company, which sources ethically from China and Southeast Asia, cannot fully pass rising tariffs on to buyers, leading to margin compression. “Consumers will always pick the cheaper option, even if it’s driven by illegality,” she said.

The problem is structural. Legal operators face intense price pressure, particularly in competitive sectors like home goods, as rivals quietly leverage fraudulent supply chains.

Enforcement Gaps and U.S. Customs Constraints

U.S. Customs and Border Protection (CBP) is facing its most aggressive enforcement test yet. With only a fraction of incoming cargo inspected, experts like Alex Capri, a former U.S. customs official, warn that current systems lack the scale to handle the volume. He argues that improved pre-departure enforcement is critical and should involve foreign governments in origin verification.

Illicit transshipment through third countries further complicates enforcement. A Goldman Sachs report estimated $110–130 billion in tariff evasion occurred in 2023 alone, with under-invoicing and mislabeling each contributing about $40 billion.

CBP spokespersons claim that current operations involve a combination of advanced technology and legal enforcement. Following Trump’s recent actions, the agency is applying “the most severe penalties permitted by law.”

A Cracking Facade of Global Trade Compliance

The proliferation of fraudulent tactics in U.S.-China trade underlines a broader unraveling of trust in the global supply chain system. While the Trump administration touts rising tariff revenue—$16.3 billion collected in April alone—the reality is that widespread evasion is bleeding billions from the system and exposing businesses to unforeseen legal consequences.

As the U.S. intensifies enforcement, companies must weigh the short-term gains of “sweet deals” against the long-term risks of complicity in customs fraud. The illusion of duty-free imports in a high-tariff era is quickly giving way to a regulatory crackdown that few firms are prepared to withstand.

Source: CNBC

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Economic

Targeted Rate Cuts Signal Monetary Policy Shift

On May 20, the People’s Bank of China (PBOC) announced a 10-basis-point cut to its key lending benchmarks, reducing the one-year Loan Prime Rate (LPR) to 3.0% from 3.1%, and the five-year LPR to 3.5% from 3.6%. These are the first adjustments since October 2024, and they follow earlier announcements this month of broader monetary easing and liquidity injections.

The LPR serves as the de facto benchmark for new lending in China. The one-year rate affects most corporate loans, while the five-year LPR is closely tied to mortgage pricing and long-term consumer credit. By trimming both rates, authorities are seeking to stimulate borrowing in both the corporate and residential sectors, with the five-year cut signaling specific concern about the stagnant property market.

Trade War Fallout Forces Policy Response

This round of monetary easing comes as China faces intensifying external shocks, particularly from escalating tariffs imposed by the Trump administration. The trade war has disrupted exports, suppressed private sector confidence, and led to renewed volatility in China’s manufacturing and financial sectors.

Beijing’s strategy—combining rate cuts with targeted liquidity support—is aimed at cushioning these headwinds without resorting to aggressive fiscal spending. The rate reduction is also part of a wider policy toolkit that includes regulatory adjustments and fiscal incentives to stabilize growth.

Although the U.S. and China reached a temporary truce earlier this month, the underlying geopolitical tension has not been resolved, and Chinese policymakers appear to be preparing for prolonged uncertainty.

Mortgage Relief and Housing Market Implications

The reduction of the five-year LPR is particularly notable as it affects mortgage rates, signaling a targeted attempt to shore up the real estate sector. Housing activity remains sluggish in many cities despite previous interventions, and weak demand for new housing has constrained broader economic recovery.

Lower mortgage costs could help revive homebuyer sentiment, especially in smaller cities where affordability concerns are highest. However, without a more decisive rebound in consumer confidence and job creation, the housing market’s recovery may remain uneven.

Economic Outlook and Limitations of Monetary Tools

While the LPR cut is a step toward easing credit conditions, it remains a relatively modest move. Analysts note that the effectiveness of monetary policy may be limited if consumer and business sentiment does not improve. Structural challenges—including high youth unemployment, local government debt burdens, and global supply chain reconfiguration—continue to weigh on the economy.

Moreover, the PBOC has to carefully balance stimulus with financial stability. Excessive credit easing could stoke asset bubbles or undermine efforts to manage long-term debt risks.

China’s decision to lower key lending rates reflects a shift toward more proactive monetary policy amid deepening trade tensions and weakening domestic demand. While the cuts aim to lower borrowing costs and stabilize key sectors such as housing and manufacturing, the broader success of these measures will depend on restoring consumer confidence, maintaining financial stability, and navigating the geopolitical pressures that continue to challenge China's economic trajectory.

Source: Reuters

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Forex

Economic

A Shift in Sentiment: Dollar No Longer Untouchable

The U.S. dollar, once unrivaled as the world’s safe-haven currency, is undergoing a notable decline in both value and prestige. The U.S. Dollar Index (DXY) has plunged over 10% from its January 2025 peak—one of the sharpest three-month retreats in years—signaling that global investors are reevaluating their faith in the U.S. economic model. The fall gained momentum after Moody’s downgraded the U.S. sovereign credit rating, amplifying concerns about unsustainable debt levels and fiscal instability.

This decline has revived the so-called “sell America” trade, where investors divest from U.S. assets amid geopolitical tension, policy uncertainty, and growing doubt about the U.S.'s long-term economic stewardship. George Vessey of Convera notes that from a valuation standpoint, the dollar remains elevated and vulnerable to further declines, possibly another 10%, which would take it back to lows seen during Trump's first presidency.

Trade Policy Turbulence and Fiscal Overstretch Undermine Trust

The Trump administration’s aggressive trade posture—marked by sweeping tariffs on allies and rivals alike—has unsettled investors. While recent diplomatic efforts have tempered some short-term fears, analysts argue these developments fail to resolve more entrenched doubts about America’s economic trajectory.

Standard Chartered’s Steve Englander cautions that the core issues of debt accumulation, institutional rigidity, and policy unpredictability remain unresolved. Trump’s tax-cut bill, projected to add $3–$5 trillion to the national debt over the next decade, only deepens the concern that Washington has locked itself into a fiscally unsustainable path. The U.S. now faces a debt load of $36.2 trillion, with no credible consensus on fiscal reform.

Deutsche Bank’s George Saravelos points to “diminished appetite” for U.S. assets amid persistently high deficits. This erosion of confidence challenges the long-held assumption that the U.S. will always remain a magnet for global capital.

Foreign Holdings and Structural Rebalancing Accelerate Dollar Drift

Despite years of inflows into U.S. stocks and Treasuries, the tide appears to be turning. Speculative positions have flipped markedly bearish, with CFTC data showing net short positions on the dollar reaching $17.32 billion—levels not seen since mid-2023.

According to Peter Vassallo of BNP Paribas Asset Management, the real shock for investors came when the dollar failed to rally as a traditional haven during recent bouts of market stress. “If the dollar is no longer diversifying us... should we really be holding this much of it?” he asks, capturing a broader sentiment shift across institutional portfolios.

Moreover, as central banks and sovereign wealth funds increase their foreign exchange hedge ratios to mitigate currency risk, the resulting selling pressure on the dollar could become self-reinforcing. These rebalancing flows are structural and could persist well beyond any short-term macroeconomic fluctuations.

Political Rhetoric vs. Market Reality

While the Trump administration maintains a rhetorical commitment to a “strong-dollar policy,” market behavior tells a different story. The tension between public declarations and fiscal actions has created ambiguity around U.S. currency strategy. White House spokesperson Kush Desai insists President Trump is committed to the dollar’s strength as a reserve currency, but global investors appear unconvinced.

The dollar’s recent decline suggests that its decades-long status as a symbol of macroeconomic resilience is no longer unquestioned. Markets are increasingly pricing in a world where alternative assets—from gold to non-dollar currencies—are more viable hedges against volatility, inflation, and policy dysfunction.

The fall of the U.S. dollar from its elevated perch reflects more than temporary market volatility—it signals a deeper erosion in global confidence in the U.S. economic model. With structural deficits, trade uncertainty, and weakening haven behavior, “Brand USA” is losing its magnetic pull. While the dollar remains dominant in global reserves, the trajectory suggests that unless fiscal discipline and policy coherence are restored, the greenback may continue its slide—not just in value, but in global strategic relevance.

Source: Reuters

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Economic

Fed Takes Measured View on Sovereign Downgrade

Following Moody’s decision to cut the U.S. sovereign credit rating—the final of the three major agencies to do so—Federal Reserve officials offered a tempered response, noting the downgrade’s potential ripple effects on market conditions without sounding alarmist. Vice Chair Philip Jefferson stated that the Fed would assess the downgrade like any other incoming data, focusing strictly on its relevance to the Fed’s mandate rather than its political context.

This cautious tone reflects a broader recognition that while the downgrade may not immediately disrupt the Fed’s monetary trajectory, it introduces structural risks. Over time, rising U.S. debt and higher interest costs could reduce credit availability and exert drag on overall economic activity.

Rising Debt and Fiscal Strain Compound Long-Term Risks

Atlanta Fed President Raphael Bostic emphasized that the downgrade is part of a broader fiscal picture that investors can no longer ignore. “It could have a ripple through the economy,” Bostic said, warning that investment sentiment could shift meaningfully over the next three to six months as the economic landscape adjusts to rising financing costs and persistent policy uncertainty.

The warning reflects more than just market volatility—it’s also a signal that credit conditions could tighten even without further rate hikes from the Fed. The growing debt burden, exacerbated by proposed tax cuts and inconsistent fiscal discipline, risks eroding investor confidence in the long-term sustainability of U.S. finances.

Trade Policy Instability Adds to Investor Anxiety

The downgrade’s timing is particularly significant amid President Donald Trump’s erratic tariff-driven trade agenda. Aggressive protectionism—targeting major partners across Europe, Asia, and the Pacific—has disrupted global flows of capital and undermined faith in U.S. policy predictability.

Minneapolis Fed President Neel Kashkari pointed out that investor confidence is now more fragile than it was just a year or two ago. “There’s more of a question mark,” he said, regarding the U.S.’s competitive standing and long-term credibility in global markets. That uncertainty, when combined with a flood of new Treasury issuance, risks undercutting the traditional safe-haven status of U.S. bonds and the dollar.

Markets React Sharply: Treasuries, Stocks, and Dollar Slide

The market’s reaction on Monday reflected a broad recalibration. Treasury yields spiked, while U.S. equities and the dollar weakened—an unusual trifecta suggesting a coordinated investor retreat. Analysts at Evercore ISI described this as a “sell-America theme,” driven by the combination of the downgrade, tariff shocks, and deepening geoeconomic uncertainty.

The decline in Treasuries, despite their safe-haven reputation, highlights the broader concern that the U.S. may no longer be a guaranteed destination for global capital. Evercore’s warning that the downgrade is “a coordinating device for an underlying shift” implies a foundational rethink by investors—particularly amid fears that markets may struggle to absorb the growing supply of government debt.

Fed Maintains Wait-and-See Approach to Rate Cuts

Despite the mounting external risks, Fed officials reiterated a cautious approach to interest rate policy. New York Fed President John Williams maintained that monetary policy is “well positioned” to respond to future developments and reaffirmed his view that the U.S. remains an attractive investment destination.

However, Bostic signaled he now expects inflation to take longer to return to the 2% target and suggested the Fed may only deliver “one cut this year,” a shift from more dovish projections earlier in the cycle. This reflects a complex environment in which the Fed must balance inflation control with heightened financial and geopolitical instability.

Monday’s comments from Fed officials reveal growing unease beneath a composed surface. While they downplay the immediate impact of Moody’s downgrade, their remarks signal awareness of deeper structural shifts. As trade policy veers unpredictably and fiscal outlook deteriorates, the U.S. risks losing part of its appeal as the world’s financial anchor. The Fed is thus navigating not just inflation and employment, but an evolving global order in which confidence—not just data—may ultimately drive monetary strategy.

Source: Reuters

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Economic

China–U.S. Trade War

Australia Steps Up as Pacific Anchor

In her first international address since the Labor government’s re-election in May, Australian Foreign Minister Penny Wong delivered a clear message in Suva: Australia will preserve its four-decade-long policy of tariff-free access for Pacific Island nations. Speaking at the Pacific Islands Forum headquarters, Wong emphasized that “Australia is a partner the Pacific can count on” as she outlined the country's strategic role in countering regional instability and foreign influence.

Her remarks came just months after Fiji, a key Pacific hub, was hit with a 32% U.S. tariff—part of a broader American policy shift that has seen Vanuatu and Nauru also targeted with 22% and 30% tariffs respectively. The fallout from these decisions has highlighted the vulnerability of small island economies that rely heavily on external markets and aid.

Trade Assurance Amid Rising Economic Pressures

Wong’s promise is particularly significant as it comes against a backdrop of increasing fiscal strain. Fiji's key exports—bottled water, sugar, and fish—now face steep barriers in U.S. markets, which once served as a vital destination. With aid flows contracting and new tariffs threatening export revenues, the Australian commitment offers a buffer that many in the region see as essential for economic stability.

By maintaining open market access, Australia differentiates itself from global partners shifting toward protectionist policies. This pledge of continuity is designed not only to provide short-term relief but to reinforce long-term trust—something Pacific leaders like Fiji’s Prime Minister Sitiveni Rabuka have increasingly called for since the U.S. froze aid earlier this year.

Geopolitical Competition Intensifies in the Pacific

Australia’s renewed emphasis on economic and diplomatic support is also a response to intensifying competition from China. As the second-largest donor in the region, Beijing has advanced policing agreements and infrastructure projects that Canberra sees as strategic encroachments. Wong’s multi-country tour—set to include Vanuatu and Tonga—is part of a broader diplomatic push to reassert Australian influence through development, not military or coercive means.

Her statement that 75 cents of every Australian aid dollar will now be dedicated to the Pacific is a clear signal of this reprioritization. The government has pledged a record A$2.1 billion (US$1.35 billion) in development aid to the region, aiming to build resilience not only against economic shocks but also against climate change and governance vulnerabilities.

A Calculated Economic and Strategic Pivot

This policy shift is not purely altruistic. Australia’s interests in a stable Pacific region are directly tied to its broader security and economic objectives. The Pacific sits at a strategic crossroads between the U.S. and Asia, making it a critical buffer zone in Canberra’s Indo-Pacific framework. Ensuring that key states like Fiji remain economically engaged with Australia also reduces the appeal of alternative partners whose aid and investment may come with less transparency or greater long-term dependency.

Australia’s proactive posture may also help counterbalance the ripple effects of U.S. protectionism, which has sparked uncertainty in Pacific supply chains and heightened political tensions. In contrast to Washington’s recent tariff measures, Canberra’s steady trade and aid commitments are being framed as evidence of consistency and reliability.

As global aid contracts and tariffs reshape Pacific economies, Australia is positioning itself as the indispensable regional partner. Penny Wong’s speech underscores a strategic alignment of trade access, financial aid, and diplomatic outreach aimed at both economic support and geopolitical influence. In the face of rising global uncertainty, Canberra is offering the Pacific not only a market but also a message: when others retreat, Australia will stay.

Source: Reuters

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Olivia Brooks

Economic

Central Bank

Federal Reserve Bank of Atlanta President Raphael Bostic repeated that he sees the central bank delivering one interest-rate cut this year amid tariff-induced uncertainty.

But, he added, a faster-than-expected resolution to some of the Trump administration’s ongoing trade negotiations could mean the Fed can act earlier.

“If it takes negotiations a long time to settle things out — we have another 90 days on China, for example — that starts to push much further into the summer, in which case we won’t actually know what the true effects are going to be for several months after that,” Bostic said Monday in an interview with Bloomberg Television on the sidelines of his bank’s 2025 Financial Markets Conference in Fernandina Beach, Florida.

But there’s also the possibility that trade discussions are resolved more quickly and tariff rates come in lower than forecast, he said.

“In that case we may be able to pull forward some of our actions, because there may not be as much that we need to do in terms of managing the price level,” he said.

Bostic said the Fed can’t act in the current environment in which consumers and businesses have halted big spending decisions as they wait to see how tariff negotiations play out.

Most Fed officials have said interest rates are well positioned for the central bank to wait and see how the economy reacts to new levies. Bostic called the current policy setting “mildly restrictive,” meaning it’s weighing a bit on economic activity. Fed officials have kept rates on hold this year after cutting them by a full percentage point in the last three months of 2024 as they try to further cool inflation.

Source: Bloomberg Europe

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Edward Lawson

Federal Reserve Vice Chair Philip Jefferson addressed the 2025 Financial Markets Conference, sponsored by the Federal Reserve Bank of Atlanta, on the topic of "Liquidity Facilities: Purposes and Functions". The conference was centered around developments in financial intermediation and their potential implications for monetary policy.

Jefferson shed light on the role of central banks in providing liquidity, a fundamental element of financial intermediation. He emphasized that the main forms of liquidity offered by central banks, such as currency and bank reserves, are the backbone of the economy’s safe liquidity. The Vice Chair also highlighted the need for central banks to be prepared to provide liquidity in times of financial stress and to take steps to minimize moral hazard.

In his speech, Jefferson focused on two types of liquidity provision that aim to reduce frictions associated with the basic operations of banks: intraday credit and overnight credit. He also drew attention to the design features of similar liquidity facilities in the U.K., Japan, and the euro area, noting the importance of learning from other central banks’ experiences.

Jefferson explained how liquidity provisions operate in the U.S. Banks maintain deposit accounts at the Federal Reserve (Fed), and these reserves are used to meet payment flows. To manage mismatches in the timing of payment inflows and outflows, the Fed extends intraday credit, also known as daylight overdrafts. These intraday credit facilities provide temporary credit to depository institutions such as commercial banks and credit unions to support the smooth functioning of the payment system.

The Fed also provides overnight credit through the discount window to approved counterparties against a broad range of collateral to mitigate short-term misallocations of liquidity. All discount window loans are collateralized, and a wide range of bank assets, including a variety of loans and securities, are eligible to serve as collateral. The Fed operates three separate facilities under the discount window: primary credit, secondary credit, and seasonal credit.

Jefferson also compared the design features of some foreign central bank liquidity facilities that are similar to the Fed’s discount window. He noted that the Bank of England (BOE) operates two such short-term facilities: an operational standing facility and a discount window. The Bank of Japan (BOJ) has two facilities: one that provides overnight loans and another that provides somewhat longer-term funding up to three months. The European Central Bank (ECB) operates a marginal lending facility quite similar to the Fed’s discount window.

In conclusion, Jefferson highlighted the Fed’s ongoing efforts to improve the operational aspects of the discount window and intraday credit. He pointed to several advancements, including the launch of a convenient online portal called "Discount Window Direct" for requesting and prepaying discount window loans. The Fed also issued a public request for information (RFI) last year seeking to identify operational frictions in these facilities, and those comments are currently under review.

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