Chinese exporters are offering sweet deals to U.S. businesses. They often come wrapped in fraud

Chinese exporters are offering lucrative deals to U.S. customers with promises of bearing the full burden of tariffs. Look beneath and there’s a web of illicit activity that’s propping up these shipments from China.

By using the “delivered-duty-paid” shipping approach where sellers pay for all import duties, and by under-invoicing shipments, some Chinese sellers are able to offer U.S. customers pre-tariff prices, while still turning a profit, according to legal experts and industry veterans.

Here’s how the scheme plays out:

Chinese exporters, often through freight forwarders — companies that handle the logistics of shipping merchandise — understate the value of goods or mislabel them, often both, in the shipping documents to draw lesser duties.

Shipments are then routed through shell companies, registered under names of foreign entities or individuals, that act as “importers of record,” which the U.S. government deems responsible for the accuracy of customs filings and all applicable duties.

Importers are required to secure a minimum $50,000 customs bond from U.S. surety providers as a guarantee to the government that they will pay tariffs. When they fail to settle the tariffs on time, the bond covers the duties. Once the bond has been utilized, often these shell companies default and cease operations, only to quickly set up a new entity — and the cycle repeats.

“Often these companies don’t bother to file bankruptcy. They simply turn off the phone, close email accounts, and choose whatever mailing address they have [to open a new firm],” said David Forgue, partner at Chicago-based law firm Barnes, Richardson & Colburn, making it difficult for the surety to chase them for tariff reimbursement.

This tactic is not new. “The incentive to underreport always exists while tariffs are in place,“ said Joseph Briggs, managing director at Goldman Sachs. Now, it has gained greater momentum, as businesses scramble to sidestep the new levies imposed by U.S. President Donald Trump in his second term.

A search for “double clearance and all tax inclusive” on Chinese social media Xiaohongshu turns up numerous ads promising cheap delivery for furniture, refrigerators and other big-ticket houseware goods to the U.S. ports, with all tariff fees included. Many are able to offer such deals by under-valuing and misclassifying shipments, industry veterans told CNBC.

“It’s an open secret in the industry,” said Ash Monga, founder and CEO of Guangzhou-based Imex Sourcing Services, a supply chain management company.

“Opening a shell company is easy, you can do that in a couple of hours. You can open as many companies as you want. The cost is a few hundreds, so this whole process is easy to execute and can be replicated as many times as you want,” Monga added.

Adopting this practice is being increasingly discussed among U.S. firms sourcing in China, as businesses look to skirt Trump’s latest tariffs, he said.

An owner of a Guangdong-based electronics manufacturer told CNBC on condition of anonymity that there have been an increase in U.S. buyers pushing Chinese suppliers to go down this route.

China Council for the Promotion of International Trade, a trade body under the Ministry of Commerce, did not immediately respond to CNBC’s request for comment.

American businesses are underestimating civil and criminal risks, whether they actively pressure their suppliers to circumvent tariffs or are unwitting beneficiaries of the practice, legal and customs experts warned.

“It is scary how businesspeople, like 90% [of them], believe that if they are not listed as the official importer of record, they are somehow immune from any civil or criminal liability for the import,” said Dan Harris, an attorney and partner at Seattle-based law firm Harris Sliwoski.

There is also a rise in cases where businesses are being hit with tariff payments, even though they are not the designated importers on record.

Harris said there’s been an increase in his clients facing unexpected customs bills and seized shipments, as the overseas sellers failed to settle import duties.

It is “a horrible game” for U.S. businesses complicit in this scheme, as they could face substantial liability under the customs law and other laws like the False Claims Act, said Forgue.

For businesses still paying pre-tariff prices on imports from China, claiming ignorance of potential customs fraud is unlikely to stand as a credible defense, Harris warned.

“There’s no way an American company that had been paying $20 for products, paid only $25” when there was a double-digit tariff, Harris said.

The importers could request their suppliers for a copy of the customs documents to check classification and declared values to mitigate risks, Harris said.

Businesses worry that competitors accepting these deals may undercut prices, leaving law-abiding firms at a disadvantage.

“Consumers are most likely to choose the cheapest options and it will be very difficult to compete with people who do business illegally,” said Cze-Chao Tam, founder and CEO of Trinity International, a California-based houseware provider. The company manufactures and sources its items from China and Southeast Asia, besides the U.S.

Facing import duties of up to 55%, Tam is negotiating with key buyers on price hikes. “Our buyers are not going to accept a full pass-through,” she said, adding that she expects the company’s margins to take a hit.

Trump’s tariff policy is a giant stress test for U.S. Customs and Border Protection, or CBP — the government body tasked with collecting tariffs and policing imports.

“There’s a massive volume of trade coming in from China and other countries … there just simply wouldn’t be enough resources to be able to to screen them all,” said Alex Capri, a former U.S. customs officer in Los Angeles.

As the CBP inspect only a fraction of incoming cargos, a “laser-focused” cargo selectivity system that sorts high-risk shipments and determine the type of examination required becomes increasingly crucial in curbing tariff evasion through under-invoicing and mislabeling, said Capri.

Underscoring how enforcing tariffs could be tricky, Trump had to delay the repeal of duty-free imports of low-cost packages from China to put enforcement procedures and systems in place.

In April, there was a 10-hour “glitch” in the customs system that prevented importers from inputting a code that would have exempted freight already on water from being subjected to higher duties.

Illicit transshipment, where goods are routed through a third-country to conceal their Chinese origin, has also been used to dodge tariffs at the risk of fines and jail time.

A Goldman Sachs’ report released in January estimated that the tariffs Trump imposed on China during his first term saw evasions worth $110 billion to $130 billion in 2023, with understating value and mislabeling each contributing $40 billion and rerouting accounting for $30 billion to $50 billion.

In comparison, the total duty, taxes and fees collected by CBP in fiscal 2023 was $92.3 billion, according to government data.

To curb illicit tariff evasion, Capri expects the U.S. government to put pressure on foreign governments during ongoing trade negotiations to enhance law enforcement efforts at the point of departure.

“You simply cannot wait until the cargo is either on the water or arriving at the U.S. port,” he said, adding that it will be more efficient to put the onus on the exporting country.

Matthew Galeotti, the head of the Justice Department’s Criminal Division, issued a new guidance last week that that prioritized trade and customs fraud, particularly tariff evasion, as one of the focus areas for investigation and prosecution.

Trump has said the federal government is taking in $2 billion a day from tariffs. While official figures indicate that was an overstatement, customs duties collected did hit a record level in April, totaling $16.3 billion, according to data from U.S. Treasury Department.

A CBP spokesperson told CNBC that tariff enforcement was being done through “a combination of legal authority, advanced systems, and operational procedures designed to ensure that duties owed are paid.”

“As a result of recent presidential actions, enforcement will include the most severe penalties permitted by law,” the spokesperson said.