Shell factories and tariff loopholes: Navigating trade risks in Vietnam

The rise of shell factories

The escalation of the US–China trade war continues to reshape the geography of global manufacturing and logistics, introducing new layers of risk for businesses. As Washington imposed successive rounds of tariffs on Chinese goods, the cost of exporting directly from China rose sharply, prompting Chinese manufacturers to search for workarounds. 

One of the most significant workarounds has been the rapid redeployment of Chinese production into neighbouring Southeast Asian countries, particularly Vietnam.

Yet, beneath the surface of this shift lies a troubling trend: many of these newly established plants do not appear to be genuine manufacturing sites. Findings from our local experts’ site visits are largely inconsistent with our project experience in Vietnam’s manufacturing sector and in-depth analyses of available international trade records. While records document robust trading activities, site visits reveal facilities with minimal equipment, little on-the-ground workforce, and limited real production. 

Despite being presented as bustling manufacturing hubs, many newly established plants lack the characteristics of genuine production sites. Instead, they are ‘shell factories’, serving primarily as a mid-stop for light assembly - repackaging Chinese goods and re-labelling them as ‘Made in Vietnam’ to evade Western tariffs.

Compliance and supply chain risks for importing businesses and governments 

Granted, transhipment in itself is legal and widely used in international logistics, as the US Customs and Border Protection’s voluntary programme Customs-Trade Partnership Against Terrorism (CTPAT) noted in its July 2025 alert. 

But misclassification of goods, incorrect reporting of trade data, or other forms of false declaration constitute illegal transshipping, CTPAP noted. This alert highlighted examples of Chinese companies rerouting their products to Vietnam in ways that could risk non-compliance with tariff rules.. 

Trade compliance frameworks rely heavily on accurate country-of-origin declarations, yet shell factories blur the line between legitimate assembly and outright misrepresentation. Governments and importing businesses must now sift through a growing number of questionable claims about where goods are actually manufactured.

For importers, the stakes include customs seizures, corporate fines, supply chain disruptions, and reputational damage. For governments, the challenge is enforcing rules of origin in a world where supply chains can be manipulated with paperwork rather than production.

What’s at stake for global trade?

Beyond compliance, the proliferation of shell factories threatens the broader integrity and stability of global supply chains. Modern supply networks depend on transparency, traceability, and accurate data; when companies exploit countries like Vietnam as rerouting hubs, they introduce opacity that cascades across borders. 

The result is a distortion not only in trade data, which becomes misaligned with real production trends, but also in economic forecasting and supply chain planning. When goods appear to originate from Vietnam that were never actually produced there, businesses and policymakers are left making decisions based on incomplete or misleading information — a systemic risk in an era of geopolitical volatility.

For investors and companies sourcing from Vietnam, the rise of shell manufacturing operations elevates country-of-origin risks from a compliance issue to a material commercial concern. Reliance on documentation alone may no longer be sufficient to demonstrate regulatory adherence, particularly as customs scrutiny intensifies. 

Mitigating this risk increasingly requires deeper visibility into supply chains, including on-the-ground verification of production capabilities and a clearer understanding of upstream sourcing. For investors, these factors continue to materially affect valuation, regulatory exposure, and long-term supply chain resilience.

How we can help

Risk Advisory works extensively in the Asia-Pacific region, helping clients identify and manage supply chain, trade compliance, and operational risks. From market entry assessments and stakeholder mapping to on-the-ground verification and supply chain analysis, we provide intelligence, evidence, and insight to support informed legal and commercial decision-making. By combining local knowledge with global expertise, we help businesses navigate complex regulatory environments and ensure their operations remain compliant and resilient.