Rules of Origin Tighten: Textile Exporters' 'Transshipment' Model Faces Compliance Reassessment

The decline in Chinese textile exports to the US and the rise in Southeast Asian garment exports is not a simple victory of industrial relocation. Data from the first half of 2026 shows a notable contraction in US apparel imports from China, while Vietnam and Bangladesh saw steady growth in garment exports to the US. However, during the same period, their imports of man-made filaments and staple fibers from China remained high. This indicates that the so-called 'China+1' strategy is more about shifting sewing operations, while the upstream supply chain remains firmly rooted in China.

Background

Superficially, moving garment assembly to Vietnam or Bangladesh and labeling products as locally made can circumvent US tariffs on China. However, the EU and US enforce strict rules of origin for textiles, which determine origin not solely by the place of sewing but by tracing back to the source of yarn and fabric. If core fabrics or fibers originate in China and only cutting and sewing occur in Southeast Asia, customs may still deem the goods as having Chinese origin, denying tariff preferences. This rule directly undermines the compliance basis of the 'transshipment' model. In July 2026, China's overall exports grew, but within the textile sector, there was clear divergence: apparel exports saw limited growth, while exports of yarn, fibers, and fabrics maintained solid growth. This pattern of 'strong raw materials, weak apparel' reveals the structural contradiction in supply chain restructuring—upstream advantages coexist with downstream compliance risks.

Industry Impact

For domestic textile companies, simply relocating assembly does not resolve trade barriers; it may instead lead to a situation of 'increased investment, unchanged risk.' If goods are deemed to have Chinese origin, companies face diminished returns on their Southeast Asian investments and potential back duties or detention of goods. More profoundly, this uncertainty is reshaping investment decisions. Vietnam and Bangladesh lack sufficient upstream supporting industries, making full local sourcing difficult in the short term. This means even firms wanting to fully de-Chinese cannot easily do so. For Chinese companies, this is both a challenge and an opportunity: upstream competitiveness remains strong, but they must operate within the rules rather than try to circumvent them.

Practical Advice

For Buyers - Re-evaluate suppliers' origin documentation, especially certificates for fabrics and yarns, to avoid customs delays due to incomplete traceability. - In contracts with Southeast Asian factories, include clauses on origin risk sharing, requiring detailed material purchase records to prevent liability from undisclosed Chinese content. - Stay updated on changes in EU/US rules of origin, particularly interpretations of 'substantial transformation,' and consult trade compliance experts when needed.

For Exporters - Before expanding overseas, systematically assess target market origin rules and conduct end-to-end risk analysis covering material sources, processing steps, and documentation, not just labor costs. - Explore compliant alternatives, such as establishing local yarn or fabric production in Southeast Asia to achieve local sourcing, or partnering with Chinese suppliers to set up dyeing or weaving facilities overseas to meet 'substantial transformation' requirements. - Establish internal compliance audit mechanisms to simulate customs inspections and ensure all export documents are traceable and verifiable, reducing the risk of being accused of tariff evasion.