NPR reports on a wonderful trade diversion story. Here is the edited version:

An American investigator traveled to the Philippines last year in search of the origin of the pencils, what he found was a dusty factory that was simply repackaging pencils from China. Chinese pencils have long been subject to a stiff US anti-dumping tariffs of 114.9%, which more than doubles the cost of Chinese pencils.

According to a U.S. customs report, the manufacturing equipment at the Philippine plant “appeared to have been covered in dust and cobwebs indicating that they had not been used for some time.” The inspector saw no evidence of manufacturing, though some pencils were being sharpened. And there were boxes and boxes of finished pencils, with labels saying they were made in China. The inspector “witnessed staff repacking what appeared to be Chinese origin products into boxes labeled ‘Made in Philippines,’ ” the report said.

Mislabeling the source of products to avoid tariffs is not a new scam. But it’s likely to grow more prevalent as the trade war between the U.S. and China drags on and tariffs are extended to nearly everything China exports. Each new brick in the president’s tariff wall brings new incentives for business people to tunnel under – classic trade diversion.

Here is the Mexican version of the story:

Roberto Durazo helps set up factories in Mexico. Lately, he has been getting a lot of calls from Chinese companies eager to avoid the mounting import taxes imposed by the Trump administration. “They tell us, like, ‘Hey, I build a TV,’ ” Durazo said. ” ‘And I want that TV to be made in Mexico so I [don’t have to] pay the duties.’ ” “They just want to put it in the box, add labels and claim that it’s made in Mexico,” Durazo said. “And we tell them it doesn’t work like that.”

When the U.S. imposes tariffs on China, it’s only natural that some production really does move to other countries. Customs investigators grow suspicious when they see what appear to be abrupt moves, especially those that involve complex manufacturing or heavy machinery. “If on Monday a company is sourcing all their product from China and on Tuesday all of it is suddenly now coming from Vietnam or some other country, depending on the nature of the commodity, that’s just not realistic,” the customs spokesman said. “If that abrupt shift occurs the day after Chinese tariffs are raised, that’s another indicator.” U.S. imports from Vietnam jumped 33% in the first seven months of the year, compared with the same period a year ago.