Why Rerouting Indian Diamonds and Jewelry via Middle East Will Backfire

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Gems News: Surge in Tariffs Puts Industry on Alert

Indian diamond and jewellery exporters—especially from Surat and Mumbai—are scrambling to avert devastating blows as the United States ramps up tariffs. On August 7, a hefty additional 25 percent country-specific duty came into effect on top of the already imposed 25 percent tariff rate, bring the total to a staggering 50 percent. This puts nearly half of India’s gems and jewellery exports—valued at over US $10 billion annually—at immediate risk.

Legal advisers are warning that rerouting Indian diamonds and jewelry via the Middle-East to the United States will backfire
Image Credit: StockShots

Dubai Route Tempting but Legally Fraught

With the US market under siege, industry voices have floated a workaround: exporting cut and polished diamonds via Dubai or other Middle Eastern hubs. Dubai’s low 10 percent tariff to the US is tempting. But this strategy collides with established US customs rules: tariffs are applied based on the country where goods are “made or substantially transformed”—in this case, India—not where they are exported from.

Midway through this Gems News report, it’s clear that attempting to reroute goods through the Gulf to dodge duties is neither creative nor feasible—it’s a legal misstep.

Country-of-origin rules are the immovable object in this debate. U.S. Customs and Border Protection (CBP) applies the long-standing “substantial transformation” test: a good’s origin is where it undergoes a fundamental change in name, character, or use. CBP rulings have repeatedly held that cutting and polishing create the origin for diamonds, and minor processing or invoicing in a third country does not. That means DMCC paperwork or a Gulf invoice won’t convert an Indian-origin polished diamond into a UAE-origin product

Nor will simple assembly rescue jewelry pieces. In a 2025 ruling on a gold ring cast in the U.S., CBP found that subsequent cleaning and stone-setting in China did not change the ring’s origin—the “essence” remained the original casting. By analogy, sending castings or partly finished mountings to the Middle East for light finishing won’t magically reset origin on entry to the U.S.

The Indian Jewelry export industry is currently in a dilemma
Image Credit: StockShots

Transshipment Penalties Loom Large

The July 31st US executive order also introduced a powerful deterrent: if CBP determines goods were “transshipped to evade applicable duties,” those goods face an additional 40 percent ad valorem tariff—in lieu of, and potentially stacked with, other measures—plus other fines or penalties. In plain English, if a reroute is judged to be a dodge, the landed cost can skyrocket beyond even the headline 50 percent numbers. Early advisory notes from trade law firms and logistics providers echo that warning while the administration finalizes detailed guidance.

Documentation and Traceability Make Workarounds Even Riskier

Diamond imports are under tighter documentation than ever. Since early 2025, importers have had to list the country of mining for natural diamonds entering the U.S., and CBP has emphasized that, in addition to mining country, the origin where substantial transformation occurred must also be correctly declared. A parcel that mixes stones from multiple mines must itemize those sources. Mislabeling or “smoothing” the paper trail through a hub risks seizures and civil penalties, and it becomes easier for authorities to spot inconsistencies between origin, mining, and route

Spillovers That Could Drag the Middle East into The Crosshairs

There’s a second-order risk often overlooked: if Washington concludes that specific transit hubs are systematically enabling duty evasion, the administration has tools to escalate—ranging from targeted enforcement to revising reciprocal tariff treatment for those jurisdictions. The same July order that created the transshipment penalty also gives the executive branch latitude to modify country coverage and stacking rules, a lever that could bring fresh costs for Gulf-routed goods beyond diamonds if misuse continues. This is a policy inference from the structure of the order and contemporaneous guidance; it is not a prediction, but it is a credible risk exporters should weigh.

Additional reasons this strategy will fail

Banks and insurers are tightening controls around trade-based money laundering and sanctions circumvention; unusual routing, off-market pricing, or documentation gaps are more likely to be rejected by compliance teams before goods even sail. U.S. retailers are also demanding tighter supplier attestations that align mining, origin, and route data—a mismatch can lead to returns or cancellations, even if customs clears the entry. Finally, moving genuine manufacturing to third countries to change origin is neither quick nor cheap, and U.S. authorities will apply the same “substantial transformation” test to those factories. In other words, only real manufacturing that confers origin will move the tariff needle—and building that capacity responsibly takes time and capital.

Industry Snapshot April–July Export Boom Masks Future Perils

Ahead of the August tariff spike, export volumes surged in July 2025. Gems and jewellery exports grew 16 percent to reach US $2.17 billion, while cut and polished diamonds jumped 18 percent to US $1.07 billion. But these gains may prove fleeting without tariff relief or new strategies.

Power Imbalance vs. Competitors

Countries like Turkey, Vietnam, and Thailand now enjoy much lower tariff barriers—15–20 percent—giving them an edge over India’s crippled competitiveness. The contrast grows sharper when juxtaposed with India’s 50 percent duty on jewellery and diamonds.

Why Middle-East Rerouting Will Fail

-Origin Rules Nail It – The WTO-aligned “substantial transformation” principle means polished diamonds remain Indian in origin, regardless of being shipped via Dubai.

-Transshipment Enforcement – The US has signaled stiff penalties for any evasion, with added 40 percent tariffs looming.

-Labeling and Documentation – Strict country-of-mining and origin labeling requirements guard against misdirection.

-Competitive Alternatives – With rivals operating under far lower tariffs, India’s export base is under direct threat.

-Domestic Market Not Enough – India sees growth domestically—from US $85 billion to a projected US $130 billion—but this alone won’t offset US export losses.

In-depth wrap-up

Some of the plans of Indian jewelers to reroute diamond and jewellery exports through Dubai or other Middle Eastern hubs is deeply flawed. US customs regulations determine tariff liabilities based on where goods are substantially transformed—so Indian polished diamonds remain subject to the full punitive duties. Attempting to use Dubai as a transit evades neither legal scrutiny nor enforcement, especially given rising penalties for transshipment fraud. With competitors enjoying lower tariff thresholds, and dealers scrambling before the duty cliffs, India’s industry faces bleak prospects unless new relief or alternative markets materialize.

For the latest on problems in the Indian Gems and Jewelry industry, keep on logging to Gems News.