Thanks for the reply, will that work with exactly the same class c subnet on both sides, just with different gateways. How will machines on each side know to go to the default gateway? If they send out a packet on the local lan (layer 2 to mac address) how will that get picked up by the firewall and sent up the tunnel?
Overlapped network lets say is X on site1 and site2. X will be natted statically to Y on site1 and Z on the site2. So when Site1 access the site2, site1 hits the Z network, and Site1 firewall will nat the X to Y before they are encrypted to ipsec tunnel and Site1 firewall knows where the Z network is located, when packets are reached to site2 LAN , source will Y, destination will be Z. Now Site2 will dnat the Z to X, leave the Y as it is, when the packet finally reaches to Site2, source Y, destination is X, problem solved!!! When packet returns from site2, source is X, destination is Y. Now the X to snat'ed to Z, leave Y as it was as its not site2 nat job. When packets are reached to site1, source is Z, destination is Y, now Y is dnat'ed to X, leave source as it is. When the final packets are reached to site1 LAN, source is Z, destination is X, problem solved. in fact, site1 and site2 never know where is nat happening, they just dont know about overlapping network even exist on either side.
As you see, there is no mac, arp issue.
If you perform the network to network nat, ip translation will happen this way-
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