9 ms·
This is a simple duty arbitrage play. For anyone wondering what he actually did wrong, there are a few key points to note. Aluminum (and all materials, really)
by liztsai 10y ago
This is a simple duty arbitrage play.
For anyone wondering what he actually did wrong, there are a few key points to note. Aluminum (and all materials, really) is exported and imported and duties are paid on the basis of the HS code and (if there is a trade agreement to be taken advantage of) certificates of origin (COO) along with the usual shipping docs.
China is inclined to tax exports of primary aluminum because aluminum is power intensive to produce. Thus, exporting raw aluminum ingots whose production has been state subsidized is basically akin to exporting (even giving away!) power. However, China relaxed export duties on certain 'finished' aluminum products. This opened up a loophole where Chinese companies could make 'finished aluminum products' which are classified under a different HS code than primary aluminum and ship it out of the country, duty free. In reality, this meant that they sloppily made it into whatever shape wasn't ingots or T bars rather than into any concretely useful shapes.
These 'finished' products then made their way out to places like Mexico and more recently Vietnam. Since they were still carrying Chinese COOs, they couldn't be directly re-exported to the US (or any other country without a FTA with China). They needed to be remelted/recycled into 'raw aluminum' and given a new COO (or for the less scrupulous given a fake COO...), hence the need for the Mexico factory.
So...if cost to ship to Mexico + cost to extrude and remelt < difference in Chinese VS Western manufacturing costs + duties on primary aluminum ... this is a profitable (and legal) trade!
- brandmeyer 10y agoI'm missing the part of this scheme where you need to have a large cache of aluminum in any form to make this work. Related: The Chinese regulations on export of neodymium magnets is similarly structured. Exporting the magnets or the raw metallic ingredients is subject to high tariffs, but export of finished products using them is not. This isn't just about energy exports though, it's straight up protectionism of their manufacturing businesses.
- joe_the_user 10y agoWell, If the aluminum they're getting is worth more than they're paying for it, they want to buy and export as much as possible. They then store it until they can sell it at the appropriate price. Especially considering that you'd assume the loophole is going to close sooner or later.
- novaleaf 10y agoa guess: in case China closes the loophole.
- liztsai 10y agoIf you're taking a protectionist view of their manufacturing business, China relaxing duties on finished goods would make sense. It's unclear (to me anyway) that that decision was made with the intent to spur raw aluminum exports vs some clever guys putting two and two together. And yes, in case the loophole closes. These guys may have been the largest operation that some guy flew a plane over but they probably weren't the only ones.
- cperciva 10y agoA similar, and perhaps more amusing, situation happened in Canada a few years ago. We have a 245.5% import tariff on cheese (why? Because dairy farmers are more important than poor people, apparently) but there was a much lower tax on "food preparations", including packaged pizza toppings. So companies would package up "pizza topping kits" in the USA, import them to Canada as "food preparations"... and then remove the cheese, which could be sold separately for far more than the cost of the complete kit. After a couple years, the classification rules were amended to exclude anything containing cheese from the "food preparations" tariff class.
- gdwatson 10y agoIsn't the whole point of free trade agreements to prevent those sorts of tariffs? Does NAFTA not cover cheese?
- cperciva 10y agoYes, that is the point. No, NAFTA does not cover importing dairy products into Canada; similarly the USA kept tariffs on some dairy products as well as sugar and peanuts. Unfortunately pretty much all "free trade" deals turn out to be "free trade except for a small number of politically well-connected industries". :-(
- nyolfen 10y agoKvetching by free trade acolytes about 'real' free market capitalism reminds me strongly of leftists bickering about the USSR not actually being communist.
- colechristensen 10y ago'real' free market capitalism can't exist because without proper regulation, power/wealth tends to concentrate to a level where the strong ruin the 'free' bit. 'real' communism can't exist (outside small rare communities) because the industrial revolution failed to bring about a post-scarcity economy which was marx's failure of prediction. A post-scarcity economy which eliminates the importance of capital is probably very possible in the future. Complete hands off capitalism probably is never going to be possible.
- wangchow 10y agoWhere does one go to learn about such things? Is it economics? Any recommendations? Thanks in advance!
- Bakary 10y agoHow do people sniff out these deals?
- rwmj 10y agoSounds like the real problem is the power subsidy.
- fredgrott 10y agountil the differences in costs of power to re-melt changes..of course that is why more than one country is used..