
Chinese Billionaire Linked to Giant Aluminum Stockpile in Mexican Desert - nkurz
http://www.wsj.com/articles/chinese-billionaire-linked-to-giant-aluminum-stockpile-in-mexican-desert-1473356054
======
liztsai
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!

~~~
cperciva
A 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.

~~~
Kenji
I loathe farmer subsidies. I have no idea why our government gives farmers so
much money and so many advantages - nobody in our society really benefits from
those incredible spendings and it's a significant fraction of our state
budget.

~~~
colechristensen
If you don't subsidize farming in rich countries, all your food will come from
poor countries. Poor countries without standards for food safety, scruples
about burning down rainforest for a few years of fertility, or worker rights
or fair wages. You starve poor countries by selling off all of their food to
rich countries and making what's left very expensive. What farming is left in
rich countries can only possibly be made economical doing so at the largest
most industrial scales. When shit hits the fan external sources get much
leverage on rich countries because they don't own their own food supply and
don't have the economy in place to make their own when the suppliers get
disagreeable.

And folks at the grocery store aren't going to like the prices if they want
their unsubsidized groceries to be grown by their own countrymen earning
middle-class wages.

Subsidies right now are certainly not where they need to be. The whole thing
needs to be reformed but there are basically two classes of people: rich
powerful special interests that profit from the status quo, and ignorant
citizens that don't understand the very basics of why anything is being done.

Ignorance and greed underly most of our problems. Which one are you guilty of?

~~~
lostlogin
This argument doesn't hold up. By that reasoning (safety, workers rights,
environmental concerns) every industry is special and deserves subsidy. Can
mine be better subsidised please?

~~~
colechristensen
To be fair, I don't believe in free trade outside equal partners.

That is, I think trade should be completely unrestricted to foreign markets
that are within some economic margin (let's say US, Japan, Canada, and Germany
to come up with a very incomplete list) and in any other cases should be
subject to significant restrictions.

I don't like the fact that it's nearly impossible to pay someone in America an
honest wage to put together t-shirts or running shoes. I don't like the fact
that I'd be hard-pressed to buy a t-shirt or a running shoe that wasn't
assembled by a person who is more like a slave than not.

But also,

Food is something fundamental, something important, more important than almost
anything else and really easy to export the production. We might be ok letting
some industries be entirely foreign, because maybe they're less essential...
basic sustenance though is in a different class of importance. It's not a fad,
it'll never go away unlike many industries that seek protections when they
should just be allowed to die.

~~~
lostlogin
Your last point is very good. It applies to other sectors too, but I'm not
going to die if a few days/weeks without those other things.

------
danielvf
The article mentions that aluminum prices have fallen 50% since 2010. However,
prices were double historical normal from 2005 to 2011. The price lowering was
just a return to normal prices.

~~~
rrggrr
This is correct. Three factors drove the bubble in aluminum and other
commodities: Increased energy expense, speculative and fraudulent investment,
and some increased consumption. However, three factors are likely to continue
to drive aluminum and other commodities under the mean: Lack of confidence,
spectacular debt burdens and deflationary trends across commodity price
inputs. Its likely to be years before a stable mean is established, despite
the occasional mirage of stability from month to month.

~~~
at-fates-hands
I remember working at a bike shop around this time and within 6 months all of
our bikes went up in price like $50-100. I had no idea what was going on and
asked one of corporate office guys what the deal was.

He said between India and China, they had both put huge strains on steel,
aluminum and titanium and it was causing a shortage for bike manufacturers, so
they were raising their prices since the prices for these metals had
skyrocketed in recent months.

Good to know it was a little more to it, but interesting nonetheless.

------
ryanmarsh
One of the reader comments said: "Extradite him to the US and then prosecute
him. Getting rich without any merits is horrible."

and I thought: you must be new here

~~~
malchow
Really? Wouldn't you think U.S. has the lowest proportion of "rich without
merits" as %age of rich of any nation in the world – and indeed in history of
world?

~~~
wskinner
Not sure why you're getting downvoted. This is a totally valid point. For the
downvoters: malchow's claim is that in the US, rich people are more likely to
be businessmen or people who have otherwise worked for their wealth, rather
than simply having been born to the right parents.

~~~
givinguflac
I agree with what you're saying, but at the same time it's a hell of a lot
easier to end up a wealthy adult if you come from a wealthy family. "Small"
loans from family etc.

~~~
djrogers
Roughly 80% of American millionaires are the first generation of their
families to be wealthy. Here's the surprising part - most of them get there by
working hard and spending less money than they earn...

[1] [https://www.nytimes.com/books/first/s/stanley-
millionaire.ht...](https://www.nytimes.com/books/first/s/stanley-
millionaire.html)

~~~
nkurz
I like your link, but I couldn't find that particular statistic within it.
Could you clarify?

Most of the studies I've seen reach the opposite conclusion, that parental
lifetime income highly predicts the income of their children. For example, a
child of parents in the 90th percentile has an expected income of over $100K,
while a child of parents in the 10th percentile has an expected income of less
than $40K.

[http://www.theatlantic.com/business/archive/2015/07/america-...](http://www.theatlantic.com/business/archive/2015/07/america-
social-mobility-parents-income/399311/) (which comes from
[http://inequality.stanford.edu/sites/default/files/economic_...](http://inequality.stanford.edu/sites/default/files/economic_mobility_short.pdf))

Income isn't wealth, but I'd be surprised if the correlation isn't strong.
What percentage of individuals in the US of 90th percent household wealth came
from families in the top half versus bottom half growing up? I don't know off
hand, but if I had to bet blindly on outcomes I'd strongly favor betting on
the individual who started out better off.

------
MrZongle2
_“My Moby-Dick has been Zhongwang,” says Mr. Henderson, president of the
Aluminum Extruders Council, a U.S. trade group._

Without context, I would have thought that a Markov text generator was on the
loose.

~~~
kwhitefoot
Really? Why? Mr. Henderson is simply claiming that hist situation bears some
similarities to Captain Ahab's. It might or might not really be true but the
statement is clear enough for anyone moderately well read in English language
literature.

~~~
MrZongle2
It's not that the reference is obtuse (it isn't), it's that one usually
doesn't encounter "Moby Dick", "aluminum extruders" and "Zhongwang" in the
same sentence. It can give one pause, in the same manner as if the sentence
were full of alliteration.

------
hourislate
This isn't happening with just Aluminum. All Carbon and Stainless Steel also.

The Chinese have hacked and stolen many of the recipes the Steel Industry has
spent decades working on. It was one of the reasons Washington had to act. Now
they can supply markets where their product was not within spec.

Chinese industry gets subsidized by the Chinese Government. Depending on the
exact industry they get a certain percentage back on exports. It can be up to
20 % on each export dollar. I once spoke to a shop that made specialized tools
for CNC and Screw Machines. The guy told me that if he had a robot that could
make the tool from start to finish without anyone needing to even come to
work. Just place a load of steel down in the shop and leave. When you get back
in a weeks time everything will be made and packed. He still couldn't compete
with the Chinese. He says their steel is subsidized, their power is
subsidized, they get subsidized to export and by the time you take all the
subsidies into account they are 20-30 % cheaper than he can even buy the raw
material for. Then to avoid any tariffs they ship product all over the world
and move it through other countries. Hence Mexico has become one of these
countries, especially when it comes to all metals.

They will stop at nothing to destroy Industry in other countries. They have
the support of their Government at the highest levels and are encouraged. It
is what makes this difficult to police.

~~~
lostlogin
Nicely said. Crap Chinese still is causing problems here in New Zealand - and
I thought we were too far away to matter.

------
bjfish
This reminds me of the 2013 Goldman Sachs aluminum story:
[http://www.nytimes.com/2013/07/21/business/a-shuffle-of-
alum...](http://www.nytimes.com/2013/07/21/business/a-shuffle-of-aluminum-but-
to-banks-pure-gold.html?pagewanted=1)

------
microDude
Now imagine the TPP goes through, how much of a footprint will be exposed to
similar practices.

------
profeta
the smoking gun graph[0] is missing how much of MX al is sold to the US.

[0] well, they split them into several images
[http://si.wsj.net/public/resources/images/BN-
PS529_201609_G_...](http://si.wsj.net/public/resources/images/BN-
PS529_201609_G_20160907120101.jpg)
[http://si.wsj.net/public/resources/images/BN-
PS530_201609_G_...](http://si.wsj.net/public/resources/images/BN-
PS530_201609_G_20160907120306.jpg)
[http://si.wsj.net/public/resources/images/BN-
PS533_201609_G_...](http://si.wsj.net/public/resources/images/BN-
PS533_201609_G_20160907120405.jpg)
[http://si.wsj.net/public/resources/images/BN-
PT063_201609_G_...](http://si.wsj.net/public/resources/images/BN-
PT063_201609_G_20160908091611.jpg)

------
davesque
I'm sure this guy will just get a little slap on the wrist.

~~~
JoeAltmaier
Its not clear he's done anything wrong. Shipping Aluminum to Mexico? What's
the problem.

~~~
oh_sigh
The simple version: If a foreign government is unfairly subsidizing an
industry, America will slap a tariff on it. This is good policy - imagine, for
example, if Airbus could afford to sell their planes for $1, because they are
being entirely subsidized by the French government. Everyone buys airbus, no
one buys Boeing any more. Boeing(along with tens of thousands of jobs) goes
bye bye, and now Airbus starts selling their planes for whatever they want,
because there is no competition left.

So, that's what China was doing - they were giving this aluminum company tons
of money, and it allowed them to produce and sell aluminum for far cheaper
than should be possible. So America put a tariff on importing that aluminum
from China.

Instead, they sent it to Mexico, and then pretended that the aluminum came
there when shipping it into America. No more tariffs!

~~~
ktRolster
Note that this trick is very hard to pull off in the long-term. China tried it
with rare-earth metals, and production just started up elsewhere. In the short
term it's annoying and causes disruptions.

~~~
Justin_K
It isn't very hard to pull off dumping, it's game that's been played for
centuries. That's why all modern governments disallow it. China especially
does it all the time, here's an example with solar:
[http://www.nytimes.com/2014/12/17/business/energy-
environmen...](http://www.nytimes.com/2014/12/17/business/energy-
environment/-us-imposes-steep-tariffs-on-chinese-solar-panels.html) .

~~~
627467
A genuine question: why is this dumping, but importing any other electronics
(say any modern computer, cellphone, appliances) not so?

~~~
ramchip
As the article mentions:

> the companies were selling products below the cost of manufacture and that
> the Chinese companies were benefiting from unfair subsidies from their
> government.

I assume Foxconn does not get subsidies to sell iPhones below cost :)

~~~
627467
I just don't understand how easy it is to determine the cost of manufacture
something outside of one's economy and infrastruture.

I'm in Argentina at the moment and I'm constantly hearing local businesses
accusing china of dumping because they can't produce more cheaply, but than
everywhere else in the world we buy Huawei, Xiaomi, etc I feel that
accusations of dumping are more political interpretations than measurable
facts.

------
known
What's wrong with it?
[https://en.wikipedia.org/wiki/Global_strategic_petroleum_res...](https://en.wikipedia.org/wiki/Global_strategic_petroleum_reserves)

------
spectrum1234
What an awesome article title

------
awqrre
At least it's not a giant pile of cocaine I guess... Edit: that was a bit of
sarcasm, as these usually don't get reported...

------
czep
It's infuriating how these crooks are the ones who get to be rich, while
people who play by the rules, work and live honestly, end up being in debt to
these criminals.

Nice bit of reporting by WSJ. I'm sure they will also get blocked in China,
just like when NYT reported on the massive wealth of Party officials.

In a few years when people ask "when did the war start?" We might be pointing
to this very incident, and many others like it.

~~~
joe_the_user
Which crooks shall we start with first? The Chinese crooks, the American
crooks or perhaps crooks of a less powerful third nation?

IE, US brokerages have engaged in similar or even more baldly speculative
dodges -

NYTimes: "Hundreds of millions of times a day, thirsty Americans open a can of
soda, beer or juice. And every time they do it, they pay a fraction of a penny
more because of a shrewd maneuver by Goldman Sachs and other financial players
that ultimately costs consumers billions of dollars."

[http://www.nytimes.com/2013/07/21/business/a-shuffle-of-
alum...](http://www.nytimes.com/2013/07/21/business/a-shuffle-of-aluminum-but-
to-banks-pure-gold.html?pagewanted=all&_r=0)

And whether any of this actually illegal is to-be-determined but we're dealing
with the people who make the laws, fighting with other people who also make
their laws, right?

------
monopolyshit
Good timing to distract public from Clinton's scandal.

~~~
lostlogin
Are you referring to the one which she has been cleared of pretty
comprehensively? I can't stand her but the faux email scandal is tiresome.

