China's Changing Import Regs

China is making big changes in its scrap import regulations—changes that could affect scrap shippers around the world. 

By Adam Minter

In the past decade, China's exponential growth in scrap imports has outpaced its ability to regulate them. The fledgling status of China’s regulatory system has been one obstacle. Time has been another. "In ten years, we had to accomplish what the U.S. did in fifty years," says an environmental regulator in Beijing. "I think we’ve done a good job, though there’s still a lot to do."

China plans "to do" two things regarding scrap imports: First, it seeks to end the importation of electronics scrap and other potentially hazardous materials into China. And second, it is determined to more accurately assess and enforce duties on imported scrap.

Here, we review China's changing scrap import regulations and talk with Wang Jiwei, secretary general of the China Nonferrous Metals Recycling Association Branch, about the factors driving the changes.

Cracking Down
When it comes to electronics scrap, China's import restrictions have their foundation in international law: As a ratifying party to the Basel Convention—an international treaty banning the transboundary movement of hazardous materials—China has made a commitment to end the importation of electronics scrap due the potentially hazardous nature of that material. Yet because of its numerous ports, its still-developing regulatory infrastructure, and its low-cost labor, China has continued to be a destination for electronics scrap.

Though exact figures are impossible to obtain, it is widely known that the majority of the electronics scrap shipped to China comes from the United States and Japan. While Japan is a full signatory party to the Basel Convention, the United States has signed the treaty but not ratified it. Regardless, China has its own laws banning the importation of electronics scrap.

Chinese customs officials express equal frustration at the number of scrap-bearing containers that arrive at China’s ports with inaccurate declarations of contents. One Chinese regulator estimates that as much as 80 percent of all imported scrap containers arrive with false declarations. In response, China’s customs agency is determined to assess and collect more accurate duties on imported scrap. In general, more accurate duties mean higher duty payments.

Reviewing the Rules
On Jan. 1, 2004, China's frustrated regulators unveiled two new rules that will fundamentally alter the Chinese scrap trade. The rules were developed to stop the importation of banned materials as well as to bring international scrap specification standards to China's scrap imports. Simply put, these new rules are the most significant regulatory changes ever imposed on Chinese scrap imports.

The first change to be noticed by scrap importers and exporters was a new and more detailed duty-assessment system. Previously, Chinese customs officials had only a handful of scrap categories to determine the value of a scrap shipment, whereas now there are more than two dozen. For example, copper scrap used to be a single all-encompassing category, but under the new system it is subdivided into 10 categories, including No. 1 and No. 2 copper, electric motors, transformers, and more. In addition, by using several China-based services that survey world scrap prices, the new system is much more accurate than the prior system. The effect has been immediate: Some scrap importers are reporting that their duties have risen as much as 50 percent in Guangdong.

The more radical rule change is a requirement that all shippers of scrap to China must register with Chinese customs as "supply enterprises." The registration process requires a significant amount of paperwork and supporting documentation. It also requires the applicant to submit to an on-site environmental inspection by representatives from CCIC—the China Certification & Inspection Co. Ltd. Only registered suppliers will be allowed to export to China. Others will have their containers refused at the port. Registrants who are caught smuggling or evading duties could have their license revoked. Currently, exporters are required to obtain a temporary registration by July 1, 2004, though there are indications that the deadline may be extended. (For more details, see “A New Registration Regime” on page 66.)

An Inside Perspective
To gain clarity on these important changes, I contacted Wang Jiwei, secretary general of the China Nonferrous Metals Recycling Association Branch. This association, often called the "Chinese ISRI," is a government-chartered industry group that represents more than 200 of China’s largest scrap recyclers. The association plays an important policymaking role regarding China's recycling industry. In fact, Wang and his organization played key roles in the development of both the new customs pricing and exporter registration systems.

In late February, I interviewed Wang about the state of China’s scrap import trade and its evolving regulations. Here are excerpts from our talks:

How does the China Nonferrous Metals Recycling Association interact with the Chinese government?
There are many ways. For example, the association is taking part in discussions relating to scrap electronics and how to handle them domestically. We also take part in developing standard industry practices and rules. We also cooperate with the examination department at customs to address instances of smuggling and other illegal behavior. We have participated in deciding how to prosecute instances of criminality, how to defeat criminality overall in our industry, and how to encourage and support the corporations that follow the laws and rules. We also cooperate with the policymaking departments at customs to set rules for our industry.

How important is the scrap metal trade to the Chinese government?
It is very important. With the development of the economy and the improvement in living standards, the government is paying much more attention to the scrap industry and, in particular, its environmental impact in China. For customs, specifically, the scrap trade is also important, though its issue is not so much the quantity of scrap coming into China but its quality. The real question at customs is how to end the import of forbidden materials. Smuggling is a big issue, especially the smuggling of electronics scrap.

Please describe the genesis of the new supplier registration system.
CIQ [China's import inspection agency] had been considering such a system for nearly two years due to the increasing amount of scrap coming into China. It is very difficult for customs to examine all of the incoming scrap. As a result, some forbidden material will enter due to the lack of sufficient domestic oversight. Further complicating the situation is the increasing number of exporters sending material to China. It is very difficult to keep track of their export patterns and material.

So what is the purpose of the new registration system?
The purpose is twofold: First, there are too many exporters, and it is difficult to examine their scrap at Chinese ports. So this is a way to more effectively examine and control the scrap on the exporter’s end. If you are certified, we assume your reputation is good and you won't engage in illegal activities. Your scrap is considered of a high quality.

Second, it is a quality-control issue. By registering exporters, we can better control the quality of material coming into China. There are just so many exporters, and some have bad reputations—they export forbidden materials such as electronics into China. Really, that’s not the sort of exporter we want sending material to China. Hopefully, this program will cut off their access to China's scrap markets.

Are you concerned that such a system could result in a loss of exporters and scrap volume for China?
In the short term, it may mean a decline in material for China, but in the long term it will mean better scrap.

The new regulations refer to "business scale" as a criterion for being granted a registration. Why?
We are concerned about the reputation of an exporter. Generally, we want larger-scale exporters with good economic backgrounds. There are smaller enterprises that have good reputations, but larger businesses are generally subject to more scrutiny so we trust their practices a bit more. We hope that exporters with good reputations will continue to follow the rules.

The new system seems to exclude brokers. Will brokers be able to register?
We do not encourage brokers. We prefer to deal directly with exporters.

The new system requires visits to exporter facilities by CIQ-appointed inspectors such as CCIC in North America. How will these inspections proceed?
At first, CIQ will inspect the registration applications. Then, if there are questions, CCIC [or another CIQ-appointed entity] will inspect. Every exporter, at some point, will undergo an environmental inspection. We are looking for environmentally clean operations.

Can you explain the genesis of the new customs pricing system?
There were two problems with the old system. First, customs inspectors had difficulty classifying the diverse grades of scrap that are imported into China. Because of this, there were difficulties in uniformly applying duties. This, of course, causes problems for Chinese importers. Second, we have to acknowledge that some exporters and importers will do illegal things. For example, some exporters supply goods different than what is on the shipping bill. Perhaps the actual shipment may contain 50-percent metal, but it is declared at 30- or 40-percent metal to qualify for a smaller duty, or the shipment could contain forbidden goods. These issues led us to decide that a new system was necessary if China’s scrap business was to continue growing and modernizing with the economy.

How was the new system developed?
In 2002, representatives from the nonferrous association, customs, large Chinese scrap corporations, domestic information services, and the pricing department at customs began to discuss how to handle these issues. There were a total of eight meetings, during which we identified two issues that a new system would have to address. First, how do we devise a system that creates agreement between customs and the scrap business on pricing issues? Second, and most importantly, how can customs obtain an actual market price for imported scrap so it can accurately assess duties? We wanted a system that resulted in a reasonable and actual scrap price.

Once those issues were identified, we addressed two additional practical issues. First, how do we classify the various types and grades of scrap for the new system? And second, how do we exchange information efficiently between parties? We used ReMA standards as a reference on the classifications. As for information exchange, we created a system that allows our five member groups to communicate quickly and efficiently on prices.

How, then, are the prices obtained?
Several Chinese pricing services provide us with information on the price of foreign scrap. This information is then submitted to domestic Chinese scrap companies for a second opinion. It is a double-check to see if the pricing information is real. After all, those prices profoundly affect our industry.

Once the pricing information is confirmed, it is sent to the pricing department at customs, which posts it for customs officers. They use it as a guide to set the correct price for duties.

Do the new scrap classifications follow the ReMA specifications? 
They are mostly based on the ReMA standards. The main purpose is to set similar standards to what exists internationally. Quite frankly, I suggest that U.S. exporters follow our standards when they sign contracts for export to China.

Many American exporters have seen their duties rise since the new system came into effect Jan. 1. Has the duty itself been raised? 
No. The duty has not changed. The classification of scrap has changed. Because the new system is more accurate regarding the classification of material, the duty payments will rise. In the past, customs officers were not able to accurately assess the duty. Also, because the price of scrap is rising, the duty payments will rise with it.

Customs officers are still burdened by shipping documents that contain false information. Frankly, I hope you will encourage your readers to file the real contents of their shipments when exporting to China.

Can you provide any suggestions on how to comply with the new system?
I suggest that exporters file their papers before shipping. The origin price will be the price that is paid on the duty in China, even if the price has risen while the material was in transit. Again, it is important that the real contents of the containers be filed accurately. This will improve the system for all parties.

One requirement in creating a more accurate system is training customs inspectors to enforce it. How are you dealing with that?
We have trained 70 of China's largest scrap corporations in the new system. They are the importers, so it is quite important that they understand it. In addition, we have trained the main officials involved in enforcing and carrying out the new system, including leading figures at customs. Customs will then train the inspectors. We are currently preparing a booklet with photos that will help the inspectors classify imported material. That will be available this summer.

American exporters often complain that China's import duties vary depending on the port and region. How do you address that?
Of course, we want to keep the market very orderly and uniform, but there are issues. Some goods shipped from Hong Kong reside in different categories than they do on the mainland [Hong Kong’s scrap import categories and duties differ from those used on the mainland, often resulting in differing duty payments between Hong Kong and the rest of the country. However, this situation is changing under a new cooperation initiative between the mainland and Hong Kong]. Also, different regions of China have different markets. For example, wire is a developed industry in Northern China. It is a stronger market with stronger prices. The duty, naturally, will be higher there.Nevertheless, the Chinese government is paying more and more attention to regionalism. This is an increasingly important issue in goods and businesses other than scrap, too.

There seems to be a trend toward consolidating Chinese scrap yards into resource recycling parks where yards are subject to minimum size requirements. Likewise, the exporter registration system favors larger recyclers. Is China trying to do away with smaller players in the scrap industry?
We do not want to exclude small-size exporters or processors immediately. But there is the quality issue, and generally bigger processors and exporters have better quality.

As for resource recycling parks, China has built five parks in succession since 2001, and there will be more. Soon the parks will be the standard for scrap processing in China. Even in Guangdong, where there are many processors, the trend will move to parks. Six are in the planning stages. Generally, the parks help to consolidate regulation and encourage the legal scrap trade. As you know, China is very concerned with ending the less-lawful aspects of the scrap trade, including the illegal import of electronics scrap.

Many American recyclers hold out hope that China will legalize such imports in the future. Will that happen?
No. Never. Under the Basel Convention and China's own laws, China cannot allow the import of electronics scrap or other hazardous materials. It will always be illegal. If it is imported, at this point, it only arrives because it is smuggled.

It is, of course, difficult to stop smuggling completely. As you know, the United States has its own difficulties with completely preventing the importation of certain illegal substances. Nonetheless, we can control it over time. There will be less and less. The smuggling can be controlled.

What are the penalties for companies caught trading electronics scrap into China?
It is the price of the scrap. It will be seized at the port of entry. The importer will not receive the goods, and neither will the exporter have them returned. Whether the exporter reimburses the importer for the loss is their business. In addition, under the new exporter registration system, those exporters caught sending electronics scrap to China will have their export licenses revoked.

U.S. scrap is labeled very clearly and certainly much better than that of other countries. So comparatively, most U.S. scrap corporations have good reputations. Then again, some do not.

Were the scrap exporters with so-called bad reputations the driving force behind China's new import changes?
On the one hand, China has only been regulating scrap imports since 1996, so the regulatory changes are part of the ongoing effort to bring some government oversight and order to the trade. On the other hand, the changes were made to address illegal practices that occur in the trade.

But let me say, these changes will be good for the scrap industry. If we do not change, we do not make progress.

What steps can U.S. scrap exporters take to improve the trading relationship with China?
I have one suggestion for U.S. exporters: Understand and follow the rules, laws, and policies of China. Don't send illegal goods. And please submit correct, strict, realistic shipping documents. We want the exporters to maintain their good reputations, and we want them to recognize that they still have the advantage in our trading relationship. Because of China's deficiencies in scrap, the nature of our relationship gives money to the exporters first. But then, when something happens with quality, we’re the ones who suffer the losses.

What steps could the U.S. government take to improve the scrap trading relationship with China?
The U.S. government should support its scrap exporters. I know that there has been recent talk about scrap export bans. That is very unhelpful to the relationship.

ISRI opposes export controls on scrap, and it seems unlikely that the U.S. government would institute such measures.

I agree, but it is also the case that once the U.S. government has the idea for such bans, it affects the industry and markets regardless of whether it supports them.

A New Registration Regime
China's new Supply Enterprises registration system, which went into effect Jan. 1, 2004, requires all overseas exporters of scrap materials to obtain a temporary registration from AQSIQ—the Administration of Quality Supervision, Inspection and Quarantine of the People’s Republic of China—by July 1, 2004.

As of early April, Chinese-language applications for supplier registrations were available on the CCIC Web site at www.ccic.com (Notice No. 115-2003). The preamble to the application explains the criteria that must be fulfilled for an exporter to receive a temporary registration. The requirements state that:

• the exporter must be familiar with Chinese environmental standards;
• its operations must have a permanent office and must be "of considerable size"
• it must have a quality-control system for inspecting scrap materials; and
• it must have no record of serious safety, hygiene, or environmental issues regarding exported scrap materials in the past three years.

Exporters must present the registration application, a copy of their company business license, documentation of environmental quality control, documentation detailing sources of scrap and corresponding quality control measures (there is no detailed guidance within the regulation on how much detail is necessary to fulfill this requirement), and a description of the scrap materials shipped to China in the past three years, including safety, hygiene, environmental, and quality information.

When completed, the application must be submitted in Chinese or in Chinese and English. At presstime, AQSIQ had not provided an address to which applications should be mailed (though CCIC North America could be assigned to handle North American scrap exporters).

If an application is accepted, an on-site environmental inspection will be arranged within three months—unless no such examination is required. Applicants that satisfy the registration requirements will be issued a temporary two-year registration certificate. Those that do not satisfy the requirements will be prohibited from shipping scrap to China.

There is every indication that AQSIQ is determined to enforce this system. In March, however, a representative at CCIC North America doubted whether the July 1 deadline is realistic from an enforcement standpoint and for applicants. It is uncertain whether CCIC’s concerns will have any effect on the regulation’s enforcement.

Editor's note: ReMA is working closely with the Chinese government to clarify the rules and procedures relative to the new registration system. In the meantime, ReMA members with questions may contact Scott Horne, counsel/managing director of government relations, at 202/662-8513 or scotthorne@isri.org.

Adam Minter is a journalist based in Shanghai, where he writes about business and culture for Chinese and U.S. publications.