September/October 2003
China’s scrap import rules can be “conflicting, confusing, and interpreted differently in different parts of the country,” says one importer—and, as in any game, there are those who break the rules. The future will be different.
By Adam Minter
Just past a security checkpoint in the Tianjin Free Trade Zone is a nine-story, white-tile building gone gray. Aside from a streak of dark glass running horizontally down the middle of the structure, there’s nothing to distinguish it from similar structures throughout industrial China. That is, unless you notice the black Hummer perched on a tilted riser in front of a showroom filled with BMWs, Porsches, and Minis.
Welcome to one of northern China’s most successful luxury car dealerships.
A sign identifies the dealership as Tianjin Peace International Trading, a name that almost mirrors Tianjin Peace Material Co., one of the largest nonferrous scrap importers in northern China. The similarity in names is no accident. That’s because the same man—Lester Huang—is president of both Tianjin Peace companies, though in North America he’s best known as president of Lane Tone International Material Inc. (Los Angeles), Tianjin Peace Material’s U.S. subsidiary that’s run by Huang’s wife Happy Zhao.
Like many of China’s most successful scrap importers, scrap was neither Huang’s first business nor his first import business, nor is it his only import into China. In fact, aside from being China’s largest importer of Hummers, Huang is also its largest exporter of bird cages (which have bottom trays made out of plastic that Huang also imports and recycles). Though these businesses don’t seem to make much sense as a conglomerate, there’s an important sense in which they fit together quite well: Each requires a mastery of China’s arcane, fluid, and downright confusing import/export environment.
Lester Huang is a contemporary master of that environment. He’s a soft-spoken and exceedingly modest man who doesn’t flaunt his success or the means by which he achieved it. He’s also expert at establishing working relationships with government officials—an invaluable skill in Tianjin’s tight regulatory environment.
Tianjin Past and Very Present
For centuries, Tianjin has been the major port of entry for North China. In the 20th century, it became one of the region’s most important manufacturing hubs, site of several large copper smelting operations that would later feed Tianjin’s electronics industry. With the advent of China’s free-market reforms, the electronics industry has expanded throughout the sprawling Tianjin municipality, now including major multinational manufacturers such as Motorola. As a result, Tianjin’s demand for copper-bearing scrap like electric motors has continued to build to the point that, today, it’s one of the top destinations in China for such material.
Tianjin also happens to be the only major Chinese scrap processing center within a short drive—120 kilometers—of China’s central government in Beijing. This proximity ensures that Beijing takes an interest in and exercises considerable control over the import of scrap into Tianjin. Though local authorities in Tianjin still exercise autonomy in regulating the specifics of the local scrap industry and its imports, they lack the luxury of distance enjoyed by regulators and the scrap industry in southern China.
Yet even processors in southern China know this is changing. Joe Chen, president of Tung Tai Group, a scrap recycling firm with major operations in the South, concedes, “Tianjin is what all of China’s scrap business will look like one day.” He’s right: Tianjin offers insight into how the central government will regulate scrap imports in the near future.
It’s well-known that since the free-market reforms of the 1980s, China has become the top consumer of virtually all types of U.S. exported scrap. In 2002, in fact, China imported 6.6 million mt of U.S. scrap, giving it a 32-percent share of all American scrap exports, according to U.S. government figures. And those figures are likely underestimates because they don’t include the substantial tonnage of U.S. scrap that flows into southern China via Hong Kong. Also, some of the U.S. export figures for specific grades are distorted because some shippers mix loads (often at the request of the buyer) to reduce the assessed value of the material and, hence, reduce the duty and value-added tax on the receiving end. In addition, government figures don’t reflect the large amount of prohibited materials that are regularly smuggled into China.
Statistics aside, there’s no question that China’s ports have become the largest and most important destination for U.S. scrap exporters. Whether this trend continues depends on how American exporters adapt to the new regulatory environment emerging in and around Tianjin.
‘It’s Different in Tianjin’
The Sanwan container yard is less than a kilometer from Lester Huang’s Hummer dealership. This yard is one of only three facilities designated to receive and inspect scrap containers at the Port of Tianjin. The reason is simply physical space: All scrap containers arriving in Tianjin are opened and inspected before being released to their consignees. On average, that equates to 4,200 scrap containers inspected every month. Executing these inspections requires huge container yards—like Sanwan and the other two designated facilities at Tianjin’s port.
It’s early afternoon on a Thursday in June, and the inspectors are just beginning their daily rounds of recently arrived scrap containers. Lester Huang drives into the yard and parks beside a line of 12 containers of copper-bearing scrap that Lane Tone has imported from the United States. Several of Huang’s employees have arrived ahead of him, including one employee whose daily responsibility it is to accompany the inspectors on their rounds.
The container seals are broken, and Huang’s employees eagerly inspect the material against the shipping documents. Soon, representatives from CIQ (the State Administration of China Entry-Exit Inspection of Quarantine of the PRC) arrive to check the import/export documents to make sure they match each container’s contents. CIQ is also responsible for imposing the regulations of China’s NEPA (National Environmental Protection Association) beginning with this initial visual inspection. The CIQ inspectors peer into each Lane Tone container, check the contents against the shipping documents, then photograph each load. No container receives more than a couple of minutes of attention before being released.
It’s important to note that Lane Tone’s inspections differ in one significant respect: The company is officially allowed to “self-inspect” its containers before they depart North America. This is a rare waiver and a testament to both the volume of material that Lane Tone imports and its good reputation in Tianjin. Usually, an agency authorized by CCIC (China National Import & Export Commodities Inspection Corporation) inspects all China-bound scrap containers for documentation and environmental compliance before they leave the United States. For most Chinese importers—as well as their scrap suppliers—CCIC is a notorious inconvenience that has been derided for offering inconsistent and even “unprofessional” guidance on export standards. Whether or not this judgment has merit, most scrap shipments to China clear their first regulatory hurdle when CCIC approves them for export.
This time, Lane Tone’s 12 containers are cleared without need for further inspection—but that isn’t always the case, even for Lane Tone. At the Sanwan yard, some containers are selected randomly for an X-ray inspection that can lead to an open-container inspection. Inspectors can also ask for a container to be X-rayed if they believe the contents don’t match the shipping documents. If the X-ray reveals something suspicious, the container is unloaded.
On this Thursday afternoon, a load of No. 2 wire from Japan is flagged for a random X-ray during which inspectors see something suspicious—probably better grades of wire than the grades claimed on the shipping invoice—and request a full inspection. Port workers then spend half an hour pulling the material from the container and spreading it on the pavement. Shortly thereafter, representatives from CIQ and customs arrive to inspect the unloaded material. With documents in hand, they conduct a brief inspection of the load, determine that it is declared correctly, and order it repacked and released.
Not all endings are as happy, however. Shortly after the Japanese container is released, a U.S. container of electric motors is X-rayed and flagged for inspection. The suspicion is quickly justified: Port workers begin unloading the container, and they discover a large load of sealed units (mostly compressors)—which are expressly prohibited by NEPA—and plastic-cased leaf blowers under a load of electric motors. The shipping documents say nothing about the actual contents of the load, which only makes the troubles for importer and exporter worse: All other containers for the same importer are flagged for additional X-raying and inspection. While that occurs, CIQ orders the leaf-blowers and sealed units repacked and returned to the United States at the importer’s expense.
“It’s different in Tianjin,” Huang shrugs as he drives out of the Sanwan container yard. In the South, such a load might have entered the country without incident. Even if it had been flagged for inspection and its true contents revealed, “arrangements” would likely have been made for its release. In Tianjin, such a container is immediately flagged as smuggled cargo and treated accordingly.
Categories and Consequences
In China, the central government has designated 10 categories that govern scrap imports and issues licenses giving companies the right to import one or more categories of material.
Importers holding Category 6 licenses have the right to import processed metal, including clean copper, brass, aluminum, and shredded metals (paper is governed under a separate license, but the actual structure of the license is similar to the Category 6 license). Officially, Category 6 shipments are allowed to contain a maximum of 20 percent nonrecyclable content. Unofficially, Category 6 material that exceeds this 20-percent figure is routinely admitted into China.
“If the regulation were followed exactly, there would be no scrap in China,” asserts Tony Huang, president of Shanghai Sigma Metals Inc., China’s largest secondary aluminum producer.
Another scrap category—Category 7—encompasses unprocessed material and is most commonly associated with electric motors, transformers, and insulated wire (plastics are covered under a license that is similar to the restrictive Category 7 license). In the past, this category also included electronics, printed circuitboards, and other computer-related scrap, but these materials are now officially banned for import into China (though “unofficial” imports are another matter altogether). Category 7 is heavily regulated due to the potential environmental impact of processing such material “incorrectly.” NEPA, in fact, has restricted the total number of Category 7 license holders to 481 to maximize its ability to prevent the importation of prohibited materials. In addition, Category 7 licenses and material tend to be restricted to specific scrap processing zones—namely southern Nanhai and Qingyuan, central coast Taizhou, and northern Tianjin.
Because these zones handle large amounts of Category 7 material, many North American exporters believe that duties on scrap vary regionally. That isn’t the case. All scrap imported into China is subject to the same duty of 1.5 percent as well as a value-added tax (VAT) of 17 percent on all loads. The value of the load determines the amount of duty and tax due on the load. For instance, a load valued at $200,000 will have a higher tax assessed than a $100,000 load.
Since some regions in China import more lower-value Category 7 material, the duties and taxes paid in those regions can appear lower than in regions that import more higher-value Category 6 material—but only because the value of the material is lower. The actual rate of assessment does not vary from region to region.
“The difference in regional prices is material-driven,” explains Wang Jiwei, secretary general of the China Non-Ferrous Metals Industry Association, Recycling Metal Branch, a government-approved association of China’s scrap importers that has 152 members, the majority of whom are Category 7 license holders.
Some scrap exporters and importers have devised ways to shortchange China’s import duty and VAT system. In some cases, for instance, the importer or its supplier misrepresents the imported material on the shipping documents, such as claiming the material is lower-value Category 7 when it’s really Category 6. In mixed loads, the importer can similarly misrepresent the amount of lower- vs. higher-value material. Unless customs detects the difference by sorting the material itself, the importer will benefit from the lower duty and VAT.
In other instances, the importer instructs its supplier to strategically load each container with the higher-value material loaded first and the lower-value material at the end nearest the doors. The shipping documents claim that the load contains only the lower-value material. If the load happens to be inspected, it does indeed appear to contain only lower-value material since that is what’s closest to the doors. Unless the load is inspected in its entirety or X-rayed, it can be virtually impossible to detect the higher-value material. Again, the importer can benefit from a lower duty and VAT on the material. This can give them a competitive advantage in the market to offer higher buying prices for the imported material.
Another issue is the reported rebate of a portion of the VAT to some Chinese importers, which can likewise give such buyers an added financial advantage in the market. According to one Chinese official, only state-owned enterprises have ever received such rebates, and this practice is currently being phased out even for those enterprises.
These examples only touch on the import games and challenges facing the Chinese government in general and Chinese customs in particular. In response, Chinese authorities are becoming more vigilant in inspecting loads of imported scrap as well as checking declared values for the material, efforts that are helping to reduce the opportunity for fraud.
The Future Is Ziya
China’s scrap import climate is indeed changing, and nowhere is that more evident than in Jinghai County, 60 kilometers from downtown Tianjin. There, rising from the salty, sparsely populated northern Chinese plains, the Tianjin Ziya Environmental Protection Industrial Zone is on the verge of revolutionizing the way China recycles. Formed in 2002, the zone will soon be the required location for Tianjin’s Category 7 license holders.
Lane Tone was the first processor to move into the zone, and its hard-surfaced, 66,000-square-meter yard is a model for how Category 7 will be handled in Tianjin. Indeed, by next year, all of Tianjin’s 46 Category 7 importers will have either moved into the zone or will be required to forfeit their licenses. The zone itself has integrated facilities for handling waste water as well as strict regulations on emissions and scrap processing. In many ways, the zone is a more advanced facility and concept for the safe handling of scrap than any that currently exists in North America.
When phase one is complete later this year, the zone will cover 2 square kilometers. Phase two, estimated to be completed in 2008, will expand the zone to 6 square kilometers. The estimated volumes to be processed there are even more staggering—500,000 mt in 2003 rising to 1.5 million mt by 2008.
A more fundamental change will occur in the basic structure of Tianjin’s scrap recycling industry. Prior to the zone, there were more than 400 scrap yards handling the region’s scrap, whereas now there will be only a handful of large yards (the minimum size for a yard in the zone is 10,000 square meters). More significantly, companies in the zone will be prohibited from outsourcing material to smaller operators—a key operating feature in the Chinese scrap industry.
This prohibition will likely devastate the smaller family-owned yards that have developed around large importers in Tianjin. Regardless, the central government is determined to see this prohibition extended nationally: On July 1, NEPA issued a regulation strongly discouraging Category 7 license holders nationwide from outsourcing processing activities. In pursuing this directive, local governments will require more extensive documentation on how material is sourced as well as assurances that companies process their material entirely on-site. Inadequate responses could provide grounds for withholding licenses. “Eventually, the small yards will be canceled or at least not encouraged,” says Wang Jiwei.
Outside of heavily regulated zones like Ziya, processors aren’t complying with this regulation to any significant degree. Still, the Chinese government is determined to follow through on the change, says Wang, who notes that “the big companies are going to receive support of various kinds in return for disassociating from the small companies. It’s just a matter of time.”
Why such a regulation? The Chinese government has long recognized that importers of prohibited material tend to outsource it to avoid detection during environmental audits. Consider electronic scrap and sealed units—both are fully prohibited under NEPA regulations yet they can be found in Chinese yards, particularly in Taizhou and the South. The new regulations will seriously deter companies from smuggling this material into China, especially to a concentrated zone like Ziya where “everyone knows what everyone else is doing,” says Lester Huang.
The Ziya approach stands in stark contrast to places like Dacheng County, which is located only a few minutes from the new industrial zone. This rural county is cut by a long, rutted dirt road that’s lined by dozens of run-down, dusty, and environmentally insensitive small scrap yards. It’s the sort of place that infuriates labor and environmental activists. Here, child labor is common, safety standards are nonexistent, open burning is the common method for extracting copper from insulated wire, and sealed units are “processed” on bare ground. None of these small yards in Dacheng is large enough to import prohibited material on its own; instead, the small yards process such material for Tianjin’s large importers, typically on an outsourced basis. This creates a problem: Dacheng County is outside the Tianjin municipality, so its scrap processing industry isn’t subject to the restrictions placed on Ziya’s Category 7 processors. Those wishing to evade the restrictions imposed in Ziya need only cross the border.
Recognizing this problem, the officials in charge of the Ziya zone, in concert with numerous government agencies, will open an environmental industrial zone in Dacheng County specifically for small operators like those being displaced in Tianjin. This new zone should be operating by 2004. Though Category 7 material won’t be outsourced in the zone, Category 6 work will be allowed. That said, since the Ziya zone will be affiliated with Dacheng, it’s reasonable to expect that Category 7 processing and outsourcing will be allowed between them—so long as both parties are operating within the rules of their respective zones.
The immediate effect of tighter regulation in the North, of course, may be the diversion of prohibited materials to the South, where they’re already common. For example, southern China and Taizhou lack the regulatory manpower and resources to inspect every scrap container, as occurs in Tianjin, so prohibited materials frequently enter those regions. Guangdong province’s scrap importers are willing to haul containers from Hong Kong—about a three-hour drive—even though Shenzhen and Guangzhou are much closer. Why? Because Hong Kong’s world-leading container volume almost guarantees that a scrap container won’t be inspected upon arrival. One large Guangdong importer estimates that he might have one container out of every 300 stopped for further inspection, prompting him to conclude, “It’s a good risk.”
Though these and other import activities are thorny problems, some regional Chinese authorities are taking steps to address them. Jinghai County officials, for instance, are considering locating CIQ and customs at the Ziya zone itself. This would have several benefits, including added convenience for importing companies located in the zone. For Chinese regulators, this move would allow the deployment of inspectors trained specifically to review and assess containers of scrap.
“The park gives us the ability to concentrate our regulatory resources,” explains Wang Yong Xing, director of Tianjin’s Environmental Protection Bureau and one of the leading figures in the establishment of the Ziya zone. “We will not be stretched too thin.”
Regional government entities throughout China are quickly adopting this concept of concentrating regulatory resources in defined environmental zones. Indeed, environmentally sensitive processing centers are being built on smaller scales all around the country, including in midsized scrap processing centers like Ningbo and Fujian. (It should be noted that the scarcity of available land in the South will likely delay the establishment of such facilities there.) These won’t be static facilities. Instead, they’re being designed to evolve with China’s scrap markets and industry.
“For any kind of material, if we have the ability to process it correctly, we allow it,” explains Tianjin’s Wang. At the Ziya zone, in fact, there’s an active effort to acquire higher-tech processing equipment. The purchase of $500,000 worth of wire-processing machinery, for example, has made it legal to import formerly prohibited low-grade No. 2 wire and cable. This difficult material—which was previously burned for copper recovery—is now a competitive item in Tianjin’s active copper markets. Other scrap such as electronic material will be more difficult to develop legally in China, though Wang hopes that Tianjin will eventually boast a modern electronics recycling facility that will enable such material to be imported legally.
Throughout China, the desire for advanced technology is inseparable from a desire to partner with U.S. scrap companies, trade associations, and government agencies. “We handle America’s waste, so it’s only natural that we would want to partner with America’s environmental industry,” says Ou Baoju, vice magistrate for Jinghai County and one of the key officials involved in the development of the Ziya zone. “We want to engage in technology-sharing. We want to increase trade.” Wang of Tianjin’s environmental agency echoes that opinion, stating, “We want more communication, more understanding. I want the import and export of scrap to conform to the laws of both countries.”
The Ending of the Beginning?
China’s scrap processing industry is the fastest growing in the history of the modern scrap business. In 20 years, it has gone from no imports to the world’s leading scrap importer. It has also gone from an industry with no environmental regulation to one with an advanced appreciation of what must be done to secure an environmentally secure future for China’s industrial base. In fact, China’s environmental laws regarding scrap are arguably more advanced than anything that existed in the United States until the 1970s.
It could be further argued that the Ziya zone is a more advanced approach to environmentally safe recycling than anything in America. Jinghai’s vice magistrate Ou suggests that such a zone merely shows “the advantage of the Chinese political system.” Regardless of the means, it’s essential to appreciate the ends that Chinese government officials are trying to reach: The Ziya zone is a new regulatory model for the scrap business in China. Certainly, it will affect processing activities within China. More importantly to North America’s recyclers, it will affect imports.
While the South will remain—in the near term—a destination for banned materials, scrap shippers who insist on sending their material there should prepare themselves for disappearing markets and a growing intolerance for smugglers. Indeed, China is already preparing itself for new markets. “Ultimately,” says Tianjin’s Wang, “we are preparing ourselves for a domestic Chinese scrap industry.”
When that industry finally arrives, it will be based on a robust regulatory infrastructure that will ensure an environmentally sensitive Chinese scrap recycling industry. Lester Huang of Lane Tone sees this future clearly, and like so many other experienced Chinese scrap importers, he often asks foreign visitors, “Where will America send its waste after China stops taking it?”
For all exporters of scrap to China, it’s time to start contemplating an answer. •
Adam Minter is a journalist based in Shanghai, where he writes about business and culture for Chinese and U.S. publications.
China’s scrap import rules can be “conflicting, confusing, and interpreted differently in different parts of the country,” says one importer—and, as in any game, there are those who break the rules. The future will be different.