Steel Smugglers Pull Wool Over the Eyes Of Customs Agents to Enter U.S. Market

Robert Guy Matthews / Wall Street Journal 1nov01

Manuel Ibanez smuggled 20,000 tons of steel into the U.S. last year. It wasn't difficult.

In one instance, Mr. Ibanez changed the shipping documents on a product called reinforcing steel bar to make it appear that it was part of a shipment of another type of steel called flat-rolled. He figures the ruse saved him $38,000 in import duties.

Multiply that story many times over. In the huge U.S. market for imported steel, most of the metal comes in legally, but there is a steady, lucrative and damaging business in smuggling. Mr. Ibanez says the international metals-trading company he works for, which he declined to name, has evaded "hundreds of thousands of dollars" in duties in the past few years.

Dozens of other small traders use falsified documents and various tricks to regularly smuggle hundreds of thousands of tons of steel into the country, according to industry officials. And the already-troubled American steel industry says it can't afford to compete with products made cheaper by tariff evasion.

Heightened Vigilance

Some relief from the steel smuggling may be emerging, but long-term solutions are unlikely. The heightened vigilance at borders since Sept. 11 may damp smuggling of all sorts for a while. Domestic steelmakers are working hard to persuade President Bush to severely limit imported steel, starting early next year. A drop in imports would give U.S. Customs Service agents more time to scrutinize the shipments that do enter the country. And a recent ruling by the Department of Commerce may help end a longstanding dispute over imported steel that has been chemically altered to fit into a duty-free category.

But for now, a Byzantine tariff structure abets evasion while hobbling enforcement by a Customs force short on staff. Each year, about 38 million tons of steel with a value of between $11 billion and $13 billion enters the U.S. Nearly half of it is subject to tariffs that, under complex and voluminous trade laws, range from pennies to hundreds of dollars a ton. The tariffs are applied to the selling price of the steel in the U.S.

Inspection and Deduction

The amount of the tariff depends on the type of steel product, of which there are close to a thousand, and on the country of origin, of which there are about 100. Computers can help only so much because a lot of the work requires a combination of visual inspection, industry savvy and Holmesian deduction. Many of the products look the same. Low-quality wire rod, which is subject to tariffs, is the twin of high-quality wire rod, which isn't. Often, the only way to distinguish low quality from high quality is by submitting the steel to costly and time-consuming tests in Customs laboratories.

Adding to the domestic industry's frustration is the fact that smuggled doesn't necessarily mean shoddy. Illicit steel is generally the same quality as the domestic product. If bridges aren't collapsing because of substandard steel, it is hard to mount a high-profile campaign citing the damaging effects of smuggled goods. There is also less reason for a guilty conscience among U.S. buyers of the illegal steel.

Slim Risks

"The risk of being caught and the odds of penalties being assessed are slim," says Washington attorney Roger Schagrin, who represents several steelmakers in trade cases. "Trading companies are always going to find some way to get the steel in."

The practice has been going on for years, and the scams are constantly evolving. The American Iron and Steel Institute, a trade and lobbying group for U.S. steel companies, holds several seminars a year to teach U.S. Customs the various ways importers skirt duties. Still, until recently, the industry largely tolerated smuggling because demand was strong and U.S. steelmakers were profitable.

That has changed. The U.S. steel industry is suffering one of its worst slumps in decades. Roughly 25 steelmakers have filed for bankruptcy protection since 1997, including the third- and fourth-largest companies in terms of output. The industry has been pressing the Bush administration for protection while it continues ratcheting up an already heavy volume of trade litigation. More than half the cases before the U.S. International Trade Commission have been filed by steelmakers seeking tariffs and penalties on low-priced foreign steel. They also have enlisted support from the United Steelworkers of America, which sees jobs being lost to foreign steel made cheaper by smuggling and is forming a task force on illegally traded steel.

The U.S. is the most open market for imported steel in the world and a very lucrative one -- qualities that have fostered an entire industry of traders and importers. For the most part, the large importers pay the assessed duty, which then goes into a U.S. Treasury fund. It is the smaller, often fly-by-night trading houses that are more likely to try to slip illegal steel into the country.

They tend to use one of three approaches. The first, demonstrated by Mr. Ibanez, is to falsely reclassify steel that would be subject to a tariff as a duty-free product. Another is to remove indications that the steel came from a country subject to tariffs and make it seem to have come from one that is exempt. A third approach involves changing the chemical composition of a steel product enough so that it can be labeled duty-free.

The scope of the task is evident at the port of Philadelphia, one of the main gateways for foreign steel shipments. Susan Y. Mark, senior import specialist at the port for U.S. Customs, concedes "it's impossible to look at everything that is coming in."

Pointing to two recently arrived ships, the Bright Laker and the Atlantic Fortune, one of Mrs. Mark's agents explained the procedures for nabbing any obviously fraudulent steel before it is unloaded: Look for inconsistencies in paperwork, determine if the steel is under a tax or tariff, and log the information into a centralized U.S. Customs computer. If a product has a quota, they alert all ports that the quota has been affected. Any steel coming in over the quota has to pay a stiff penalty.

No Stamps

In an oil-slicked corner of a steel warehouse, Mrs. Mark pointed to the stamp on a piece of pipe that "tells you that this pipe comes from Russia." But most steel doesn't have such stamps, making it easier to falsify the country of origin on shipping documents, and close inspection of the steel itself is generally impossible, given the volume of product coming in.

Scams often are detected only after a shipment has passed through Customs and a member of the industry becomes suspicious. For instance, the American Wire Rod Producers, a group representing makers of steel-wire rod used in nuts and bolts, recently spotted a red flag in Customs figures detailing how much steel is imported and from which countries. The figures for April, May and June of 2000 showed that about 150,000 tons of high-quality wire rod, not subject to tariffs, had come in from the Ukraine, Moldova, Venezuela, Germany, Turkey and Trinidad and Tobago. That couldn't be, the group said. None of those countries makes high-quality wire rod.

A trader involved in one of the transactions said he used a typical reclassifying scam. The trader said he bought 20,000 tons of low-grade wire rod from a mill in Ukraine. He said the product is subject to a 10% tariff, which in effect makes it unprofitable to sell in the U.S. The trader studied the laws and saw that eight categories of high-grade wire rod didn't have a tariff.

Identity Change

So he changed the classification codes that U.S. Customs uses to identify steel products to say he had high-quality wire rod. The deception, he says, saved him from having to pay $42,000 in tariffs, and he saw nothing wrong with that. He complained that recent trade laws are unfair and that the only way to make any money is by skirting the laws. Indeed, some of the tariffs double the price of each ton of steel. "If I followed all the trade restriction rules made by the U.S., I would never make any money," he said.

Customs didn't know that Ukraine makes only low-quality wire rod, but the American Wire Rod Producers did. Their attorneys sent a letter to Customs officials, who went back to their records, tracked down three importers and fined them.

Customs wouldn't identify the offending companies, but keeps them listed on an internal database so investigators throughout the country can keep an eye out for them. The agency says its procedures do a good job of catching cheaters, but that it's difficult to get all of them. Officials declined to say how many cases have been prosecuted, or how many traders have been fined or had their licenses revoked. "We feel this is a privacy issue," says Ed Goggin, Customs director in Chicago, where the agency's steel-investigation team is based.

Customs inspectors can do little about the steel once it has gotten past them. They can't seize it because often it is already sold and in use. "Customs lets imports in and asks questions later," says Daniel DiMicco, chief executive of Nucor Corp., the country's second-largest steel company.

In the meantime, the people buying the steel get a nice price break. Most of the buyers are small processing centers or small-scale individual buyers. Some buyers might not know that their steel was smuggled in, says Brian Masterson, co-owner of Masterson Metals, a small metals fabricator in Los Angeles. "A big clue would be if the steel is selling for a lot lower than you could get most anywhere else."

John Correnti, chief executive of Birmingham Steel Corp., says it should be obvious to buyers of low-priced steel that it didn't come through the open market. "You can't help but realize that there is a lot of cheating going on," he says.

Birmingham Steel makes reinforced steel bar, or rebar, which is used to strengthen concrete. In the late 1990s, Mr. Correnti and other steel-bar makers began hearing from once-loyal customers that they could get the product much cheaper elsewhere. The producers got the Rebar Trade Action Committee, a lobbying group to look into the situation. The committee studied Customs documents and noticed that during one year in the late 1990s 50,000 tons of rebar came from Austria to U.S. ports, where it was shipped to Seattle and other cities.

That raised a red flag because Austria doesn't export or ship rebar to the U.S. The committee contacted Customs, which took the case from there and eventually fined three of the nine importers. But tracking down these cases can take years, and during that time, the suspect steel continues to arrive at ports and to be bought and shipped across the country, and sold at sharply lower prices.

One battle that began in 1993 shows how difficult it can be to sanction smugglers.

Even though the Department of Commerce determined last January that Canada's Co-Steel Lasco Inc. and Brazil's Gerdau MRM Steel had been slipping carbon plate steel into the U.S. without paying duties for more than eight years, neither company was ever forced to pay up. Co-Steel and Gerdau had been getting around paying duties by adding an extremely minute amount of boron -- 0.0008% by weight -- to the carbon plate steel. The boron didn't affect the character of the steel but did make it chemically different from the carbon plate steel that was subject to duties.

The case spent so long in appeals courts that by the time the Commerce Department completed its ruling, the duty on carbon plate steel, which had been imposed for a five-year period to counteract dumping, had expired.