Tariff waiver intended to protect steel exports creates loophole for Chinese plates to skirt antidumping duties

A trade system designed to support Korea’s steel exports is instead becoming a loophole in the country’s efforts to fend off a flood of cheap Chinese steel, critics say.

As the government began imposing provisional antidumping duties on hot-rolled steel from China and Japan in September of last year, a tariff exemption on imported foreign raw materials used to make goods for overseas markets, or bonded imports, unwittingly became a scheme for steelmakers.

Once the stricter measures took effect, such imports by rerolling companies that use hot-rolled steel surged.

Some steelmakers say that companies are skirting tariffs with the acquisition of permits for bonded warehouses, where materials can be stored and processed without paying import fees until — or if — the products are sold domestically.

All hot-rolled steel imports entered Korea as regular imports through the second quarter of last year. Bonded imports began rising in the third quarter of last year and are estimated to have accounted for 94 percent of hot-rolled steel shipments in the first quarter of this year, according to industry insiders.

“The number of companies seeking special permits to operate bonded warehouses suddenly increased after the antidumping measures took effect,” said a source from the steel industry. “A significant share of the products subject to antidumping measures ended up entering bonded warehouses without paying the duties.”

Another loophole involves what happens inside a bonded warehouse.

Imported materials that undergo minor processing can become products that are no longer subject to the duties. For example, Chinese or Japanese hot-rolled steel can be turned into coated steel — which is exempt from the duty — and sold in Korea without the antidumping tariff.

During a seminar held by the Korea Trade Remedies Association and law firm Bae, Kim & Lee LLC on Thursday, experts called for closing loopholes in the bonded warehouse system as Korea’s steel industry grapples with a structural crisis. 

A panel of experts proposed imposing duties on the original imported materials when finished products from bonded warehouses are sold in Korea and tightening requirements for special bonded warehouse permits.

“Korea — unlike the United States, the European Union and Japan — has no explicit review criteria for bonded warehouses,” said Joo Seong-jun, an attorney from the law firm. “The permit review should be tightened by introducing criteria such as whether an applicant intends to circumvent trade remedies.”

Some experts also argued that Korea should scale back benefits for bonded warehouses as countries around the world strengthen protectionist measures in response to China’s excess supply.

Under this approach, Chinese raw materials imported by bonded warehouses would remain subject to antidumping measures even when the finished products are intended for export.

“Bonded warehouses help promote exports and increase corporate profits, but that does not give companies a free pass to disregard fair trade practices,” said Kim Tae-hwang, a global economics professor at Myongji University. “Antidumping duties are penalties against unfair trade practices and should not be waived simply for the sake of corporate profits.”

Another expert also called for active state-led policy measures to protect the domestic industry.

“Korea needs to pursue more aggressive trade remedies in response to China’s export push,” said Cho Soo-jung, a professor at Korea University School of Law. “In particular, if we fail to prevent cases in which Chinese raw materials undergo only minor modifications before being exported to countries such as the United States, Korea risks gaining a reputation as a transshipment hub for Chinese goods.”

Tightening antidumping measures, however, presents a dilemma.

While stronger restrictions could protect Korean steelmakers, industries such as shipbuilding that rely on Chinese raw materials could face higher input costs. Experts called for measures that would allow the steel and shipbuilding industries to remain competitive together.

“It has been 40 years since tariffs for bonded warehouses were waived to promote exports,” said Cheung Jae-ho, the vice president of the Korea Institute of Public Finance. “As the global trade environment shifts from free trade toward protectionism, it is time to consider how long this system should remain in place.”

BY NAM YOON-SEO [[email protected]]