A Chinese Company Under DOJ Investigation Is Infiltrating the U.S. Aluminum Industry
The U.S. government is expected to make a momentous decision as to whether or not a Chinese company under investigation by the U.S. Department of Justice (DOJ) for allegedly dodging $1.5 billion in aluminum tariffs should be allowed to acquire a U.S. aluminum company that supplies the American military with aluminum plates. President Donald Trump promised to protect the U.S. economy against such Chinese trade practices and this case presents the chance to do so.
In August of last year, Chinese company China Zhongwang Holdings, backed by the Chinese aluminum magnate Liu Zhongtian, announced its intention to acquire Ohio-based aluminum manufacturer Aleris in a $2.33 billion deal. The deal has been under review by U.S. regulators at the Committee on Foreign Investment in the United States (CFIUS) for months, but CFIUS is expected to make a decision shortly.
Aleris manufactures aluminum armor plates for the U.S. military. For this reason, 27 U.S. lawmakers urged U.S. Treasury Secretary Steve Mnuchin (who heads up CFIUS) to reject the proposed merger, in order to protect U.S. security interests. The lawmakers warned Mnuchin that allowing the sale to go through would be a "strategic misstep."
"It is critical that CFIUS exercise extreme caution when a foreign investment transaction includes the transfer of military proficiencies and sensitive technology to China," the lawmakers wrote. "Chinese entities, including state-owned or state-controlled enterprises, often maintain relationships with China's military, compounding the risk that U.S. technologies will fall into the wrong hands."
In defending the merger, Aleris spokesman Jason Saragian said Aleris did not make defense products in the U.S. This is true — the company's military plant is in Germany. Even so, the aluminum company is based in the U.S., and sells military technology to the U.S. military.
Besides the military aspect, Zhongwang Holdings is currently under investigation by the DOJ, and has previously been investigated by the Commerce Department. The Chinese company and the businessman who owns it, Liu, allegedly shipped tons of aluminum to other countries, especially Mexico and the U.S., in violation of tariffs.
Last month, the DOJ filed a civil complaint, alleging that Perfectus Aluminum, based in Fontana, Calif., illegally imported more than 2.1 million aluminum pallets from China between 2011 and 2014, violating a 2010 Commerce Department ban on certain aluminum imports from China and dodging $1.5 billion in tariffs.
The complaint alleged that Perfectus Aluminum is controlled and "effectively owned" by Liu Zhongtian, the founder and chairman of Zhongwang Holdings. The company is one of China's biggest aluminum producers and exporters.
These allegations helped piece together a puzzle about massive stockpiles of aluminum discovered in Mexico, the U.S., and elsewhere, previously reported by The Wall Street Journal. Liu and his associates were allegedly involved in a complex effort to ship billions of dollars' worth of aluminum from China to Mexico, Malaysia, Vietnam, and the U.S., among other countries.
American aluminum producers have been complaining about Chinese companies allegedly flooding U.S. markets with inexpensive aluminum. Liu and Zhongwang Holdings appear to be at the center of such an effort.
In addition to Perfectus, the DJ complaint also implicated Aluminum Shapes LLC, a factory outside Philadelphia, Pa., which the DOJ claimed was involved as part of Liu's scheme to evade tariffs by disguising aluminum as shipping pallets. Aluminum Shapes had previously told The Wall Street Journal that it hadn't violated any rules.
"Aluminum Shapes was purchased, at least in part, for the purpose of melting Zhongtian Liu's and Perfectus's stockpile of bogus aluminum 'pallets' into aluminum billet, for sale in the United States," DOJ prosecutors wrote.
DOJ prosecutors alleged that the scheme to ship aluminum into the U.S. disguised as pallets began in 2011, after a Commerce Department finding that certain aluminum products from China, including some shipped by Zhongwang Holdings, harmed the U.S. aluminum industry.
The complaint alleged that Liu and associates imported about 2.1 million pallets, avoiding the required payment of more than $1.5 billion in tariffs. Perfectus planned to melt the metal pallets down into raw aluminum and resell it on the U.S. market. The pallets were stored at several warehouses in the Los Angeles area.
This is far from the first time Liu has been implicated in attempts to flood foreign markets with cheap aluminum. In December, The Wall Street Journal reported that nearly two million tons of aluminum worth about $5 billion had been shipped to a Vietnamese facility linked to the Chinese businessman.
Perhaps more pertinent to CFIUS, the Commerce Department investigated Zhongwang Holdings in 2015 and 2016. Last November, the department found that the company had "circumvented antidumping restrictions imposed by U.S. trade authorities."
Commerce began investigating the Aluminum Shapes stockpile after the Aluminum Extruders Council complained in 2015. U.S. Customs and Border Protection examined the Shapes pallets in 2015, concluding that they complied with U.S. laws, but Commerce was unsatisfied with that conclusion.
The Department of Commerce first investigated Zhongwang Holdings in 2010, and slapped punishing tariffs on certain aluminum imports. Commerce concluded that several companies were selling cut-rate aluminum while receiving subsidies back home in China. After the tariffs, Zhongwang Holdings' U.S. shipments took a nosedive, and its 2010 profits fell 26 percent from 2009.
At about this time, Singapore native businessman Po-Chi "Eric" Shen purchased a plot of land in Mexico and established a company, Aluminicaste Fundición de México. That company planned to construct a $200 million factory to melt aluminum into raw metal. Sound familiar?
In April of this year, President Donald Trump ordered the Department of Commerce to investigate whether or not China was dumping aluminum into U.S. markets and whether such actions threatened U.S. national security.
"The investigation, which the Commerce Department initiated on the eve of Trump's planned signing, could result in tariffs or other restrictions on foreign imports of aluminum, which could have a direct effect on China, one of the largest exporters of aluminum," CNN reported.
"Imports have been flooding into the aluminum industry and the defense angle is that high-purity aluminum is used in the F-35" as well as other military aircraft and vehicles, Commerce Secretary Wilbur Ross told reporters. In the event of a war, domestic manufacturers may not be able to meet the Pentagon's needs.
It appears Liu and Zhongwang Holdings were able to circumvent the 2010 tariffs, and are continuing their attempts to infiltrate the U.S. aluminum market. Why hasn't CFIUS realized this malign influence? Why has the agency taken so long to block Zhongwang Holdings' attempt to buy Aleris? Will President Trump step in and prevent the merger himself?