[liztsai]

This is a simple duty arbitrage play.

For anyone wondering what he actually did wrong, there are a few key points to note. Aluminum (and all materials, really) is exported and imported and duties are paid on the basis of the HS code and (if there is a trade agreement to be taken advantage of) certificates of origin (COO) along with the usual shipping docs.

China is inclined to tax exports of primary aluminum because aluminum is power intensive to produce. Thus, exporting raw aluminum ingots whose production has been state subsidized is basically akin to exporting (even giving away!) power. However, China relaxed export duties on certain 'finished' aluminum products. This opened up a loophole where Chinese companies could make 'finished aluminum products' which are classified under a different HS code than primary aluminum and ship it out of the country, duty free. In reality, this meant that they sloppily made it into whatever shape wasn't ingots or T bars rather than into any concretely useful shapes.

These 'finished' products then made their way out to places like Mexico and more recently Vietnam. Since they were still carrying Chinese COOs, they couldn't be directly re-exported to the US (or any other country without a FTA with China). They needed to be remelted/recycled into 'raw aluminum' and given a new COO (or for the less scrupulous given a fake COO...), hence the need for the Mexico factory.

So...if cost to ship to Mexico + cost to extrude and remelt < difference in Chinese VS Western manufacturing costs + duties on primary aluminum ... this is a profitable (and legal) trade!

[cperciva]

A similar, and perhaps more amusing, situation happened in Canada a few years ago. We have a 245.5% import tariff on cheese (why? Because dairy farmers are more important than poor people, apparently) but there was a much lower tax on "food preparations", including packaged pizza toppings.

So companies would package up "pizza topping kits" in the USA, import them to Canada as "food preparations"... and then remove the cheese, which could be sold separately for far more than the cost of the complete kit.

After a couple years, the classification rules were amended to exclude anything containing cheese from the "food preparations" tariff class.

[tesseract]

This kind of waste seems common and from an outside perspective very frustrating.

There is a famous example where Ford imported cargo vans from Europe to the US with disposable seats in them so they would be taxed (more cheaply) as passenger vans. I think the tax in question was referred to as the "chicken tax".

The situation is a bit different but China's value-added tax scheme combined with the prevalence of factories in bonded export zones leads to a lot of useless shipping of goods (or components of goods) from China to Hong Kong (or another nearby foreign jurisdiction) and back for no good reason other than to avoid tax. I'm sure this works out great for the local freight industry...

[witty_username]

I just can't wrap my head around protectionism. We lose, and they lose, and such crazy inefficiencies occur.

[tmoertel]

But somebody wins, and that's who's usually behind the protectionism in question.

[flyinghamster]

That was the Ford Transit Connect. One of the big ironies of that whole situation was that back in the 1960s, Ford was a beneficiary of the tax (which was mostly aimed at Volkswagen). After the tax was enacted, the Type 2 pickup and cargo van disappeared from VW's US product lineup.

The loophole has been closed, and Ford no longer sells the Transit Connect in the US.

[yuhong]

This also reminds that Hynix had to be bailed out in 2001 and in 2003, US and EU imposed high tariffs as a a consequence. I wonder what would happen if Hynix actually failed and had to be bought by Micron.

[Kenji]

I loathe farmer subsidies. I have no idea why our government gives farmers so much money and so many advantages - nobody in our society really benefits from those incredible spendings and it's a significant fraction of our state budget.

[colechristensen]

If you don't subsidize farming in rich countries, all your food will come from poor countries. Poor countries without standards for food safety, scruples about burning down rainforest for a few years of fertility, or worker rights or fair wages. You starve poor countries by selling off all of their food to rich countries and making what's left very expensive. What farming is left in rich countries can only possibly be made economical doing so at the largest most industrial scales. When shit hits the fan external sources get much leverage on rich countries because they don't own their own food supply and don't have the economy in place to make their own when the suppliers get disagreeable.

And folks at the grocery store aren't going to like the prices if they want their unsubsidized groceries to be grown by their own countrymen earning middle-class wages.

Subsidies right now are certainly not where they need to be. The whole thing needs to be reformed but there are basically two classes of people: rich powerful special interests that profit from the status quo, and ignorant citizens that don't understand the very basics of why anything is being done.

Ignorance and greed underly most of our problems. Which one are you guilty of?

[slyall]

Lovely argument, if only it were true. Your whole argument is all over the place, not least because a lot of food eaten in rich countries is has minimal subsidies already. Why don't you examine the world as it is today rather than how you think it is.

> "You starve poor countries by selling off all of their food to rich countries and making what's left very expensive"

The food produced in the poor country will sell for "the world price", pretty much the same everywhere. Not "cheap" in the rich countries and "expensive" in the poor ones.

I'll assume you are talking about US production. The vast majority of US crops don't need subsidies. They are heavily mechanized on cheap land (middle of Iowa etc) fairly close to markets and with good infrastructure.

[colechristensen]

It's all over the place because there's a tree of possibilities that's difficult to cover succinctly.

>The food produced in the poor country will sell for "the world price", pretty much the same everywhere. Not "cheap" in the rich countries and "expensive" in the poor ones.

Spending power around the world varies by several orders of magnitude. If there's one "world price" for a crop, that price will be incredibly cheap for rich countries and incredibly expensive for poor ones. Agricultural poor countries will not be able to afford the food they grow.

>a lot of food eaten in rich countries is has minimal subsidies already

In the US, SNAP (food stamps) costs about $75 billion per year and is about 80% of the spending on the farm bill. It's hard to think of that as anything but a subsidy, and it covers more or less all food.

There's a lot more as well...

[slyall]

> Spending power around the world varies by several orders of magnitude. If there's one "world price" for a crop, that price will be incredibly cheap for rich countries and incredibly expensive for poor ones. Agricultural poor countries will not be able to afford the food they grow.

Significant numbers of both poor and rich countries do not subsidize food today. Many agricultural products are commodities and traded at the "world price" already. This is the world you live in right now. Have a look at what is actually happening rather than speculating...

>In the US, SNAP (food stamps) costs about $75 billion per year and is about 80% of the spending on the farm bill

Food Stamps are not a subsidy to farmers, they are a welfare program for poor people. They just are part of the "farm bill" for political reasons.

[witty_username]

> Spending power around the world varies by several orders of magnitude. If there's one "world price" for a crop, that price will be incredibly cheap for rich countries and incredibly expensive for poor ones. Agricultural poor countries will not be able to afford the food they grow.

This is just bad economics. If food is "incredibly cheap" for rich countries, and agricultural poor countries are unable to afford the food they grow, then the prices will rise. Humans can't survive without food.

[jfoutz]

There are also some echoes of the world wars. If your country can't feed itself, you can't support an industrial base to fight. Kinda like the highway system.

[lostlogin]

This argument doesn't hold up. By that reasoning (safety, workers rights, environmental concerns) every industry is special and deserves subsidy. Can mine be better subsidised please?

[colechristensen]

To be fair, I don't believe in free trade outside equal partners.

That is, I think trade should be completely unrestricted to foreign markets that are within some economic margin (let's say US, Japan, Canada, and Germany to come up with a very incomplete list) and in any other cases should be subject to significant restrictions.

I don't like the fact that it's nearly impossible to pay someone in America an honest wage to put together t-shirts or running shoes. I don't like the fact that I'd be hard-pressed to buy a t-shirt or a running shoe that wasn't assembled by a person who is more like a slave than not.

But also,

Food is something fundamental, something important, more important than almost anything else and really easy to export the production. We might be ok letting some industries be entirely foreign, because maybe they're less essential... basic sustenance though is in a different class of importance. It's not a fad, it'll never go away unlike many industries that seek protections when they should just be allowed to die.

[lostlogin]

Your last point is very good. It applies to other sectors too, but I'm not going to die if a few days/weeks without those other things.

[mikeash]

Your industry doesn't starve the country to death if it gets outsourced and then blocked as a weapon of war.

[thaumasiotes]

You might like to know more about Australia's experience with unsubsidizing farmers.

Or, heck, you might not like it. But I think you should know more about it anyway.

[kleiba]

Why, what experience is it?

[thaumasiotes]

From memory:

Food production (amount of food) rises, while falling as a share of GDP. Agricultural productivity (food output production per unit input) shoots up. A lot of land is repurposed from sheep to other products.

And of course, subsidy spending goes way down.

[witty_username]

I eat food from the poor country India (I live in India). Sure, food standards aren't as good, but I'm fine.

> Poor countries without standards for food safety, scruples about burning down rainforest for a few years of fertility, or worker rights or fair wages.

The wages are bad but if you don't buy from poor countries their wages will be even worse.

[icantdrive55]

Walk through the produce section at Whole Foods, or Safeway.

Play a little game. Try to find the fruit, or vegatables that arn't produced in the rich country, fair wage country, safety conscious country of Mexico.

[colechristensen]

If even a simple majority of the calories you consume come from the produce aisle, you are in a tiny elite minority.

Even then, where it was produced doesn't matter much, if it wasn't grown in Mexico or shipped in from somewhere more exotic, much of the human labor was likely done by migrant workers from Mexico anyway.

Let's not pretend that the working conditions for the unmechanized portions of most produce-related jobs are anything but appalling.

To put a fine point on it, I don't want any part of my quality of life to be put on the backs of a workforce outside the middle class (or a foreign equivalent through trade)

----

The question is – is your goal replacing all food production with foreign wage-slaves? Are you holding up the current American market for "unsubsidized" produce as a shining beacon to be emulated? If you look into it, you realize far too much of it exploits the desperate and poor and creates shitty situations everywhere it goes. Proper subsidies and market regulations could mean that you could be proud to be a part of the food economy instead of feeling like a 21st century colonialist.

[meanduck]

Everyone is egocentric. For countries, egocentric-ness is maximum.

UBI/FB like threads are filled with comments that seemed to forgot this so obvious fact of life. Its the worst thing about HN.

[colechristensen]

What point are you trying to make?

[meanduck]

No country subsidize for other countries. Certainly not for moral reasons.

Subsidizes get introduced either to score political points and/or bribes. Thats it.

[ArkyBeagle]

It's a way of bandlimiting (lowpass filtering?) price change through mild overproduction.

It works because overproducing food costs less than the risk of market shortage transients. It's one of those Catch-22 moments where you feel in awe of the genius of it.

I am very sorry it is a significant fraction of your state budget. Given the nature of the risk profile your state should not be underwriting this risk.

[kyllo]

In manufacturing terms it is a way of encouraging the use of inventory to buffer against demand volatility and reduce the probability of shortage events.

[oxryly1]

Some (likely outdated) idea to do with treating farming capacity as a strategic reserve.

[hkmurakami]

There's some rogue political wing in Japan that wants to have 100% capacity for domestic food production to meet domestic consumption needs. They've been pushing for subsidies for years to achieve "food independence", whatever that means.

I imagine their true goal is to just pad their pockets.

[ArkyBeagle]

It really seems to more of a sacrifice to some god of the Apocalypse to me. Although given the history of Japan since the Meiji period, nothing should surprise me.

Medieval Japanese culture is just so achingly beautiful it does not surprise me that people have such love fr it.

[Kenji]

Look, in war times, we can plant potatoes in all our gardens and take our spare meadows. We don't need these farmers in peace time; we really don't. They are leeches.

[rtkwe]

Tiny little farms like that wouldn't be a huge amount of food. It's vastly inefficient compared to a huge factory farm and you can just summon up the tractors and watering infrastructure to properly run a farm.

[sverige]

Tell that to those who lived under the Soviet collective laws. They were allowed something like 1/2 acre to grow food for their families. Those little patches produced a significant amount of the food that wasn't grown on the collective farms.

Of course, a lot of that had to do with incentives....

[ittekimasu]

Great idea! Maybe this could help Venezuala. Oh wait...

[vidarh]

Some places can - if you have huge gardens and areas you're free to make use of. Many can't.

Norwegian farming policy is focused on maintaining near-independence in the food supply because the British embargo during the Napoleonic wars in the early 1800's is still seared in the collective consciousness. E.g. every Norwegian primary school child will go through the very long, very tedious poem "Terje Vigen" about a man who tried to evade the British embargo by taking a small boat to Denmark to get food to feed his starving family.

Starvation happened despite farming most of the available land.

The concern of local food production rose to prominence again during World War II, when German occupation meant strict rationing, which led to "fun" food innovation such as flour substitute made from bark, as growing vegetables etc. in your back garden simply doesn't produce enough for most people to sustain a family.

[kwhitefoot]

That's not the only reason for Norwegian farming policy. Another is to ensure that non-industrial areas and areas where it is simply difficult to live do not become entirely depopulated. I live and work and pay tax in Norway and I am quite happy with the basic principle that the country should produce most of its own food; it helps to reduce the tendency to race to the bottom of the market and, if done well, promotes pride in quality. Of course it is not easy to export the Norwegian experience to a much larger country like the US with a different political system and much higher concentration of ownership of the farms and also difficult to export it to a smaller much more densely populated country like the UK. But that doesn't mean it wouldn't be worth trying to learn from it.

Don't mistake me, I'm not claiming that Norwegian farming policy is perfect, merely that it does seem to work at the moment.

[trapperkeeper79]

Terje Vigen is a fascinating tale .. thanks for pointing it out. Does it end in a cliff hanger or does he exact revenge on his captor???

[cheez]

Why would it be outdated?

[oxryly1]

The days of sieges and naval blockades are behind us now. Probably.

[ArkyBeagle]

Then there are those "aircraft carriers made of sand" in the South China Seas.

[icantdrive55]

I wouldn't mind subsidizing smaller farmers. Larger farmers shouldn't be subsidized.

The government would need to prevent large companies from splitting up, and suddenly overnight you have 20 different small companies. They could beef up legal penalties for any blatant, repeated shinagigans. (Will never happen? The money their lobbyists sending congress is staggering?)

It's a shame how taxpayer money is wasted by administrators/politicians.

In the Bay Area, we have a lot of civil engineering jobs. (Those street repair/pipe jobs that never end, and tie up traffic for years). For years, it seemed like one company got all the work-- Billotti Brothers. (Didn't use their real name, out of fear.)

Even though every project required three bids, by three different companies, it seemed like Billotti got all the work. I used to wonder why. They must be one efficent company?

The Internet arrived, and people had some honest questions, basically, the main one was, "Is this the only company?"

I then noticed news papers started to list the construction companies that lost out on the bids. I looked into these companies. They all seemingly were founded by a Billotti? It looks like they sent their kids to Sacramento to get their contractors licenses? (Very easy to get).

These companies then all bid on projects. The lowest bid won! "Hold up a glass of red wine!"

And of course, they didn't plan this wacky coincidence, commingle assets("I don't need that grader brother."), share workers, work on eachother's projects--never.

And I actually don't have a clue to what they did, but it just doesn't look right. And it all could be legal--I just don't know? Or maybe, all the kids/grandkids just followed in dad's footsteps, and got into construction aspect of civil engineering?

(Edit: If I recall, the whole save the American farmer thing was started when I was a child. It sounded great, but farmers bought up all the small farmers, and the subsidies never stopped. Sorry about going off topic with the Billotti Brothers. I've become so dissalusioned with our society.)

[sfifs]

In general, the reason to have farm subsidies is to maintain sufficient farming capability to provide food to the population in case a major disruption (blockade, war etc) that makes it difficult to import food. If not present, this dependency on outside for food can be used as leverage by others and not providing population with food is recipe for civil unrest at the weakest moment.

If you don't provide farming subsidies, farming will move to countries with cheap labor and people with knowledge and capability for farming will become too few to ramp up quickly in case of emergency.

[valvar]

Farmers do! And farmers also vote. And that's the reason for why they are subsidised. Farmers have a special interest in receiving subsidies, and politicians gain far more by pandering to them than by saving a little bit of money for everyone else.

[kwhitefoot]

I presume you are thinking mostly of the west here. Farmers voting has little or no impact on policy. In most developed countries total employment in farming is less than 5% of the population.

[valvar]

You'd be surprised how much a vocal minority (which is a lot more than 5% in agricultural states) can push senators around. Still, even 5% of the population constitutes a very powerful special interest.

[gdwatson]

Isn't the whole point of free trade agreements to prevent those sorts of tariffs? Does NAFTA not cover cheese?

[QuarterReptile]

The host of one of my favorite podcasts once asked Milton Friedman (huge free market guy, in case someone doesn't know) what he thought of NAFTA, and Friedman said he didn't like it. Friedman said that a real free trade agreement would've been one page, rather than the pile of exemptions it turned into. Everyone with the political clout to make it to the table was able to keep their protectionism somewhat intact.

[cperciva]

Yes, that is the point. No, NAFTA does not cover importing dairy products into Canada; similarly the USA kept tariffs on some dairy products as well as sugar and peanuts.

Unfortunately pretty much all "free trade" deals turn out to be "free trade except for a small number of politically well-connected industries". :-(

[makomk]

Or (for example) "free trade, except that Canadian companies can no longer sell Canadian cheese to Canadians at parmesan-style to help the Italian cheese industry".

[nyolfen]

Kvetching by free trade acolytes about 'real' free market capitalism reminds me strongly of leftists bickering about the USSR not actually being communist.

[colechristensen]

'real' free market capitalism can't exist because without proper regulation, power/wealth tends to concentrate to a level where the strong ruin the 'free' bit.

'real' communism can't exist (outside small rare communities) because the industrial revolution failed to bring about a post-scarcity economy which was marx's failure of prediction.

A post-scarcity economy which eliminates the importance of capital is probably very possible in the future. Complete hands off capitalism probably is never going to be possible.

[cmarschner]

Communism failed because of human nature. It is incentives gone wrong. If there is no pressure to become more efficient, or even remain efficient, things will become less efficient and everybody suffers (to the point of starvation). Central planning failed due to complexity of the task.

Free market / small government doesn't work because a) it is inherently unstable due to power laws (rich get richer), b) lots of externalities (e.g. environmental damage) not being priced in, c) lower overall wellfare without government spending on infrastructure etc. In the end, it won't work because of human nature (incentives gone wrong).

So the challenge is to design the system for a society such that incentives are set right, such that a) there is efficient production such that the society can survive in the short run b) it is sustainable such that it and the whole ecosystem can survive in the long run. The past 50-100 years made a lot if progress on a), and the next 50-100 years need to solve b).

[brandmeyer]

I'm missing the part of this scheme where you need to have a large cache of aluminum in any form to make this work.

Related: The Chinese regulations on export of neodymium magnets is similarly structured. Exporting the magnets or the raw metallic ingredients is subject to high tariffs, but export of finished products using them is not. This isn't just about energy exports though, it's straight up protectionism of their manufacturing businesses.

[joe_the_user]

Well,

If the aluminum they're getting is worth more than they're paying for it, they want to buy and export as much as possible. They then store it until they can sell it at the appropriate price. Especially considering that you'd assume the loophole is going to close sooner or later.

[liztsai]

If you're taking a protectionist view of their manufacturing business, China relaxing duties on finished goods would make sense. It's unclear (to me anyway) that that decision was made with the intent to spur raw aluminum exports vs some clever guys putting two and two together.

And yes, in case the loophole closes. These guys may have been the largest operation that some guy flew a plane over but they probably weren't the only ones.

[novaleaf]

a guess: in case China closes the loophole.

[wangchow]

Where does one go to learn about such things? Is it economics? Any recommendations? Thanks in advance!

[rwmj]

Sounds like the real problem is the power subsidy.

[Bakary]

How do people sniff out these deals?

[fredgrott]

until the differences in costs of power to re-melt changes..of course that is why more than one country is used..