Significant Transformation & China Circumvention Investigation

“Domestic Producers [U.S. steel mills] maintain that the process for completing CRS from HRS is minor or insignificant. Under Section 781(b)(2) of the Act, the Department considers five factors to determine whether the process of assembly or completion is minor of insignificant. Domestic Producers allege that the production of HRS in the PRC [People’s Republic of China], which is subsequently further processed into CRS in Vietnam, comprises the majority of the value associated with the merchandise imported into the United States, and that the processing of HRS into CRS in Vietnam adds relatively little value.”

Commerce then goes on to name the five factors they use:

1) Level of Investment: The domestic steel mills contention is the cost of the re-rolling equipment is minimal compared to that of an integrated steel mill which melts iron to make steel. They use the cost of an integrated mill vs. that of a mini mill because “…90 percent of the steel production in the PRC comes from fully integrated steel mills.”

2) Level of Research and Development: The U.S. steel mills contend that the level of research in Vietnam is either “minimal or non-existent.”

3) Nature of the Production Process: The U.S. steel mills believe the production process to roll cold rolled from HRS is much less complicated than “…melting and refining, casting molten steel into semi-finished forms [slabs], and hot-rolling the semi-finished forms into HRS…”

4) Extent of Production Facilities in Vietnam: The domestic steel mills contend there is no facility in Vietnam capable of producing HRS. Also, “…Vietnam has limited production facilities that would allow for production of CRS to support the significant increase of imports into the United States from Vietnam.”

5) Value of Processing in Vietnam: The U.S. steel mills point to a recent investigation by the ITC (International Trade Commission)which states, “…the price of HRS is consistently between 80 percent and 90 percent of the value of CRS… Domestic Producers estimate that the cost of manufacture for the CRS operations value added in Vietnam is less than ten percent….”

Trade attorney Lewis Leibowitz told Steel Market Update that he was disappointed in the Commerce Department ruling as, according to Leibowitz, “cold-rolling clearly creates a different class or kind of merchandise from hot-rolling.” He was dismayed that Commerce did not address that issue in the initiation notice.

The fact that Commerce initiated an investigation does not mean their final determination will be to rule in favor of the domestic steel mills. However, this is a very political year and the Trump Administration is expected to be very pro-steel (Politico reports that Wilbur Ross and Dan DiMicco are two potential appointees to head the U.S. Department of Commerce).

When the Circumvention Complaints were first filed Steel Market Update asked trade attorney Lewis Leibowitz the following question:

2) What are the chances of the US DOC changing the definition of “substantial transformation”?

“ANSWER:  Commerce has the discretion to change its definition and is not bound by previous decisions.  So the chances are non-negligible.  The “substantial transformation” standard is often used by Customs in country of origin cases, but Commerce is not bound by Customs’ views on particular products.  In other words, Commerce can disagree with Customs on whether a particular process is a substantial transformation.  For AD/CVD purposes, Commerce’s determination is conclusive.” 

There are two separate circumvention complaints: cold rolled and CORE (corrosion resistant steels such as galvanized and Galvalume). The issues with the CORE complaint are similar to what was discussed above regarding cold rolled steels.