SYLVIE DOUGLIS, BYLINE: This is PLANET MONEY from NPR.
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KEITH ROMER, HOST:
David Rashid had worked setting up and running auto parts factories for the better part of two decades when he got this job offer that would launch him on a very strange journey.
DAVID RASHID: Some friends of mine called me up and asked me if I could help them out with a business that they had invested in that made power-steering hoses.
JEFF GUO, HOST:
These hoses - they're skinny. They're made of rubber and steel. And they're vital to the power-steering system in your car. And that is about as technical as we're going to get for now.
ROMER: That's about as technical as I think I can get.
GUO: (Laughter) Anyway, David's friends, who offered him this new job - they worked for a private equity fund that had just made this big investment in a company called Plews & Edelmann. It had plants in both the U.S. and Mexico.
ROMER: So when you were brought on, what was the mission that they gave you? What were you asked to do?
RASHID: Fix it.
(LAUGHTER)
ROMER: Fix what?
RASHID: Fix the trend.
ROMER: The downward trend. Plews & Edelmann was struggling. A Chinese company called Qingdao Sunsong had started selling their own power-steering hoses. And their prices were so low that they were taking away customers.
GUO: David takes the job, and he gets to work. He figures out how to make the company more efficient in all these different ways.
RASHID: You know, we worked on bringing the inventories down. We worked on consolidating two manufacturing facilities into one.
ROMER: This sounds like a lot of Excel spreadsheets were created during this process.
RASHID: Oh, Lord, absolutely (laughter).
GUO: David says they did eventually get to a point where they could produce their hoses for a lot less, but they were still losing business to that Chinese competitor, Sunsong. David was checking in with buyers from the big auto parts stores, and they told him, Sunsong's hoses were still cheaper.
ROMER: And then, David's company gets thrown a lifeline. The Trump administration fires one of the first shots in this ongoing trade war with China - a new 10% tariff on, among other things, auto parts made in China. In 2019, that 10% tariff is increased to 25%.
GUO: David knows that Qingdao Sunsong has these two North American subsidiaries in Ohio. And now, when those subsidiaries import steering hoses from China, they will have to pay a 25% tax on the value of those hoses, which should drive up how much Sunsong charges its customers.
RASHID: I thought, OK, now we're going to see, you know, a change. And now we're going to have an opportunity to potentially take some business back. But that's not what happened.
GUO: David says, somehow, despite these new tariffs, Sunsong's prices stayed low.
RASHID: And so we we're scratching our head. We were saying, hold on - tariffs came in, and yet we're still not competitive? How does that work? How does pricing not change if tariffs just kicked in?
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GUO: Hello, and welcome to PLANET MONEY. I'm Jeff Guo.
ROMER: And I'm Keith Romer. The thing that had David Rashid scratching his head - it goes right to the heart of one of the big reasons for the tariffs on Chinese imports for both the Trump and Biden administrations.
GUO: Yeah, among other things, these tariffs are intended to help American manufacturers - to keep companies like David's from being wiped out by their Chinese competitors by helping them compete on price. But for David's company, the tariffs were, for some reason, not doing that.
ROMER: Today on the show - the wide gulf between how tariffs work in theory and how they actually work in practice and David's quest to figure out what, if anything, he could do about it - a quest that will involve international detectives, forensic chemists and good, old-fashioned American bureaucracy.
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ROMER: David Rashid thought that the new tariffs on Chinese imports would force his Chinese competitor, Sunsong, to significantly raise its prices, which would help his company win back customers. But two years after the tariffs went into effect, neither of those things had happened. And David's company, Plews & Edelmann, was having real problems. They had to sell off a division and lay off about 50 workers.
RASHID: You know, these are good people. But as the size of your business shrinks, it's impossible to continue to keep them on. And so there are absolute consequences to us if we can't successfully compete with Sunsong.
ROMER: David knew he had to get to the bottom of this mystery of how his competitor, Sunsong, had managed to keep its prices low despite the tariffs. He brought together all of his company's brightest minds.
RASHID: So we put together, like, a - you know, a - it's like an A-team of different skills. And we started asking the question - how are they doing this, and what are we going to do to investigate? 'Cause we felt like something was going on, but we didn't know. We didn't even know where to look.
GUO: One member of that A-team was Plews' head of IT. He was like, you know, we can actually go online and look up all of Sunsong's shipments coming into their U.S. subsidiaries. We can see what's in them and where they're coming from.
RASHID: And what we were able to see was, before - let's say mid-2018 - they were importing all of their product from Qingdao Sunsong, which was their parent in China. Then, the tariffs - just before the tariffs hit, there's this, like, void where we don't see any importations. And then, in 2020, it appears again. But now they're pulling from some place in Thailand - a company we had never heard of - called Imperial Cable.
ROMER: And there's a logic to Sunsong changing things up and getting some of its product from a Thai supplier. The tariffs that the Trump administration put in place - they were not on Chinese companies. They were on goods made in China. So any Thai-made hoses would be able to come into the U.S. tariff-free.
GUO: But after looking over all the import data for Sunsong, David was like, I'm not sure that is what's going on here. So he had some folks from his team go down to their local auto parts store to buy a few of those Sunsong hoses.
RASHID: Some of them said, country of origin - China. Some of them said, country of origin - Thailand. And that made sense because, as you go through a transition - right? - the inventory on the shelf, some of it's going to be a little older, and so it came from China. And some of it's going to be newer, and it came from Thailand.
ROMER: They took the hoses out of the bags, the Chinese-made hoses and the ones from Thailand, and they compared them, these two skinny, black rubber hoses with metal fittings and tubes on the end.
GUO: They looked at the design of the hoses, the look and the feel of the rubber, the way the little metal joints at the end were shaped.
RASHID: And we could not see any difference. And, you know, because I spent 15 years manufacturing this stuff, I'm used to having two plants that are supposed to be making the same product, but, you know, in spite of our best efforts, it's hard to get it exactly the same.
GUO: A suspicion starts to crystallize in David's mind. Is Sunsong really making hoses in Thailand? Or is it just shipping Chinese-made hoses via Thailand to get out of paying the tariff? - 'cause that would be fraud.
ROMER: At this point, David wasn't thinking about what he was doing as collecting evidence for some future government investigation. He was just trying to figure out for sure what Sunsong was up to.
GUO: He sends samples of Sunsong's hoses to a couple of labs that specialize in what's basically forensic analysis, one in Canada and one in Ohio.
ERICK SHARP: I'm Erick Sharp. I'm the CEO and founder of ACE Laboratories.
GUO: Erick runs the lab in Ohio, and he says this is not the first time a company has come to his team asking the kinds of questions David was asking.
SHARP: What's happening a lot is these producers in China, which are subject to these tariffs, are setting up a factory in Southeast Asia. But the thing is, is it's normally just a foothold. So they'll produce maybe 10% of what they're doing. The rest of it, they'll actually ship product into and just use it as a hub for moving product through, not actually manufacturing.
ROMER: This is called transshipment, which isn't illegal. But it is illegal if you're using it to get out of paying tariffs.
GUO: A few years ago, Erick was in Vietnam and Thailand as part of a trade mission, trying to make connections between U.S. and Southeast Asian companies. And while he was there, he thinks he saw signs of this kind of illegal transshipment firsthand. He visited some new factories - to be clear, not Sunsong factories but just plants that had started shipping a lot of goods to the U.S. And the factories, they just seemed too small to produce everything they were exporting. Also, when he asked for a tour, they were like, no, no, uh-uh, not a chance.
SHARP: Those two things together makes you question the legitimacy of if it's actually being manufactured there.
ROMER: There is not any reliable data about just how much illegal transshipping is going on. It's illegal so, you know, companies are trying to hide it. But when you look at how much countries are importing and exporting in total, there have been some interesting patterns since the tariffs went into effect. China is now exporting less to the U.S., but at the same time, it's exporting more to intermediate countries like Thailand and Vietnam and Mexico. And those intermediate countries, they are now sending more goods into the United States.
GUO: A lot of that shift in trade flows is legit, whether it's American companies buying more from those intermediate countries or Chinese companies setting up factories there. But at least some of that shift in trade flows is cheating.
ROMER: Anyway, to see whether the Sunsong steering hoses that David had sent, the ones from China and the ones from Thailand, are in fact the same hoses, Erick's lab runs them through this whole battery of tests.
SHARP: Yeah, this is the rubber nerd's version of CSI.
GUO: First, they look at the material that's used in the hoses.
SHARP: One test is called TGA, which is thermogravimetric analysis.
GUO: Thermogravimetric analysis is this really neat process where you cut off a chunk of the rubber so that you can burn it and see what happens.
SHARP: So everything that's inside of a rubber component has a point to where it burns and volatilizes. So what this test does is it slowly ramps up temperature, and it weighs how much is burning off at each temperature point. So we can say, oh, it's got X amount of polymer, X amount of filler, X amount of plasticizer in it and break it down quantitatively in that way.
GUO: They run all these other tests. And when they compare the results for the two hoses, everything looks really similar.
SHARP: So there was no deviation we...
ROMER: So that - you lit the two pieces of rubber on fire in a variety of ways, and they seemed to be basically made of the same stuff? Is that - that's the takeaway?
SHARP: Yeah. Yeah. And that's always the first screening check.
GUO: The next check involved cutting open the tube and comparing the thread and the metal inside used to reinforce the tube - and, again, exact match. Also, the metal fitting on the end of the hose - it was clearly crimped by the exact same crimping tool.
ROMER: Erick says the chances that the steering hose labeled made in China and the steering hose labeled made in Thailand were actually made in different factories is basically zero.
SHARP: If they're able to match in two different locations like that, they have a pretty good engineering team 'cause I've never seen a company do that before.
ROMER: Erick sends David this whole forensic report, and David's like, I knew it.
RASHID: It told us that the Thai parts and the Chinese parts, we believed, in our opinion, were coming from the same location, and therefore, it suggested that they weren't being manufactured in Thailand.
ROMER: And if they're not being manufactured in Thailand but in China, then it sure looked like trade fraud. And David thinks proving that Sunsong is committing trade fraud could help his company get some of its business back.
GUO: Now, David wasn't only gathering forensic evidence. He had also been pursuing a separate, more direct mode of investigation to figure out what was going on at Imperial Cable - you know, that Thai company that, at least according to the import records, was manufacturing hoses for Sunsong.
ROMER: For this part of the story, bear with me. We actually have to go back in time a little bit to this one night when David met an Israeli guy named Gilad at a crossfit class.
RASHID: One day, after a hard workout, we're all lying down, just exhausted. And we just start chatting. And we start talking about hummus of all things because, I mean, my background, my father's Palestinian. And so we start chatting about hummus. And I love to cook, and I make hummus. And he loves to cook, and he makes hummus.
ROMER: I mean, just try to find me a more stable foundation for friendship. You cannot.
GUO: (Laughter).
ROMER: Anyway, over time, David and Gilad become good enough friends for David to learn that when Gilad did his military service in Israel, he made some connections in military intelligence and that now he runs a cybersecurity company that knows its way around some of the darker corners of the internet. OK. And so this is where it gets back to the story about the power steering hoses because when David is looking around for ways to investigate imperial cable, he's eventually like, maybe I should ask Gilad if he's got some connections that could help me here.
RASHID: And at first, I was really nervous because I thought, I don't want him to think that I - you know, I didn't - I just felt awkward asking, you know? I felt like somehow it was not appropriate, that...
ROMER: Wait, why did you feel that way?
RASHID: I don't know. Like, hey, can you put me in touch with your secret agent buddies? Like, you know, that's not...
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RASHID: You know, that's not something I felt necessarily comfortable with, but effectively, that's what I asked. And he said - you know, and he's such an entrepreneur. He's like, David, no problem. I got you covered. Walk me through your situation, and then I'll see what I can do.
ROMER: Gilad ends up connecting David with a private investigation firm that has assets on the ground in Southeast Asia.
RASHID: We were having weekly calls. I was talking to someone in Cape Town, someone in Tel Aviv and someone in Thailand.
GUO: David needs them to dig up some concrete proof that the Thai company, Imperial Cable, is not manufacturing these hoses, that the hoses are still all coming from China. So the investigators head to the ports.
RASHID: So we can see very clearly all of the product coming from Thailand to the United States. All that information is available. It's public. What you can't see is the product from China into Thailand. But this is information that our investigators were able to obtain from a confidential informant.
ROMER: So they had a guy on the inside who who was - who could, like, show them the paperwork. Is that what I'm to understand?
RASHID: That's how I understood it.
GUO: This new port data from Thailand put a whole new company on their radar, a company called Virayont.
ROMER: They could see Sunsong was shipping hoses from China to Virayont. And then somehow, those same hoses were showing up as imports to one of Sunsong's subsidiaries in Ohio coming from the other Thai company, Imperial Cable.
GUO: So to try and figure out how these two Thai companies are connected, the investigators do some more digging.
RASHID: And then they were able to get the financial information for these two companies out of Thailand.
GUO: The investigators send all these documents to David, and he starts poking around.
RASHID: You get into it, right? Like, you burrow into this data, and it just - it's infinite.
ROMER: David - he has been looking at financial reports for decades. He lives and breathes this stuff. And the more he looks at the numbers, the more suspect it all seems. He's like, this is not what your records look like if your primary business is manufacturing things. These records - they're more like what you'd see from companies that make their money warehousing things for some third party.
GUO: Eventually, David would learn that Virayont and Imperial Cable were, in fact, deeply intertwined. They were run and owned by the same people. They were even located in the same building.
ROMER: Virayont and Imperial Cable did not respond to our requests for comment. But what seemed to be happening was that Virayont was bringing Sunsong cables in one side of the plant, and then Imperial Cable was sending them out the other side. And somewhere in that process, Sunsong was able to magically transform their Chinese hoses into Thai hoses. Voila. No more 25% tariff.
GUO: David was like, this is it. We have got them. Now what?
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ROMER: After the break, what happens when David takes all that evidence he's gathered and gives it to the U.S. government?
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ROMER: Okay, so David had managed to gather all this evidence - physical evidence that showed that the Chinese-made steering hoses were the same as the ones that were labeled as being made in Thailand, and trade and financial evidence from confidential informants in Thailand that corroborated that physical evidence. But it was not totally clear what he should do with all that evidence.
GUO: And look, in an ideal world, if some company was violating U.S. trade laws, the U.S. government would have already found them out and stopped them. Kind of the first line of defense here is Customs and Border Protection. This is the federal agency that has the authority to take a look at every planeload, every shipping container and package that comes into the country.
ROMER: But there's a reason Customs might not catch something like steering hose fraud. The sheer volume of stuff that comes into the U.S. is mind-boggling, more than $3 trillion worth of imports every year. And Customs has to police things like illegal shipments of fentanyl and guns. It's a lot.
GUO: So in 2021, David embarked on the next phase of his journey, trying to get the government to act. First, he reached out to some trade lawyers. They told him that what you want to do is file something called a False Claims Act lawsuit. Basically, it's a way of saying to the Department of Justice, I know this other company has been lying to the government, and I can prove it.
RASHID: So we put it all together - the financial data, the trade data, the lab data - and we gave it to the Department of Justice and asked them to intervene. And six months later - five months later, they came back and told us that they declined to intervene.
GUO: All that work, and then nothing.
ROMER: You spent years gathering all of this evidence, and they say, yeah, sorry, we can't help you. Like, how did that make you feel?
RASHID: Deflated. I mean, my partner and I - I'll never forget. We're sitting at the same table. We had the call set up. We were expecting success. And when we got the news, we just looked at each other, and we put our heads into our arms. And we were like, what are we going to do now? Oh, my God.
ROMER: Because remember, they are sure Sunsong is doing something illegal. They think Sunsong is keeping their prices low, in part, by committing trade fraud. And for years now, David's own company, Plews and Edelmann, it has been losing business to Sunsong and losing money.
GUO: David thinks, there has to be some way we can do something with all this evidence we have. So he fills out what's called an e-allegation on the Customs and Border Protection website, but that doesn't seem to go anywhere either. And around this time, his lawyers tell him, you know, there is one more thing we can try. We did just hire this new guy.
JASON KENNER: My name is Jason Kenner, and I'm the litigation lead at Sandler, Travis & Rosenberg.
ROMER: Before joining Sandler, Travis & Rosenberg, Jason had worked for a different part of the Department of Justice than the one David had been talking to before, for a team called the Trade Fraud Task Force. He says, look, the way the government is set up to deal with trade fraud cases, it's kind of a mess.
KENNER: What you have is a very fragmented approach. And, you know, everyone has their own little fiefdoms and their own little tools, and you don't want to get into each other's ways.
GUO: But Jason thought that the little fiefdom where he used to work, the Trade Fraud Task Force, they might actually be able to help David. I mean, it's right there in the name. They fight trade fraud - or at least they try to.
ROMER: How many attorneys work there?
KENNER: If there's two or three on there right now, I think we're lucky.
ROMER: So David and Jason have all these calls over the course of months with the Trade Fraud Task Force. But then, at some point, the calls stop. They've given the task force all the evidence they have. And once again, all David can do is wait.
GUO: Jason says, He now understands how hard this opaque, slow-moving process is for companies in a way that he never did when he worked for the government.
KENNER: I never truly grasped the gravity of the situation until I, you know, got into private practice. And you start talking to companies about, you know, what is this really doing to me? And you know, wait a minute - you're tell me a case can take five, six, seven, eight, nine, 10 years. I can tell you, I'm not going to be here in five, six, seven, eight, nine, 10 years. So, you know, I've always understood the importance of trade enforcement. I have a new appreciation of not only you need robust enforcement, but you need quick.
GUO: And presumably, enforcement may be even harder to come by now that the U.S. has slapped tariffs on what was its largest trading partner, China. I mean, think about it. There are so many companies in China that export to the U.S. And now a lot of them have at least an incentive to try and skirt the rules. There's just a much bigger pool of potential scofflaws.
ROMER: OK, so once David had taken things as far as he could with the Department of Justice, he reached out to the congressman for the district where Plews and Edelmann is located. And the congressman took a big interest in this case. A committee he was on wrote a letter to the Department of Homeland Security, accusing Sunsong of trade fraud, which is why it's hard to say what ultimately led to the government taking action in Plews and Edelmann's case. But earlier this year, things started to happen.
RASHID: So in January, I think it was the 18 of January, the Department of Homeland Security raided Sunsung North America's facilities in Moraine, Ohio.
ROMER: Federal search warrant, investigators crawling all over the place for hours.
RASHID: And Department of Homeland Security just indicated that it's part of an ongoing investigation.
GUO: Now, we reached out to Qingdao Sunsong and its subsidiaries in the U.S., but they did not respond. And no one from Homeland Security or Customs or the Department of Justice was willing to comment on the case. But the way this usually goes is that prosecutors will review the evidence they've seized, and if they think they've got enough, they will put the case in front of a grand jury and try to get an indictment. If that happens, Sunsong could face millions of dollars in penalties, and some of its employees could even face prison time.
RASHID: You know, when we got into this, I didn't anticipate this taking this long. But I can't give up.
ROMER: David has spent five years and, he says, north of $1 million gathering evidence and trying to get the government to take action against Sunsong. It's been a hard road for him and his company.
RASHID: I mean, you know, we have - yes, we've made - you know, we've had layoffs, and yes, we've lost business. But we can rehire, and we can build back our business. And so I'm optimistic. I have to be.
ROMER: So on the one hand, this is a story about how the United States enforces its trade laws and how hard that can be. But there is this other story kind of hidden behind that first one. That story is about how tariffs actually work in a globalized world.
GUO: Yeah. These tariffs are designed in part to be a kind of wall protecting American companies from their Chinese competitors. But tariffs don't necessarily work as well as they once did. There are so many ways around that wall now. Some of them are illegal, like what Sunsong seems to have been doing by just shipping things through Thailand. But there are also perfectly legal ways around that wall. For one, Chinese companies can simply assemble or manufacture their goods in other countries. And this has been happening a lot. Since the tariffs went into effect, there are all these new Chinese-owned factories going up in Vietnam and Mexico and Thailand.
ROMER: Even Sunsong seems to be taking this more legitimate route. Financial records suggest that in the last few years, they have invested millions of dollars setting up an assembly plant in Thailand. It won't get them out of legal consequences that might come from that raid on their U.S. subsidiary, but it might let them shift enough production work to Thailand that they will legally be able to export power steering hoses to the U.S. tariff free.
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GUO: A quick note - in this episode, we mentioned the Department of Homeland Security, which is a sponsor of NPR.
ROMER: Today's episode was produced by Emma Peaslee and edited by Molly Messick. It was fact-checked by Sierra Juarez and engineered by Ko Takasugi-Czernowin. Alex Goldmark is our executive producer. Special thanks today to David Applegate (ph) and Emily Blanchard (ph). I'm Keith Romer.
GUO: I'm Jeff Guo. This is NPR. Thanks for listening.
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