NUE Nucor Corporation

The Department of Commerce is expected to launch a formal investigation Monday into whether Chinese steel companies are shipping steel through Vietnam to avoid U.S. import tariffs, according to a person familiar with the matter.

The decision to investigate follows a complaint in September from U.S. steelmakers, and is an escalation of U.S. efforts to stop a glut of China-made metal from flooding U.S. markets. The inquiry could result in new tariffs on steel imported from China via Vietnam, under rules designed to prevent such a tariff-evading practice, known as circumvention.

U.S. steel producers alleged in their complaint that Chinese steelmakers have shipped metal to Vietnam, made enough changes to it that they could then classify it as Vietnamese and then shipped it to the U.S. under the lower tariffs charged on Vietnamese steel.

A spokesman for the Dept. of Commerce declined to comment.

At the heart of the issue is whether the changes—for example adding zinc to make it corrosion-resistant—fundamentally alter the steel enough to make it essentially a brand new product that is "Made in Vietnam."

A letter written to Commerce by lawyers for some U.S.-based steelmakers says that coating the steel involves "relatively small investment, adds relatively little value, and adds no components or mass whatever."

Importers of Asian steel in the U.S., who could end up paying higher prices, complain that they're being unfairly penalized. Minmetals, Inc., a New Jersey-based steel trading company that is opposing the investigation, argued in a letter to Commerce that "a substantial transformation occurs" when steel is coated.

Under pressure from American steelmakers, the U.S. in the past year has imposed tariffs as high as 266% on at least four new categories of steel from China. That initially allowed U.S.-based steelmakers to charge more for their steel, so they grew concerned when steel from Vietnam started flooding into U.S. ports. And in September, four of the steelmakers—U.S. Steel Corp., Nucor Corp., AK Steel Holding Corp. and ArcelorMittal— filed their petition with Commerce.

A spokesman for ArcelorMittal said the company was looking "forward to the outcome of the investigation."

Independent trade data supports what the steelmakers are alleging. In the first six months of 2016, shipments of steel from Vietnam to the U.S. increased to 312,329 tons, from 25,756 tons in the year earlier period. Over the same period, Chinese exports of steel to Vietnam rose 46% to 6.3 million tons from 4.3 million tons, according to data firm Global Trade Information Services.

The fight to contain the market glut of metals from China extends beyond steel. Commerce and the Department of Homeland Security are also looking at whether China Zhongwang Holdings Ltd., one of that nation's biggest aluminum producers, improperly shipped aluminum through Mexico and transformed the metal at a plant in New Jersey to avoid U.S. import tariffs.

China Zhongwang has denied any improper activity.

Write to John W. Miller at john.miller@wsj.com

(END) Dow Jones Newswires

November 06, 2016 20:45 ET (01:45 GMT)

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