Free Trade Agreement Series: Part 4- The New Korean Market and Rules of Origin
A free trade agreement approximately six years in the making is now a reality for Korea and the United States. Just as with other FTAs, this new market access allows for reduced and sometimes eliminated tariff rates and quotas as well as duty-free treatment of goods and services with an emphasis on leveling the playing field for U.S. auto manufacturers and workers. The agreement entered into force on March 15, 2012 making approximately 80% of U.S. exports to Korea duty-free. For decades most Korean exports to the United States have already enjoyed duty free treatment here under the Generalized System of Preferences. In the next five years, approximately 95% of bilateral trade in consumer goods will become duty free and remaining tariffs eliminated with ten years. Also in line with other FTAs, UKFTA has certain exclusions to the general duty-free rules including safeguards on motor vehicles and textiles.
Similar to NAFTA, there are certificate of origin and record-keeping requirements (see FTA series parts 1 and 2 and 19 U.S.C. §3805 note Publ. Law 112-41 Secs. 206, 508 http://www.gpo.gov/fdsys/pkg/PLAW-112publ41/pdf/PLAW-112publ41.pdf). And like all other FTAs, UKFTA has stringent rules of origin (“ROOs”) importers and exporters must follow in order to claim duty-free treatment. As with any other ROOs, the ones found in Section 202 of the UKFTA implementation act, can be very confusing and require a certain amount of saavy when it comes to deciphering what goods may be included and what goods may not.
There are three situations in which a good may be eligible for duty-free treatment under UKFTA. First, and most logically, a good is originating if it is “wholly obtained or produced entirely in the territory of Korea, the United States, or both…” 19 U.S.C. §3805 note, Publ. Law 112-41 Sec. 202. However, if a good is produced in one of these countries but also contains materials from a different country, “nonoriginating materials”, then the nonoriginating materials must undergo a change applicable to the requirements of Annex 4-A or 6-A of the UKFTA before the finished product may be duty-free. Finally, a good may also be originating even with nonoriginating materials if it satisfies the requirements for “regional value-content” or “RVC”. The deminimis requirement for nonoriginating material in most goods is 10%.
While it is certainly easy to determine whether a good is wholly obtained or produced in the U.S., Korea, or both, it is not always easy to ensure duty-free treatment on goods falling in the second two categories of potentially duty-free treatment. For example, in order to determine the RVC, an importer, exporter, or producer must use either the “build-up method” (RVC = Value of Originating Material/Adjusted Value of good x 100) or the “build-down method” (RVC = AV- Value of Nonoriginating Material/AV x 100). Even these methods are not general for every product covered by the FTA; rather, there are special rules for particular goods, such as automotives.
Furthermore, in determining the value of the nonoriginating material for purposes of calculating the RVC, the importer, exporter, or producer may deduct some costs such as freight, insurance, packing, cost of waste and spoilage, originating materials, etc. Understanding the rules of origin takes time and patience, but by doing so or consulting with a Customs Broker or Attorney well versed in these areas, you can save a lot of money and possible setbacks with U.S. or Korean Customs.
For more information on Rules of Origin please contact us at nmooney@customscourt.com or smorrison@customscourt.com. You can also find information on Rules of Origin and other issues surrounding the new KORUS FTA by visiting the following websites:
- http://www.cbp.gov/linkhandler/cgov/trade/trade_programs/international_agreements/free_trade/korea/korea_fta.ctt/korea_fta.pdf
- http://www.ustr.gov/trade-agreements/free-trade-agreements/korus-fta
- http://www.cbp.gov/xp/cgov/trade/trade_programs/international_agreements/free_trade/korea/