The U.S.-Korea Free Trade Agreement (Agreement) entered into force on March 15, 2012. One of the Agreement’s principal benefits is reduced duties on originating goods traded between the United States and the Republic of Korea (Korea). Companies should not, however, assume that all goods made in the United States or Korea qualify as originating goods. The Agreement contains rules of origin—reproduced in General Note 33 of the Harmonized Tariff Schedule of the United States—that dictate when goods may be certified as originating. Moreover, goods must meet additional requirements beyond the rules of origin. For example, goods that enter the commerce of a third country do not qualify for preferential duty rates. Thus, U.S.-origin goods shipped to Korea from a distribution center in China would not qualify for preferential duty rates in Korea if the goods entered the commerce of China while at the distribution center. U.S. Customs and Border Protection has promulgated interim regulations implementing the Agreement’s customs provisions, and issued implementation instructions to the various ports of entry throughout the United States.

Rules administered by the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) prohibit the unlicensed importation into the United States of goods that contain materials, services or technology from the Democratic People’s Republic of Korea (North Korea), even if the materials are substantially transformed in a third country, such as Korea. According to the manner in which the United States has implemented the Agreement, products manufactured in whole or in part in the Kaesong Industrial Complex or other designated outward processing zones in North Korea would not be permitted entry into the United States without a license from OFAC.

U.S. importers should work with their suppliers in Korea to ensure that they understand the Agreement’s rules of origin and the prohibition against both direct and indirect imports from North Korea, absent a license from OFAC. Given the substantial penalties for OFAC violations, U.S. importers may wish to obtain certificates of origin that state not only that the goods qualify as originating goods, but also that the goods do not incorporate any materials, technology or services from North Korea.

The Agreement also expands government procurement opportunities for U.S. and Korean companies by lowering the value threshold for procurements in which each government will give equal treatment to goods and services of the other country. Thus, the United States and Korea, on a reciprocal basis, have agreed not to discriminate against the goods or services of the other Party in procurements valued at or above $100,000 or 100 million won, respectively. The threshold under the World Trade Organization’s Government Procurement Agreement is $202,000 or 250 million won. The Agreement’s lower value threshold means that additional U.S. government procurements can be filled with Korean goods and services, and vice versa. In addition, the United States and Korea each committed under the Agreement not to require that an offeror previously have been awarded a government contract or had prior work experience in the country in which the procurement occurs.

The Agreement presents opportunities but also compliance challenges for U.S. and Korean companies. Sidley lawyers are well-versed in the Agreement’s provisions, including those addressing customs, government procurement and investment matters.

March 16, 2012

Source: Sidley Austin LLP

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