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:

 

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Free Trade Agreement Series: Part 2- Importer Requirements Under NAFTA

Having originated nearly 20 years ago NAFTA, is a well established free trade agreement that continues to have a significant impact on importers and exporters.  In efforts to open global markets to U.S. businesses, the U.S. government has entered or is planning to enter into fourteen other free trade agreements and promotions.   The most recent agreements include the Colombian FTA, the KORUS (Korea) FTA, and the Panama TPA.

With these new FTAs comes the need to revisit basic principles of NAFTA in order to better understand the rules and regulations these new FTAs will impose on exporters and importers.  Throughout the next few weeks, this series on FTAs will delve not only into NAFTA requirements, but will move on to discuss the implications on free trade that other FTAs have had and will have on the U.S. trade community.

In last week’s entry we discussed the requirements for exporting goods to Mexico or Canada (“NAFTA Countries”).  Importing requirements are similar in some ways, but in order to ensure preferential duty, you should be aware of the significant differences.  In the U.S., the rules governing NAFTA importers are set forth in 19 C.F.R. 181 Subpart C* and 19 U.S.C. Chapter 21.

  • Declaration = A declaration must be made seeking duty free treatment for importing goods into the US. The declaration must include as a prefix the symbols “CA” if your product is from Canada, or “MX” if it is for Mexico.  Generally, this declaration will be based on the Certificate of Origin (this is the same document, CBP form 434, as that referenced in the exporter post last week. http://forms.cbp.gov/pdf/CBP_Form_434.pdf
  • Any errors on the declaration and/or Certificateof origin should be corrected in writing within 30 days of the mistake being discovered, and any change in duty must be paid.
  • Records and Submissions = Importers must maintain all importation documents pertaining to their product, including a copy of the Certificate of Origin, for five years after the entry of the goods.  Such documentation must be provided to the port director upon request (within 4 years of the date on the Certificate) and must include:
  1. CBP Form 434 signed by exporter or exporter’s authorized agent
  2. Be completed in English or have an English translation if prepared in the language of the actual Country of Origin
  • The Certificate and Declaration may be applicable to single or multiple importations occurring within a specific period of time set forth by the exporter or producer but not to exceed 12 months.
  • Acceptance = When the Certificate is accepted by the port director as valid, the acceptance will result in the imported goods being granted preferential treatment.
  • Certificate Not Required When=
    1. The port director is satisfied that the product is NAFTA qualified and waives the Certificate requirement
    2. The importation of the product is non-commercial
    3. The total value of the originating goods does not exceed US$ 2,500.  In this instance; however, your invoice must be included with the following signed and dated statement:

“I hereby certify that the good covered by this shipment qualifies as an originating good for purposes of preferential tariff treatment under the NAFTA.”

  1. The statement must indicate whether the signatory is the producer, exporter, importer, or agent.
  • Failure to comply with regulations may result in the cancelation or denial of preferential treatment for your product.

* http://ecfr.gpoaccess.gov/cgi/t/text/text-idx?c=ecfr&sid=707af3099083c027393664c26eeb50ca&rgn=div6&view=text&node=19:2.0.1.1.25.3&idno=19

**http://www.law.cornell.edu/uscode/text/19/chapter-21

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Free Trade Agreement Series: Part 1- Exporter Requirements Under NAFTA

When you are preparing to export goods to Mexico or Canada (“NAFTA Countries”), you are likely going to seek preferential treatment of your goods under NAFTA.  However, before you ship the goods to your buyer, make sure you are familiar with the regulations governing duty free treatment.  Otherwise, you may end up paying duty when you least expect it.  Carefully following NAFTA regulations and ensuring the goods you are exporting “originate” in the U.S., Canada, or Mexico will keep you from paying unexpectedly.

In the U.S., the rules governing NAFTA are set forth in 19 C.F.R. 181* and 19 U.S.C. Chapter 21.**

Export Requirements

  • Certificate of Origin = As a U.S. exporter, it is your responsibility to prepare the Certificate of Origin (“Certificate”) for your product (the same is true for foreign exporters to the U.S.).
  • As an exporter, you need not be the actual producer of the goods, but if you aren’t,  make sure you know whether the goods qualify as originating from a NAFTA country.  You can ascertain this information directly from the producer, and your reasonable reliance on the word or signed Certificate of Origin from the producer may form your legal basis for completing CBP Form 434.
  • Exporters need not submit the form to CBP upon shipping the goods because the form will be used by the Importer in the country of destination to prove the goods qualify for NAFTA duty free treatment. However, if CBP requests a copy of the Certificate, the exporter (or his producer) must provide it.
  • If the exporter (or producer) finds an error in the Certificate, he must be sure to remedy the mistake within 30 days of discovering the error by written notification to all parties sent a copy of the Certificate if the change affects its accuracy or validity.
  • Additionally, exporters (or producers who complete a Certificate) are required to maintain a copy of the Certificate for five years after the date it is signed as well as any documentation associated with the goods covered under the Certificate.
  • Should the exporter fail to follow these guidelines, CBP may impose penalties pursuant to 19 U.S.C. 1508(e) or other “such measures as the circumstances may warrant.” 19 C.F.R. §181.13

*http://ecfr.gpoaccess.gov/cgi/t/text/text-idx?c=ecfr&sid=820fc987e3708e8dae0b64e96cb12cab&rgn=div5&view=text&node=19:2.0.1.1.25&idno=19#19:2.0.1.1.25.2.2.1

**http://www.law.cornell.edu/uscode/text/19/chapter-21

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