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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The First Sale Rule: Could It Lead To Duty Savings For You?

Some readers may be aware that Customs, through a proposed rulemaking, attempted to abolish the first sale rule in 2008. The first sale rule is a method of determining transaction value, or the price paid or payable, for valuation and appraisement purposes. The rule provides that a U.S. importer may base the valuation of an imported product that was the subject of several transactions according to the products’ value in the first sale for export to the United States, rather than the last one.

An example of the first sale rule at work would be a transaction that involved a sale from a Chinese producer to a Hong Kong middleman to a U.S. importer. The first sale rould would allow the U.S. importer to declare the value of its goods as the goods’ transaction value in the first sale, that is, the sale from the Chinese manufacturer to the Hong Kong middleman, so long as certain conditions are met. One condition is that the first sale must be a bona fide sale, and not a sham transaction. It must be conducted at arm’s length. Another is that the goods must have been clearly destined for the U.S. at the time of the first sale.

In 2008, CBP attempted to abolish the first sale rule. The agency ran into stiff opposition from members of Congress and U.S. industry. Congress stepped in and passed legislation that prevented CBP from taking steps to abolish the first sale rule until January 1, 2011 and requiring importers to provide certain data regarding the use of the first sale rule so that the International Trade Commission could study its use. The ITC published the results of its study at the end of 2009, and we will touch on several of its findings here. The ITC studied data collected from September 1, 2008 through August 31, 2009. It found that:

* 23,520 importing entities, or 8.5% of all importing entities, utilized the first sale rule.

* Of $1.63 trillion in imports during the study period, $38.5 billion was imported using the first sale rule.

* The first sale rule was used most often by importers of machinery and computers classified under Chapter 84. 16% of first-sale imports consisted of these goods.

* Importers of electrical machinery under Chapter 85 comprised 14% of first-sale imports.

* Importers of textiles and apparel under Chapters 62 and 61 comprised 10% of first-sale imports.

Overall, the study showed that few importers employ the first sale rule to reduce their applicable duty rates. Whether this adds to CBP’s determination to do away with the rule remains to be seen.

While the rule remains, importers may want to evaluate whether using the rule would lead to duty savings. Take the China-Hong Kong-U.S transaction discussed above. Were the good to be dutiable at 15%, and the last sale be valued at $100, the importer would owe CBP $15. If the first sale to the middleman, however, were $80, and this were declared as the transaction value at entry under the first sale rule, duty would be $12, for a $3 savings. Multiply this by hundreds or thousands of transactions and one can see the beauty of the first sale rule. It pays to consider its use.

International Trade Commission Publication 4121 (First Sale Rule Study)

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