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Korean FTAs in Effect

The Effectuation of the Korea–US FTA

Essential Checklist for the Korea–US FTA

To maximize the effectiveness of FTA, it is required to pay full attention not only to basic matters including the country of origin criteria, but also to the special matters set forth in the provisions of the Korea–US FTA (e.g., textile and apparel products origin verification procedures, etc.). Due to the nature of the Agreement, special matters have complex contents and a separate referential commentary for small- and medium-sized companies (SMEs) is not currently available. Therefore, please be fully advised of the following six precautions that are prepared with specific examples for an easy understanding of SMEs.

Background

Many of the textile and apparel goods originating from China are restricted by the US safeguard and quantitative import restrictions (Quota). In this regard, the United States raised concerns about possible circumventions, in which textile and apparel goods originating from China are being exported to the United States simply via Korea (after origin laundering) upon the execution of FTA. To minimize the damage caused by the circumventions, despite the principle of prior notification of origin verification, the United States demanded it be provided in the Agreement that origin verification of textile and apparel goods shall be exceptionally executed without prior notification.

Download Guidance

  • The principle of providing prior notification for
    origin verification
  • Exceptional banning of prior notification for
    the origin verification of textile and
    apparel goods

Other FTAs and Current Customs Laws

  • The principle of prior notification of customs
    investigation to taxpayers regardless of
    product type

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Precautions

According to the decision of the United States concerning the possible discarding of related documents in case of prior notification of origin verification, Korea’s textile and apparel goods exporters and their partners should be prepared for origin verification without prior notification.


To prepare for origin verification on Korean exporters, the Korea Customs Service runs a system of prior origin verification service. Exporters, particularly those of textile and apparel goods, should take full advantage of it.

Background

The Korea–US FTA adopts the system of voluntary issuance of an origin certificate by the trading parties (① exporter ② importer ③ producer).


i) Differentiation from the system where the relevant authorities (Chamber of Commerce and others) issue an origin certificate

ii) Differentiation from the Korea–EU FTA that allows only the registered exports to issue an origin certificate voluntarily


The US government was concerned that, under the voluntary issuing system of an origin certificate, irregularities including certificate forgery would occur relatively more frequently. Therefore, it intended to supplement the system with the direct origin verification method. (For reference, the US government has accumulated a considerable level of knowledge for direct origin verification through the implementation of the NAFTA and others.)

Text of the Korea–US FTA

  • It is stipulated in the Agreement that the direct origin verification method is adopted.
    (Article 6.18 of Chapter 6 of the Korea–US FTA)

Direct Origin Verification : Propriety of country of origin determination on Korean exports

Verifying Entity : Government of the importing
country

Other FTAs

  • Other FTAs (except the US) adopt the indirect verification method or run the direct and indirect verification methods in parallel
    (e.g., EU – indirect verification method)

Direct Origin Verification : Propriety of country of origin determination on Korean exports

Verifying Entity : Korean government (primary), government of the importing country (final)

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Precautions

The US government (or customs authorities) conducts direct origin verification on goods from Korea through written requests for information from the importers and their partners (primary) and visits to the premises (secondary); therefore, it is required to check and be fully aware of the US government’s origin verification manual in advance.


Given that the verification targets in the early days of the NAFTA trades (that the US government attended) were automotive and textile industries, exporters and their partners from such industries should prepare for the verification process.

Background

A “blanket certificate” means that the first origin certificate can be repeatedly used in terms of multiple shipments or multiple import declarations of goods of similar type and quality within any period specified, not exceeding 12 months from the date of the first issuance.


The Korea–US FTA adopts the system of voluntary issuance of an origin certificate. Therefore, exporters, producers, or importers may issue origin certificates by filling in the form attached to the “Act on Special Cases of the Customs Act for the Implementation of Free Trade Agreements” (Annex 6–9) or by preparing documents in free format including the mandatory information required by the Agreement.

Text of the Korea–US FTA

  • It is stipulated in the Agreement that repeated
    use of an origin certificate within a specific
    period is allowed.
    (“blanket certificate”)
    (Article 6.15 of Chapter 6 of the Korea–US FTA)

Other FTAs

  • Other FTAs (except the United States) do not
    have specific regulations on blanket certificates.

vs

Precautions

In the case of using a blanket certificate, the entity issuing origin certificates (exporter, importer, or producer) can prove the origin of the goods of similar type and quality in multiple shipments or multiple import declarations with the first certificate (within 12 months from the date of the first issuance). They can save on temporal and financial costs from the repeated origin certificate issuance.


However, if the starting date of a blanket certificate is earlier than the first certificate (e.g.. the starting date of a blanket certificate is June 01, 2012 – May 31, 2013, and the first certificate issuance date is August 01, 2012), the customs authority may have a reasonable doubt on the propriety of the blanket certificate; therefore, i) the starting date of the blanket certificate and ii) the date of the first issuance of the certificate must be identical.

Background

As the Korea–EU FTA stipulating the voluntary preparation of an origin certificate by exporting companies and others (likewise, the Korea–US FTA) does not provide any provision mandating the signatory to be a person of a certain level of authority or status, a considerable number of exporting companies designate a responsible official as the signatory of an origin certificate in practice for the purpose of business convenience.


For trade in accordance with the Korea–US FTA, the practice guide from the US Customs and Border Protection defines the signatory of an origin certificate as i) a person who has access to various records and ii) a person who has legal authority and also requires to provide the title, phone number, e-mail address, address, and date of signing the certificate.

Text of the Korea–US FTA

  • The US Customs and Border Protection defines the signatory of an origin certificate in the voluntary issuance system as “a responsible official in the exporting company.”

Other FTAs

  • Other FTAs (except the United States) do not
    have specific regulations on blanket certificates.

vs

Precautions

Aside from other FTAs, the Korea–US FTA requires an origin certificate signed by a responsible official. Therefore Korean exporters are advised to designate their signatories in consideration of such requirement.


In particular, for companies that export similar goods to the EU as well as the United States, the staff members responsible for exporting to the EU (not a responsible official) are also likely to take charge of signing on the origin certificates required by the Korea–US FTA. Whether such members are a responsible official with authority as defined above should be checked in advance.

Background

A value-added test to determine whether a good is originating includes i) the “build-up method” and ii) the “build-down method.” The Korea–US FTA adds the “net cost method” to the above two.


However, the net cost method is only available for automotive-related industries (including parts), and i) the build-up method, ii) the build-down method and iii) the net cost method can also be selected as the origin determination criteria.

Text of the Korea–US FTA

  • It is stipulated in the Agreement that as the criteria of a value-added test to determine whether a good is originating, the net cost method is added. However, it is only applied to the automotive industry (including parts).
    (Article 6.2 of Chapter 6 of the Korea–US FTA)

Other FTAs

  • Other FTAs (except the United States) do not
    have specific regulations on blanket certificates.

vs

Precautions

The net cost method is calculated using the following formula: (net cost − value of non-originating materials / net cost) × 100, and the net cost is the net cost of goods after deducting the marketing cost and royalty.


In terms of the Korea–US FTA, automotive goods (including parts) exporters are advised to be aware of the above net cost method provisions and to compare it to i) the build-up method and ii) the build-down method. If the nest cost method is the most favorable way to meet the criteria of origin determination, it is advised to seriously consider using the method.

Background

In general, the subject of customs inspection (including examination) to verify the propriety of the imposition of customs duty is the importers of the goods who are responsible for paying the taxes.


On the other hand, in the case of FTA, the exporter is responsible for determining the origin of the goods. The subjects of primary verification are the exporters, not the importers. However, given the case of determining whether a good is originating in consideration of the shares that the raw materials from the region take from the good (e.g., applying the value-added criteria), FTA defines not only the exporters, but also the partners that supply them with raw materials as subjects of origin verification.

Text of the Korea–US FTA

  • It is stipulated in the Agreement that the scope of origin verification (to examine whether a good meets the criteria of origin determination) includes (i) the exporter, (ii) importer, and (iii) producer.
    (Article 6.18 of Chapter 6 of the Korea–US FTA)

Other FTAs

  • This provision applies to all FTAs
    (including Korea–US).

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Precautions

Export partners including the automotive industry, whose dependence on suppliers are relatively higher, are not free from origin verification even though they are not directly involved in the export. Therefore, they are required to do their best to secure the documents pertaining to the origin of raw materials and prove their origin.

The information above is provided only as a reference for users and we are not legally liable for the errors in the content or the consequences of use of the information.
Please use the information above for reference purposes only and confirm the final information with relevant domestic law or administrative agencies.

The information above is provided by the Korea International Trade Association.

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