І. Overview ІІ. Steps to Benefit from Korea-USA FTA ІІІ. KCS’s Support for Korea-USA FTA Implementation IV. Conclusion
Characteristics of trade System under FTA
In order for companies to enjoy benefits from the FTA, FTA regulations and procedures shall be complied in a good manner. ※ Existing trade system refers to ‘WTO trade system’. Under WTO, origin fulfillment is not required. In other words, MFN rate is applied and the same tariff rate is also applied for the same products.
The major difference between the systems under WTO and FTA; - Origin Determination Criterions - Certificate of Origin - Clearance Procedures under FTA, and - Origin Verification Procedures
Importance of Rules of Origin
Country of Origin refers to the origin of good produced. ㅇ For animals and plants, it refers to the country where the animals and plants were brought up. Where as, in case of industrial products, Country of Origin refers to the country where the goods was produced. Why is Country of Origin important within the FTA trade system? ㅇ FTA is a bilateral agreement only beneficial to the FTA contracting countries.
Importance of Rules of Origin ď ą Examples under Korea-US FTA are provided Automobile parts produced in Mexico were disguised as U.S originating. They were, then, imported to Korea with preferential tariff applied. FTA beneficiaries: Automobile part company in Mexico - Importation volume of the price-competitive automobile parts made in Mexico was proliferated. - As a result, domestic automobile part industry experienced unexpected damages and losses. - Due to the wrongly applied FTA preferential tariff, negative side effects such as reduced national income etc. occurred.
Hence, rigid origin-related regulations are currently applied and, only the products which fulfill Rules of Origin under the FTA are entitled to gain preferential tariff treatment.
<Reference> Origin-related Regulation Violation Case 1 Fine Imposition CaseⅠ(Ford) Situation - In 1996, Ford imported auto components from its subsidiary located in Mexico and benefited from preferential clearance by submitting C/O to the U.S. Customs office - Ford submitted C/O to US Customs and underwent preferential clearance. - In 2001, Customs requested them to provide documents including C/Os and exporter’s information - Ford refused to submit the information with the reason that the information was kept by the overseas exporter - Ford was fined $41m by US Customs -> filed a law suit
<Reference> Origin-related Regulation Violation Case 2
Fine Imposition Case Ⅱ (Pioneer) Situation - Pioneer located in the U.S. produced speakers in Mexico by carrying out s imple assembly and used 3rd country originating parts. NAFTA Preferential t ariff treatment was then applied. The U.S. Customs decided that the goods did not fulfil the origin rules and imposed penalty afterwards.
1) For application based on falsified evidence → $21m fine 2) For failing to keep required supporting documents → $16m fine
<Reference> Origin-related Regulation Violation Case 3
Domestic case under Korea-EFTA FTA Import of Swiss gold bullion surged after KOREA-EFTA FTA took effect and doubts were rising on whether the goods satisfied the origin criterions - Requested origin verification on the Swiss producers - Found out that the goods did not satisfy origin criteria Imposed KRW 5.9b on 7 companies for 9 tons of imported gold bullion which failed to meet origin requirements (declared import value: KRW 179.3b) KCS conducted further investigation on other Swiss-gold bar companies.
Key Elements for Successful FTA Utilization Elements for FTA utilization in terms of FTA Trade Flow Spot Business Opportunity
• Understanding Rule s of Origin and FTA t ariff rate for the comp any’s goods • Establishing Busine ss Strategies
• Confirming wheth er the goods are ful filling origin criterio ns • When failed to fulf ill origin criterions, production method shall be changed.
• Issuance of C/Os under each FTA • Preparing suppor ting documents for proof of origin
• Prepare for the oth er country’s verificati on visit • Thorough preparati on is required, espec ially for high-risk indu stries
Example: Precondition for FTA Utilization - Engine The company produces kerosene engine ( Cylinder volume range between 1 000cc and 2000cc) and exports the good to the U.S Î¸Spot Business Opportunity 1. Confirmation on the HS code of the engine: 8407.34.18 2. Confirmation on preferential tariff and rules of origin applied to the engine (8407.34.18) under Korea-US FTA. - U.S MFN Rate: 2.5%, FTA Preferential Tariff : Immediate tariff elimination (0%) - Rules of Origin : A change to subheading 8407.31 through 8407.34 from s
any other heading, or if no change in tariff classification i required, provided that there is a regional value content of not less than; (a) 35 percent under the build-up method; or (b) 55 percent under the build-down method; or (c) 35 percent under the net cost method.
Example: Precondition for FTA Utilization - Engine θ Production 1. Selection of the best origin criterions for the company. 2. Production of engine fulfilling the origin criterions. θ Export 1. Record Keeping to prove fulfillment of the selected origin criterions 2. Confirm the origin according to the documents provided and issue the C/Os. ※ Korea-US FTA : Producer, Exporter, Importer are to self-issue C/Os.
3. Submit C/O to the U.S importer θVerification 1. submit supporting documents when required by US Customs. 2. If insufficient documents were provided, on-site verification will be conducted by U.S. Customs -> Expected Cooperation.
Steps to Benefit from the Korea-USA FTA
5 Origin Verification
STEP 1 : Classification Why should items be clssified correctly? Accurate classification is the most important step as it influences tariff ratesâ€“normal or conventional â€“ and rules of origin to be applied.
US Conventional Rates
8 digits (US)
Staging Category 8 digits (EU)
A, B, C,D, E, F, G, H, I, J, K, L, M, N, O, P, Q, R, S, T, U, V, W, X, Y, Z
What are Harmonized System codes? The harmonized Commodity Description and Coding System (HS) of tariff nomenclature is an internationally standardized system of names and numbers for classifying traded products developed and maintained by WCO. The six-digit level is international standard. The following 2 to 4 digits are determined by each nation. Example: 8708.70.6060 HTS Code
Vehicles other than Railway, Parts and A ccessories
Parts and accessories of the motor vehicl es of headings 8701 to 8705:
Bumpers and parts thereof:
Duty rate / Tariff Item
Depending on a country
STEP 1-2 : Checking Tariff Treatment Why should you confirm preferential tariff? In case where preferential tariff is greater than MFN rate, the company would wa ste efforts and time in applying for the preferential tariff. In other words, if MRN r ate is lower than the preferential tariff, the company can simply pay the MFN rat e rather than utilizing FTA.
Formula for FTA tariff benefits Tariff Benefit = (MFN rate â€“ Conventional Rate) x Customs value
STEP 2 : Checking Applicable ROOs What are rules of origin? Rules of origin set out in the Free Trade Agreement are used to determine whet her a good is originating from one or more parties to the treaty. ď Źâ€ˆ Origin
Contents - wholly obtained product : wholly obtained criterion Basic principles
-incompletely obtained product: regional + sufficient process (special cases - sect oral) -wholly and incompletely obtained products: transportation requirements
(Provisions) Special cases (sectoral)
Cumulation Fungible Products
Accessories, Spare Parts and Tools
Packing Materials & Containers Sets
Product-Specific Criterion (sub-regulations)
Change of Tariff Classification, Value Added Rule, Processing Operation Criteria, Combination Crit erion and Choice Criterion
STEP 2-1 : Change in Tariff Heading CTH (Change in Tariff Heading) Goods with tariff shifts in compliance with the Agreement are determined as origi nating. ď Źâ€ˆ EX) HS 7209:
Change to Heading 72.09 from 72.06 or 72.07
Iron Ingots products (7208)
Cold-rolled flat iron products (7209)
STEP 2-2 : Regional Value Contents
Definition of RVC ㅇ Within the process of goods’ production, if x% of RVC is fulfilled, the product is regarded as originating within the country. ㅇ if the good is produced within more than 2 countries, RVC is fulfilled in case where the goods were produced within the FTA contracting countries. RVC is, in theory, more suitable than Change in Tariff Classification Rule. However, for the substantial application of the RVC rule, supporting documents including cost accounting etc are required.
STEP 2-2 : Regional Value Contents Local Contents (LC) If a certain percentage of regional value is derived, the good is regarded as origi nating.
RVC Requireme nts
Calculation Formul a
Calculation C riterion of Pr oduct Price
Build-up Method Build-down Method Net Cost Method
STEP 2-2 : Regional Value Contents Rules of Origin for Automobile Engine (KOR-US FTA) θHS Codes of engine and other automobile parts ㅇ Kerosene Engine : 8407.31
ㅇ Applied Rules of Origin HS Code 8407.31 - 8407.34
Product-specific Rules of Origin under Korea-US FTA A change to subheading 8407.31 through 8407.34 from any other heading, or if no change in tariff classification is required, provided that there is a regional val ue content of not less than; (a) 35 percent under the build-up method; or (b) 55 percent under the build-down method; or (c) 35 percent under the net cost method.
STEP 2-2 : Regional Value Contents Rules of Origin for Automobile Engine (Korea-US FTA) Cost Description Originating Material Co st
Non-originat ing Material Cost
Direct Labor Cost
Deducted Cost (Marketing, sales cost and loy alty etc.)
STEP 2-2 : Regional Value Contents Rules of Origin for Automobile Engine (KOR-US FTA) Origin Determination A) Fulfillment of CTC Rule
Preferential tariff treatment granted
B) Fulfillment of RVC Rule ① Origin Determination By Build-down Method Preferential tariff treatment granted (Regional Value Content) =
(Adjusted Value) – (Value of Non-originating Material) (Adjusted Value)
142,000 – 50,000 142,000
× 100 = 64.79
STEP 2-2 : Regional Value Contents Rules of Origin for Automobile Engine (KOR-US FTA) ② Origin determination by Build-up Method ff Treatment (Regional Value Content)=
Denial of Preferential Tari
(Value of Originating Material) (Adjusted Value) 40,000 142,000
× 100 = 28.17
③ Origin Determination by Net-cost Method ment granted (Regional Value Content)=
Preferential Tariff Treat
(Net Cost) - (Value of Non-originating Mat erial) (Net Cost)
STEP 2-2 : Regional Value Contents Rules of Origin for Automobile Engine (KOR-US FTA) (a) Requested information for Net Cost Calculation − Product Price : KRW 102,000 ▪ Value of Originating Materials : KRW 40,000 ▪ Value of Non-Originating Materials : KRW 50,000 ▪ Direct Labor Cost : KRW 12,000 − Period Cost: KRW 20,000 − Deducted Cost : KRW 20,000
(b) Net Cost Calculation − Net Cost (122,000) = Total Cost(142,000) – Deducted Cost (20,000)
(c) RVC Calculation - Based on the Net Cost Calculation, RVC equals to 59.02% which fulfils RVC rule.
122,000 - 50,000 122,000
× 100 = 59.02
STEP 3 : Confirming Satisfaction of ROOs ă…‡ Prepare for supporting documents for the proof of origin after determining the best rules of origin for the product. - CTC Rule : Part List, Production Process Description etc. - Value Added Rule: Supporting documents to prove price of materials.
ď ą In case where the product is produced in Korea and the materials are provided from the U.S., Japan and China, under Korea-US FTA (CTC Rule applied) Originating Material
(No confirmation required)
Non-originating Material Confirmation
STEP 3 : Confirming Satisfaction of ROOs Looking into Bills of Material (BOM) indicating materials used in production BOMs also show where the materials are sourced from. Even materials locally sourced may fail to qualify as originating if they do not me et requirements under FTAs. Materials imported from the other party may be categorized as qualifying when t heir COs are submitted to Customs. (Accumulation) Locally sourced materials may be regarded as non-qualifying when their origins cannot be identified.
Check HS codes of materials and determine their origin
LEVEL NO 1 2 3 4 5 1
STEP 3 : Confirming Statisfaction of ROOs Study regulations regarding certificates of origin? C/Os are issued only for goods meeting origin requirements. ROOs should be written on C/Os as the Agreement instructs. Preferences may be denied when ROO is not shown on C/Os or if it is wrongly written.
To verify whether rules are wrongly applied. Wrongly using ROOs may lead to post origin verification ex) in case where the C/O for the vehicle indicates that the goods are originati ng for the â€˜wholly obtainedâ€™ criterion where it is only applied to animals and plant s etc.
STEP 4 : COs under the Korea-USA FTA Certificate of Origin is an essential document to gain preferential Tariff treatment under FTA. ㅇ Self-Issuance by exporters themselves ㅇ Authority Issuance by Customs and Chamber of Commerce and Industry etc. <Proof of Origin under FTAs>
Customs, Chamber of C ommerce & I ndustry
Customs, Chamber of C ommerce & I ndustry
Exporter, Prod ucer, Importer
Invoice Decl aration Form
Under USD 1,000
Korea’ s Clearance Procedure under FTAs Import
Verification documents (Import/export C/S)
Entry of goods
Import declaration (Claim for preferential treatment)
Issuance of C/O
Claim for preferential treatment (after acceptance)/ Drawback
Import declaration Claim for Preferential treatment (before acceptance)
Clearance of goods
Claim for Preferential treatment (after acceptance)
STEP 4 : COs under the Korea-US FTA
Claim for Preferential Treatment (after import approval) Without submitting C/Os at the time of importation, importers cannot claim prefer ential treatment. However, the importers can apply for preferential tariff if they submit the C/O in q uestion within 1 year after the import declaration is accepted.
STEP 5 : Preparation for Origin Verification Record Keeping Requirement (Exporter) To keep all records necessary to demonstrate that the good in question originating good, for 5yrs (Importer) To keep all records related to the importation (Customs Authority of Importing Party) To keep submitted origin declaration for 5yrs
Korea-USA FTA Verification Direct Verification
Notify the result
Request V to the other party
Notify the result
KCS’s Support for KOREA-USA FTA implementation
Simultaneous & Comprehensive FTA policy
tariff and non-tariff
Adopting Advanced systems for the investment and service sectors
strengthening economic fundamentals
Stronger National Competitiveness
In Force (45countries)
Finished Negotiation (29 countries)
Canada, Mexico, Tur
India, EU, Peru Rate of Tr ade Accumu-la ted Rate
key, Australia, New
China, Japan, Russia, Mercosur(5),
KOR-US FTA is expected to take effect in 2012.
2. Support for implementation of the Korea-EU FTA FTA-PASS The system for supporting SMEs to decide origin of their goods â˜ž FTA-PASS ; Korea Customsâ€™ Electronic CO Management System
Rules of Origin under FTAs are hard to certify origin of goods
Containing complicated origin rules automatically suggests right origins based on the rules
Reduce the risk of penalty caused by misunderstanding of origin rules
Integrated global economy due to liberalization and informatization - FTA leads to create economic border Dynamism of Korea is playing positive role in implementing open policy - Korea, at the forefront of FTA conclusion, will become a bridge for entering into the future East Asian market. - Various policies to create business-friendly environment for foreign investors - Supporting companies to enjoy benefits from the FTA and preventing companies from gaining illicit preferential tariff treatment. Virtuous circle ; Proliferated Trade Volume â†’ Job creation â†’ GDP growth - Transparent policy to help foreign investors predict customs activities - Government, the nation & KCS will consider the U.S as an invaluable partner