Details of House Summary of KORUS FTA Draft Implementing Bill

(On July 7, 2011, the House Ways and Means and Senate Finance Committees held "mock" mark-ups and approved draft implementing bills for the Korea, Colombia, and Panama free trade agreements. Following the Administration's review of these drafts, it is expected that final versions will be submitted to Congress for an up-or-down vote (i.e., no amendments). See ITT's Online Archives or 07/18/11 news, 11071813, for similar BP summary of the draft bills for the Colombia and Panama FTAs.)

Summary of KORUS FTA Draft Implementing Bill

The Committee's summary of the KORUS FTA draft implementing bill includes a number of differences from the summaries of the Colombia and Panama FTA draft implementing bills (which were very similar to one another). The KORUS FTA draft implementing bill contains differences regarding motor vehicles, enforcement actions in textile or apparel trade, relief measures, etc.

Highlights of the KORUS FTA draft implementing bill summary include the following (text that is different from the summaries of the Colombia and Panama implementing bills is underlined):

Section 101: Approval and Entry into Force

Section 101 states that the Agreement enters into force when the President determines that South Korea is in compliance with all provisions that take effect on the date of entry into force of the Agreement and exchanges notes with the Government of South Korea providing for entry into force on or after January 1, 2012.

Section 201: Tariff Modifications

Section 201(a) provides the President with the authority to proclaim tariff modifications necessary or appropriate to carry out the Agreement. Section 201(d) provides the President with the authority to proclaim tariff modifications with respect to motor vehicles of South Korea, consistent with the agreement entered into pursuant to an exchange of letters between the U.S. and the Government of South Korea on February 10, 2011.

(The corresponding section in the draft implementing bills for the Colombia and Panama FTAs provided that the President is required to terminate those FTA countries' designation as beneficiary developing countries for the purpose of the Generalized System of Preferences (GSP) program, etc.)

Section 202: Rules of Origin

Section 202 codifies the Agreement's rules of origin. Section 202(b) establishes three basic ways for a South Korean good to qualify as an "originating good" and therefore to be eligible for preferential tariff treatment when it is imported into the U.S. A good is an originating good if:

(1) it is "wholly obtained or produced entirely in the territory of South Korea, the U.S., or both";

(2) it is produced entirely in the U.S., South Korea, or both and any materials used to produce the good that are not themselves originating goods are transformed in such a way as to cause their tariff classification to change or the good otherwise meets regional content and other requirements, as specified in the Agreement; or

(3) it is produced entirely in the territory of South Korea, the U.S., or both exclusively from originating materials.

Under the rules in the Agreement, an apparel product must generally meet a tariff shift rule that effectively imposes a "yarn forward" requirement. Thus, to qualify as an originating good imported into the U.S. from South Korea, an apparel product must have been cut (or knit to shape) and sewn or otherwise assembled in South Korea, the U.S., or both from yarn, or fabric made from yarn that originates in South Korea, the U.S., or both.

(Note that Section 202 in the draft Colombia and Panama FTA implementing bills contains information on additional duties on certain agricultural goods, which the KORUS FTA implementing bill does not include. The rules of origin apply the same, but are contained in Section 203 in the Colombia and Panama draft implementing bills.)

Section 203: Customs User Fees

Section 203 implements the U.S. commitments under the Agreement to eliminate the Merchandise Processing Fee (MPF) on originating goods. In accordance with U.S. obligations under the General Agreement on Tariffs and Trade (GATT) of 1994, the provision also prohibits use of funds in the Customs User Fee Account to provide services related to entry of originating goods.

Section 204: Disclosure of Incorrect Information; False Certifications of Origin; Denial of Preferential Tariff Treatment

Section 204(a) prohibits the imposition of a penalty upon importers who make an invalid claim for preferential tariff treatment under the Agreement if the importer acts promptly and voluntarily to correct the error and pays any duties owed on the good in question. The provision also makes it unlawful for a person to falsely certify, by fraud, gross negligence, or negligence, that a good exported from the U.S. is an originating good. However, the provision prohibits the imposition of a penalty if the exporter or producer promptly and voluntarily provides notice of the incorrect information to every person to whom a certification was issued.

Section 206: Recordkeeping Requirements

Section 206 implements the recordkeeping requirements of the Agreement. The provision requires any person who completes and issues a certificate of origin under the Agreement for a good exported from the U.S. to maintain, for a period of five years after the date of certification, specified documents demonstrating that the good qualifies as originating.

Section 207: Enforcement Relating to Trade in Textile or Apparel Goods

Section 207 implements the customs cooperation and verification of origin provisions of the Agreement, under which the U.S. may request the Government of South Korea to conduct a verification of whether a claim of origin for a textile or apparel good is accurate or a particular exporter or producer is complying with applicable customs laws, regulations, and procedures regarding trade in textile or apparel goods. Section 207(a) provides that the President may direct the Secretary of the Treasury to take "appropriate action" while such a verification is being conducted. "Appropriate action¹" may include:

(i) suspension of liquidation of entry of any textile or apparel goods that the person subject to the verification has produced or exported if the verification was based on a reasonable suspicion of unlawful activity related to such goods; and

(ii) suspension of liquidation of the entry of a textile or apparel good that is the subject of a verification.

Under Section 207(c), the President may also direct the Secretary of the Treasury to take "appropriate action" when the Secretary determines that the information obtained within 12 months after making a request for a verification is insufficient to make a determination. Such action may include: (i) denying preferential tariff treatment to textile or apparel goods that the person subject to the verification has exported or produced; and (ii) denying entry to such goods.

Under Section 207(f), the Commissioner of Customs may require an importer to submit a certificate of eligibility, which must be signed by an authorized official of the Government of South Korea, to receive preferential tariff treatment under the Agreement.

Section 311: Commencing of Action for Relief

Sections 311 to 316 authorize the President, after an investigation and affirmative determination by the International Trade Commission (ITC), to impose certain import relief measures when, as a result of the reduction or elimination of a duty under the Agreement, a South Korean product is being imported into the U.S. in such increased quantities and under such conditions as to be a substantial cause of serious injury or threat of serious injury to the domestic industry.

Section 311 provides for the filing of petitions with the ITC and for the ITC to conduct safeguard investigations. Section 311(a)(2) provides that an entity filing a petition may request provisional relief be provided as if the petition had been filed under Section 202(a) of the Trade Act of 1974. Section 311(a)(3) provides that any allegation of critical circumstances shall be included in the petition.

Section 311(d) exempts from investigation South Korean articles, except for South Korean motor vehicle articles, with respect to which relief has previously been provided under Subtitle A of Title III of the Act (see Section 321 below).

Section 312: Commission Action on Petition

Section 312 requires the ITC to make a determination not later than 120 days (180 days if critical circumstances have been alleged) after the date on which the Section 311 investigation is initiated.

Section 313: Provision of Relief

Section 313(c) sets forth the nature of the relief that the President may provide. The

President may take action in the form of a suspension of further reductions in the rate of duty to be applied to the articles in question, or in the form of an increase in the rate of duty on the articles in question to a level that does not exceed the lesser of the existing Normal Trade Relations (NTR) rate or the NTR rate of duty that was imposed on the day before the Agreement entered into force.

In the case of a duty applied on a seasonal basis, the President may increase the rate of duty on the articles in question to a level that does not exceed the lesser of the NTR rate for the corresponding season immediately preceding the date the import relief is provided or the NTR rate of duty that was imposed for the corresponding season immediately preceding the date on which the Agreement enters into force.

Under Section 313(c)(3), if the relief the President provides has duration greater than one year, the relief must be subject to progressive liberalization at regular intervals over the course of its application, except with respect to a South Korean motor vehicle article (see Section 321). Section 313(d) provides that the President may initially provide import relief for up to two years. This period may be extended by up to one year for a South Korean article and by up to two years for a South Korean motor vehicle article if the President determines that import relief continues to be necessary and there is evidence that the industry is making a positive adjustment to import competition. (Note that according to the draft implementing bills for Colombia and Panama, the import relief may be extended for an additional two years, to a maximum aggregate period of four years.)

Section 314: Termination of Relief Authority

Section 314 provides that no relief may be provided under this Act after ten years from the date the Agreement enters into force, unless (i) the scheduled phase-out period for the article under the Agreement is greater than ten years, in which case relief may not be provided for that article after the scheduled phase-out period ends; or (ii) the President determines that South Korea has consented to such relief. In addition, per Section 321, relief for a South Korean motor vehicle article may be provided during any period before the date that is 10 years after the date on which duties on the article are eliminated.

Section 321: Motor Vehicle Safeguard Measures

Section 321 implements the motor vehicle safeguard established by the exchange of letters between the U.S. and the Government of South Korea on February 10, 2011 related to trade in automobiles. This Section provides that more than one investigation of South Korean motor vehicles may be conducted and that progressive liberalization is not required while relief is being provided. Relief may also be extended for up to two so that relief may be provided for a total of up to 4 years. This section also provides that import relief may be provided with respect to a South Korean motor vehicle article up to 10 years after the date on which duties on the article are eliminated.

Section 331: Commencement of Action for Relief

Section 331 provides that an interested party may file a request with the President for safeguard relief under Subtitle C to Title III of the Act (Sections 331-338). The President must review the request and determine whether to commence consideration of the request.

Section 332: Determination and Provision of Relief

Section 332(b) sets forth the relief that the President may provide, which is a suspension of any further reduction provided for under the Agreement, or an increase in the rate of duty on the articles in question to a level that does not exceed the lesser of the existing NTR rate or the NTR rate of duty that was imposed on the day before the Agreement entered into force.

Section 333: Period of Relief

Section 333 provides that the period of relief shall be no longer than two years. The aggregate period of relief, including any extension, may not exceed four years. (Three years for the Colombia and Panama FTA draft implementing bills.)

Section 336: Termination of Relief Authority

Section 336 provides that the authority to provide safeguard relief under Subtitle C to Title III of the Act expires ten years after the date on which duties on the articles are eliminated pursuant to the Agreement. (Five years for the Colombia and Panama FTA draft implementing bills.)

Section 341: Findings and Action on Goods from South Korea

Section 341(a) provides that if the ITC makes an affirmative determination, or a determination that the President may consider to be an affirmative determination, in a global safeguard investigation under Section 202(b) of the Trade Act of 1974, the ITC must find and report to the President whether South Korean imports of the article that qualify as originating goods under the Agreement are a substantial cause of serious injury or threat thereof. Under Section 341(b), if the ITC makes a negative finding under Section 341(a), the President may exclude any imports that are covered by the ITC’s finding from the global safeguard action.

¹Note that "appropriate action" in the draft implementing bills for the Colombia and Panama FTAs included: (i) suspending preferential tariff treatment of such textile or apparel goods; (ii) denying preferential treatment to such goods; (iii) detaining such goods if there is not enough information to determine their country of origin; and (iv) denying entry to such goods if a person has provided erroneous information on their origin.

(See ITT's Online Archives or 07/13/11 news, 11071320, for BP summary of provisions in the draft implementing bills which were not FTA-related, such as provisions to increase the Merchandise Processing Fee, extend GSP and ATPDEA, renew certain user fees, etc.

See ITT's Online Archives or 06/21/11 news, 11062117, for BP summary of the Congressional Research Service and various industry advisory committee reports to the U.S. Trade Representative on past industry concerns with the KORUS FTA.

See ITT's Online Archives or 02/10/11 news, 11021032, for BP summary of the February 2011 exchange of letters between the U.S. and Korea.

See ITT's Online Archives or 06/09/11 news, 11060908, for BP summary of the Korean Customs Service taking steps to prevent illegal transshipments.)