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EXECUTIVE OFFICE OF THE PRESIDENT

THE UNITED STATES TRADE REPRESENTATIVE

WASH I NGTON , D.C. 205 0 8

October 7,2011 The Honorable John B. Larson U.S. House of Representatives Washington, D.C. 20515 Dear Congressman Larson: During the October 5 Ways and Means Committee markup of the United States-Korea Free Trade Agreement (KORUS), at which my General Counsel, Tim Reif, was a witness, you asked Mr. Reif several questions pertaining to the relationship of the KORUS to U.S. sanctions on North Korea, to the treatment of products produced in the Kaesong Industrial Complex located in North Korea, to the application of rules of origin under the KORUS, and to concerns with transshipment of goods. In addition to the responses Mr. Reif provided during the markup, I am pleased to provide more detailed written answers to the questions you raised.
What impact will the FTA have on U.S. sanctions on North Korea?

Answer: Nothing in the KORUS changes U.S. sanctions on North Korea, including the prohibition on direct and indirect importation of goods, services, and technology from North Korea. U.S. Customs and Border Protection (CBP) will continue to deny entry to goods that do not comply with U.S. sanctions, including unlicensed imports of goods with North Korean content, regardless of the percentage. When implemented, the KORUS will strengthen CBP's ability to enforce sanctions through enhanced information sharing provisions and strengthened cooperation with South Korean Customs authorities on enforcement issues, including with respect to these restrictions.
Can goods from Kaesong come into the United States under the FTA?

Answer: All goods from North Korea, including those containing parts or components manufactured in North Korea (such as in the Kaesong Industrial Complex), are prohibited from entering the United States unless exempted from regulation by Congress or licensed by the Treasury Department's Office of Foreign Assets Control (OFAC). OFAC will issue an import license only if it is determined that the importation is consistent with U.S . law, national security, and foreign policy objectives, as well as our international obligations. Neither the rules of origin provisions, nor any other provision of the KORUS, change U.S. sanctions on North Korea, including the prohibition on direct and indirect importation of goods, services, and technology from North Korea. This means that South Korean finns cannot avoid U.S. sanctions by including parts or components from North Korea in their exports to the United States and claiming preferential tariff treatment under theXORUS.
How is the United States going to ensure that Korean products containing Kaesong components don't enter the United States?

Answer: Before arrival into the United States, information on all imports is run through CBP's Automated Targeting System. CBP collects information about potential North

Korean transshipment from numerous sources including information provided by other U.S . government agencies, foreign governments, and the trade community, information gathered during previous enforcement actions, and information collected during post­ importation verifications and summaries of goods and uses this information to target its enforcement activities at preventing North Korean goods and parts from entering the United States. CBP has several offices including the NTAG (National Targeting Analysis Group) and the CTAC (Commercial Targeting Analysis Center) devoted to these efforts. These offices analyze trade patterns and information gathered through the process described above in order to target CBP's activities at potential shipments of North Korean goods. Moreover, CBP officials also cooperate extensively with their South Korean counterparts to determine whether any South Korean companies are potentially transshipping North Korean goods or goods containing North Korean parts or components to the United States. For example, the United States and South Korea have concluded a Customs Mutua1 Assistance Agreement (CMAA), which allows the United States to request assistance from South Korea to verify that an export from South Korea has been lawfully imported into the United States. The United States may also request that South Korean Customs conduct surveillance of modes of transport or goods destined for the United States that are suspected of violating U.S. law. If CBP receives information that a shipment poses a risk of containing North Korean goods or parts or components while the shipment is in transit or once it has reached a U.S. port, CBP will detain the shipment for inspection and verification of the origin of the goods and parts or components. CBP's inspection may include physical inspection of the goods, review of the relevant entry and supporting documentation including invoices, and transportation records. CBP will not release the shipment unless it concludes that it does not contain North Korean content or that it is permitted to enter the United States pursuant to a license granted by Treasury or an exemption from regulation by Congress. Further, in order to make a claim of origin, an importer, exporter, or producer must certify that the good has met the rules of origin and other provisions in the KORUS. Consistent with the KORUS, U.S. law provides for strong verification procedures and imposes a number of recordkeeping and other obligations on those making a claim, helping ensure that individuals who make false claims of origin are held accountable. Civil, administrative, and criminal penalties may apply under both customs and sanctions laws. CBP may apply civil or administrative penalties against the company that imported the product for violation of customs laws and regulations . Penalties include assessment of monetary fines and forfeiture of the merchandise. CBP will refer cases to U.S. Immigration and Customs Enforcement (ICE) where criminal penalties may apply. In addition, if an importer violates U.S. sanctions, Treasury may impose civil penalties or refer the case to the U.S. Department of Justice for criminal prosecution. Furthermore, when implemented, the KORUS will strengthen CBP's ability to enforce sanctions through enhanced information sharing provisions and strengthened cooperation

with South Korean Customs authorities on enforcement issues, including with respect to these restrictions.
If goods from Kaesong were going to be covered by the FTA and afforded duty relief, what would need to happen? An executive order? A resolution? Legislation?

Answer: Goods produced in the Kaesong Industrial Complex (KIC) do not receive any benefits under the KORUS. Kaesong is not mentioned in the Agreement. More generally, the possible future treatment of special geographic zones called "Outward Processing Zones" (OPZs) is discussed in an annex to the KORUS. Under the annex, the United States and South Korea agreed to establish a Committee, comprised of government officials of both the United States and South Korea, to meet one year after the KORUS enters into force. This Committee would identify geographic areas that may be designated as OPZs. Kaesong is not identified as an OPZ, and therefore the Committee would need to designate it as such. The Committee would review whether conditions on the Korean peninsula would be appropriate for further economic development through the establishment and development of OPZs. If the Committee determined those conditions were appropriate, the Committee would establish the criteria that must be met before any good from an OPZ could be eligible for preferential tariff treatment under the KORUS. After this process and assessment, the Committee would make a recommendation to the South Korean and U.S. governments. Such a decision to issue a recommendation has to be reached by consensus - it could only occur if the U.S. government fully agrees. Given the United States' longstanding and serious concerns with respect to North Korea, the U.S. Committee members would not agree to such a recommendation without fundamental changes in North Korea. Finally, if the governments agreed with any recommendation to extend preferential tariff treatment to an OPZ, they would then need to seek legislation in order to implement that recommendation. In other words, Congress maintains final authority over this issue. Congress would have to pass legislation, and the President would have to sign that legislation into law, for any extension of preferential tariff treatment to goods produced in an OPZ to take effect.
What steps are being taken to ensure that Chinese manufacturers don't transship goods through Korea in order to obtain duty relief under the FTA?

Answer: The KORUS rules of origin were carefully constructed on a product by product basis and in close consultation with stakeholders to ensure that only goods produced in the United States or South Korea benefit from the tariff preferences under the Agreement, and contain strict customs enforcement provisions designed to prevent transshipment from China or anywhere else. CBP will use all of the tools at its disposal to enforce these provisions and to ensure that the benefits of the Agreement accrue only to U.S. and Korean producers and workers. If CBP finds any false claims of origin, it will take swift

action to recover duty losses, pursue penalties as appropriate, and establish enforcement criteria to prevent future potential fraudulent claims. Under the KORUS, CBP can take several other courses of action, including but not limited to: conducting comprehensive cargo exams or importer audits and performing laboratory analysis on the contents of imports. Under the KORUS, CBP will conduct extensive verifications as warranted of imports for which preferential duty treatment is sought to ensure that they legitimately qualify under the Agreement. With regard to textiles, CBP can visit South Korean textile factories to validate a factory's production capability as well as compliance of the goods with the requirements of the KORUS. If a factory does not have the facilities to produce goods or documentation to support a KORUS claim, CBP can deny preferential treatment on future shipments. If CBP determines that a particular importer is illegally transshipping Chinese goods or violating the law in some other way, it may also deny entry to goods from that producer. In addition, under the KORUS, the United States may request that South Korea examine transshipped textile or apparel goods whether or not a claim for preferential tariff treatment has been made. I hope these answers are helpful to you as you consider the KORUS. The Agreement will bring significant economic and strategic benefits to the United States, take our relationship with a key ally to a new level, and enhance our leadership and credibility in the Asia-Pacific region. I look forward to working closely with you as the Agreement advances.

I

Ambassador Ron Kirk

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