Their interest has been sparked by the debate over the South Korea-U.S. Free Trade Agreement (KORUS FTA), which would lower or eliminate U.S. tariffs and non-tariff barriers on most imports from South Korea. Some, particularly the agreement's opponents, argue that the agreement could lead to increased U.S. imports of goods or components made in North Korea. Those concerned that the KORUS FTA would change this situation focus considerable attention on the Kaesong Industrial Complex (KIC), a seven-year-old industrial park located in North Korea just across the demilitarized zone, where more than 100 South Korean manufacturers employ over 45,000 North Korean workers at relatively low wages. Critics argue that South Korean firms could obtain low-cost Kaesong-made goods or components, incorporate the latter into finished products such as electronics or automobiles, and then reship the final goods to the United States with "Made in [South] Korea" labels. The first section of this report examines existing U.S. rules and practices governing imports from North Korea. The third section addresses the issue of how, if at all, the KORUS FTA would affect potential U.S. imports of North Korean content, including whether the agreement could result in legal action against the U.S. government if it kept out imports of North Korean content. In 1999, President Clinton significantly loosened restrictions on U.S. exports to and imports from North Korea except those involving national security concerns. Admissibility: Department of Treasury Approval Required

				Importing Directly from North Korea

One may not import directly from North Korea without approval from OFAC; this applies to all imports from North Korea. Over the course of the 2000s, North Korea's significant export markets shrunk to two countries, South Korea and China, which in 2010 appear to have accounted for over three-quarters of North Korea's export shipments. By the end of February 2011, almost all of North Korea's exports to South Korea were attributable to activities in the KIC. By the end of the decade, more than half of North Korea's imports and most of its foreign assistance came from China. North Korean exports to China rose nearly fivefold from 2001 to 2009, and in 2010, North Korea's $1.2 billion in commercial shipments to China accounted for over 40% of its total annual exports. Recently, North Korea has increased its exports of primary products (such as fish, shellfish and agro-forest products) and mineral products (such as base metallic minerals). The KORUS FTA in the future could allow products made in the Kaesong Industrial Complex to be covered by the agreement, thereby conferring preferential treatment to these products. The KORUS FTA might constrain the U.S. government's ability to impose restrictions on imports from North Korea. In March 2011, the Office of the United States Trade Representative (USTR) issued a statement that "Congress would need to pass, and the President would need to sign, a law to extend any KORUS tariff benefits to products made in Kaesong or any OPZ." Thus, in the event that the United States were to prohibit the importation of a good from North Korea, the KORUS FTA would not preclude the United States from prohibiting the importation of that North Korean good from the territory of South Korea as well. Rules of Origin (ROO)42

A number of U.S. critics of the KORUS FTA have argued that under the agreement's rules of origin (ROO), South Korean manufacturers will be able to incorporate North Korean components into their exports to the United States. Since goods from the KIC must also pass through South Korean customs, to the extent that the KORUS FTA (1) further assists in the establishment of rules-based trade between the United States and South Korea, (2) continues to deepen the U.S.-South Korea economic relationship, and (3) continues to provide grounds and methods for customs cooperation and ongoing dialogue between officials of the two countries, one could argue that the proposed FTA may serve to further limit the entrance into the United States of North Korean-manufactured inputs. Conclusion

The KORUS FTA appears likely to have only a minimal impact on whether U.S. sanctions on North Korean imports are put to the test. The KORUS FTA's preferential terms would not apply to finished goods made in the KIC, and the provisions for bringing the KIC into the agreement include multiple opportunities for the United States, including Congress, to block such a move by a future South Korean government. The agreement also contains provisions that aim to help preserve the United States' ability to maintain its restrictions on imports of North Korean goods and components. As long as U.S. sanctions on North Korean imports remain in place and are adequately enforced, the KORUS FTA's rules of origin—which are used to determine the country of origin of imported products—would apply only in cases where an importer has received a license from OFAC to bring in a South Korean good that contains North Korean components. Thus, the issue of how best to handle imports from North Korea appears to center on customs controls, cooperation, and enforcement. There is no means to determine with one hundred percent certainty that there are no goods or components originating in North Korea entering U.S. commerce without proper authorization.
In early 2011, many Members of Congress focused their attention on U.S. rules and practices governing the importation of products and components from North Korea. Their interest was stimulated by debate over the proposed South Korea-U.S. Free Trade Agreement (KORUS FTA) and the question of whether the agreement could lead to increased imports from North Korea. Some observers, particularly many opposed to the agreement, have argued that the KORUS FTA could increase imports from North Korea if South Korean firms re-export items made in the Kaesong Industrial Complex (KIC), a seven-year-old industrial park located in North Korea, where more than 100 South Korean manufacturers employ over 45,000 North Korean workers. Two concerns expressed by critics are (1) that South Korean firms could obtain low-cost KIC-made goods or components, incorporate them into finished products and then reship the goods to the United States with "Made in [South] Korea" labels so that they would receive preferential treatment under the KORUS FTA; and (2) that such exports would benefit the North Korean government.
At present, North Korea's relative economic isolation and an array of U.S. restrictions have resulted in less than $350,000 in U.S. cumulative imports from North Korea since 2000. Thus, the issue of U.S. imports from North Korea is essentially about what might happen in the future.
This report examines the issue of U.S. imports from North Korea in three parts:
U.S. rules and practices governing imports from North Korea. The United States does not maintain a comprehensive embargo against North Korea. However, imports from North Korea require approval from the Treasury Department's Office of Foreign Assets Control (OFAC). This restriction includes finished goods originating in North Korea as well as goods that contain North Korea-made components. The U.S. Customs and Border Protection (CBP), of the Department of Homeland Security, is responsible for reviewing an importer's OFAC license as the goods enter the United States. North Korea's exports to South Korea (via the KIC) and China, its dominant export markets. In 2010, over three-quarters of North Korea's export shipments went to China and South Korea. Most of North Korea's $1.2 billion in exports to China in 2010 were mineral resources or primary products (such as fish, shellfish, and agro-forest products). An increasing proportion of North Korea's exports to South Korea have become attributable to activities in the KIC, where factories manufactured more than $320 million in goods in 2010, a 25% increase over 2009. The present South Korean government has halted plans for a major expansion of the complex. If a future South Korean government resumes these plans, or if China and North Korea significantly boost bilateral economic integration, more North Korean goods and components could enter global supply chains and test U.S. restrictions against North Korean imports. The KORUS FTA's potential effect on U.S. imports of North Korean content. The KORUS FTA appears likely to have only a minimal impact on whether U.S. sanctions on North Korean imports are put to the test. At present, the agreement would not give preferential treatment to finished products made in the KIC. The agreement would establish a binational committee to discuss whether zones such as the KIC should be given preferential treatment in the future. The committee would operate by consensus, and Congress would need to pass a law to extend any KORUS FTA tariff benefits to products made in the KIC. Moreover, the KORUS FTA contains provisions that make it highly unlikely the agreement would constrain the United States' ability to maintain its restrictions on North Korean products. Many critics of the KORUS FTA argue that the agreement's rules of origin would make it possible for South Korean exports with North Korean components to receive preferential treatment. However, the KORUS FTA's rules of origin do not appear to limit the United States' ability to enforce its restrictions on imported products that contain North Korean inputs.
The issue of how best to handle imports from North Korea appears to center on customs controls, cooperation, and enforcement. The complex nature of many types of goods, such as automobiles and electronics, poses a particular challenge for Customs and Border Protection officials to determine the origin of these products. There is no means to determine with one hundred percent certainty that there are no goods or components originating in North Korea entering U.S. commerce without proper authorization. This will be true regardless of whether the KORUS FTA is in effect. Thus, perhaps the most important factor that will determine whether U.S. restrictions on North Korean imports are tested appears to be the degree to which North Korean goods enter global supply chains.