	Introduction

On June 30, 2007, the United States and South Korea signed the U.S.-South Korea Free Trade Agreement (KORUS FTA). The provisions concerning automobiles and auto parts are among the most controversial elements of the KORUS FTA. On December 3, 2010, the United States and South Korea reached a further agreement that modified the auto sector provisions. These rules will be used to determine if automotive goods imported from South Korea are eligible to receive duty-free or reduced tariff benefits under the KORUS FTA, and whether automotive goods from the United States are eligible for corresponding benefits upon export to South Korea. Finally, it discusses whether the domestic content rules in the KORUS FTA could enable circumvention of the rules of origin by allowing automotive components produced in North Korea's Kaesong Industrial Complex (KIC) to enter the United States duty-free in assembled motor vehicles, and thereby receive the benefits provided by the agreement. Roughly 15,000 components are needed to assemble a motor vehicle. Today, few, if any, vehicles are built entirely from parts made in any one country. An RVC test requires that a certain percentage of the value of a manufactured product (as determined by the cost of inputs, labor, and other direct costs of processing operations) originate in the FTA region. The value of inputs from South Korea and the United States is added together, and if their total value exceeds 35% of the adjusted value of the vehicle or the component, the product would qualify for the benefits of the KORUS FTA. In addition to the KORUS FTA, the South Korean government has negotiated a trade agreement with the European Union, referred to as the KOREU FTA. This agreement enters into force on July 1, 2011. Notwithstanding these differences, Administration experts assert that the regional value content requirements in the KORUS and KOREU FTA are roughly equivalent. One enforcement issue is whether the KORUS FTA could encourage manufacturers in South Korea to incorporate goods produced in the KIC into products exported to the United States, effectively circumventing the U.S. restrictions on goods from North Korea and also enabling North Korea to obtain duty-free access to the U.S. market, to which it is not entitled under the agreement. Although current U.S. regulations effectively prohibit any North Korean goods, including auto parts, from being incorporated into South Korean products that are exported to the United States, if OFAC were to approve a license application, then the KORUS FTA rules of origin for automobiles would apply. As North Korea is not a party to the KORUS FTA, the North Korean inputs would not be counted as regional value content under the rules discussed in a previous section of this report. Sample Regional Value Content Calculation
The U.S.-South Korea Free Trade Agreement (KORUS FTA) was signed on June 30, 2007. The provisions on the automotive sector were among the most difficult areas negotiated, and were among those in which the Obama Administration and South Korean officials reached further agreement on December 3, 2010.
The agreement's effect on the automotive sector has drawn particular scrutiny as Congress considers implementation of the KORUS FTA. In particular, the specific rules of origin (ROO) for automobiles and auto parts have become a matter of debate. These rules determine whether the products imported into an FTA participating country are eligible to receive the duty-free or reduced tariff benefits of the agreement. For autos and auto parts, a certain percentage of the parts, labor, and other associated costs must come from the region. This is known as a regional value content (RVC) test.
Few vehicles built today are built of parts made in any one country. The roughly 15,000 parts needed to produce a single motor vehicle are typically supplied by a complex web of manufacturers located throughout the world. This makes it challenging to determine whether a particular vehicle or a complex component, such as an engine or a transmission, qualifies for duty-free access to the U.S. or South Korean markets under the KORUS FTA.
Based on analysis of the regional value content required under the KORUS FTA rules of origin, a significant proportion of a vehicle's value would need to originate in South Korea or the United States for that vehicle to enter the United States duty-free. Simply assembling a product from inputs obtained from other countries would likely result in insufficient regional value content for a product to qualify for the tariff benefits of the KORUS FTA. It appears that the requirements under the KORUS FTA are roughly equivalent to those imposed upon South Korean and European Union vehicles under the South Korea-European Union Free Trade Agreement, which takes effect July 1, 2011.
Content produced in North Korea is not presently allowed into the United States, a situation that the KORUS FTA would not change. If at some future time the United States were to ease trade restrictions on North Korea, U.S. and South Korean negotiators would then need to discuss the treatment of North Korean inputs to South Korean products under the agreement. The KORUS FTA contains provisions to promote cooperation between the two countries' customs officials. Nonetheless, ensuring that North Korean parts are not used in South Korean products exported to the United States will remain a challenge, whether or not the KORUS FTA takes effect.