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Friday, July 15, 2011

Imports from North Korea: Existing Rules, Implications of the KORUS FTA, and the Kaesong Industrial Complex

Mark E. Manyin, Coordinator
Specialist in Asian Affairs

Jeanne J. Grimmett
Legislative Attorney

Vivian C. Jones
Specialist in International Trade and Finance

Dick K. Nanto
Specialist in Industry and Trade

Michaela D. Platzer
Specialist in Industrial Organization and Business

Dianne E. Rennack
Specialist in Foreign Policy Legislation

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 KICmade 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.

Date of Report: July 8, 2011
Number of Pages: 18
Order Number: R41859
Price: $29.95

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