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
May 24, 2011
Congressional Research Service
7-5700
www.crs.gov
R41843
CRS Report for Congress
P
repared for Members and Committees of Congress

Imports from North Korea: Existing Rules, KORUS FTA, Kaesong Industrial Complex

Summary
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
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Imports from North Korea: Existing Rules, KORUS FTA, Kaesong Industrial Complex

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, pose 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.

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Imports from North Korea: Existing Rules, KORUS FTA, Kaesong Industrial Complex

Contents
Introduction ................................................................................................................................ 1
Existing U.S. Laws and Regulations Governing Imports of North Korean Goods and
Components............................................................................................................................. 2
Overview .............................................................................................................................. 2
Importing from North Korea into the United States ............................................................... 3
Admissibility: Department of Treasury Approval Required.............................................. 3
Tariff Treatment: North Korea Denied Normal Trade Relations (NTR) Status.................. 7
North Korea and the Global Economy ......................................................................................... 8
North Korea’s Exports to South Korea: The Kaesong Industrial Complex (KIC).................... 9
China .................................................................................................................................. 12
The KORUS FTA’s Possible Impact .......................................................................................... 13
Annex 22-B and the Kaesong Industrial Complex ............................................................... 13
Admissibility of Goods ....................................................................................................... 15
Rules of Origin (ROO)........................................................................................................ 18
Conclusion................................................................................................................................ 19

Figures
Figure 1. The Kaesong Industrial Complex and the North-South Korean Border........................ 11

Contacts
Author Contact Information ...................................................................................................... 20

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Imports from North Korea: Existing Rules, KORUS FTA, Kaesong Industrial Complex

Introduction
A number of groups and individuals have recently focused attention on U.S. rules governing
imports from North Korea. 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.1 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. The KORUS FTA will not enter into force unless Congress approves
implementation legislation, which Obama Administration officials have said they expect to send
to the 112th Congress.
As a result of North Korea’s relative economic isolation, the undeveloped state of its export
sector, and U.S. trade restrictions, the United States imports virtually no finished goods from
North Korea.2 Between 2000 and 2010, cumulative U.S. bilateral imports of finished North
Korean goods totaled $335,700, which is equivalent to a rounding error in annual U.S. trade
flows with most countries.3 Nearly half of this amount consisted of stamps, with another 40% or
so consisting of women’s clothing. Since 2005, according to U.S. trade data, the only finished
imports that have entered the United States from North Korea have been $8,363 worth of stamps,
which were imported in June 2010. Imports of finished North Korean goods have literally been
zero in four of the past five years.
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. If the KORUS FTA were in effect, the
argument runs, these goods might receive preferential treatment, to the benefit of the North
Korean government, which receives revenue from the KIC.
The first section of this report examines existing U.S. rules and practices governing imports from
North Korea. The second section analyzes the two main portals through which North Korea
conducts its minimal economic interaction with the outside world: the KIC and China. 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.

1 For more on the KORUS FTA, see CRS Report RL34330, The Proposed U.S.-South Korea Free Trade Agreement
(KORUS FTA): Provisions and Implications
, coordinated by William H. Cooper.
2 North Korea’s official name is the Democratic People’s Republic of Korea (DPRK). South Korea’s official name is
the Republic of Korea (ROK).
3 By way of comparison, from 2000 to 2010, the United States imported over 4,000 times more in goods from Nepal, a
country with a comparable population and gross domestic product (GDP) to North Korea. U.S. imports from Nepal
were worth over $1.4 billion during that time period. Sources: The World Factbook 2009, Washington, DC: Central
Intelligence Agency, 2009. Trade data compiled from the U.S. Department of Commerce and the U.S. International
Trade Commission and accessed via the U.S. International Trade Commission’s Interactive Tariff and Trade DataWeb.
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Existing U.S. Laws and Regulations Governing
Imports of North Korean Goods and Components

Overview
Though the United States requires licenses for all imports from North Korea and severely restricts
exports to that country, it no longer maintains the comprehensive embargo that was in place for
years after the Korean War (1950-1953). A significant loosening occurred in 1999, when
President Clinton announced he would lift many restrictions on U.S. exports to and imports from
North Korea except those involving national security concerns. The Departments of Commerce,
Treasury, and Transportation issued new regulations a year later that implemented the new
policy.4 In 2008, President Bush removed the final vestiges of the economic restrictions first
imposed in 1950 and strengthened in 1988 to isolate North Korea for its support of acts of
international terrorism during the 1980s.5 President Bush terminated the exercise of Trading With
the Enemy Act (TWEA) authorities with regard to North Korea 6 and, in place of those fairly
comprehensive sanctions, declared a new national emergency to continue to block assets that had
been frozen as of June 2000 and to prohibit persons under U.S. jurisdiction from using DPRK-
flagged or DPRK-registered vessels.7
Throughout this period, from the 1950 outbreak of the Korean War through the 2008 removal of
the Trading With the Enemy Act and terrorism designations, importing from North Korea was
either highly circumscribed or banned altogether. Though President Bush removed these two
obstacles to trade relations, the Office of Foreign Assets Control (OFAC), Department of the
Treasury, continues to require that U.S. businesses obtain approval to import from North Korea.8

4 65 Federal Register 38148-38166, June 19, 2000, in which the Departments of Commerce, Transportation, and the
Treasury each issued changes to regulations (15 CFR § 730 et seq., 44 CFR § 403, and 31 CFR § 500, respectively) to
implement the President’s June 1999 announcement.
5 For more on the history and full range of U.S. economic sanctions on North Korea, see CRS Report RL31696, North
Korea: Economic Sanctions Prior to Removal from Terrorism Designation
, by Dianne E. Rennack, and CRS Report
R41438, North Korea: Legislative Basis for U.S. Economic Sanctions, by Dianne E. Rennack.
6 Presidential Proclamation 8271 of June 26, 2008, 73 Federal Register 36785, June 27, 2008.
7 Executive Order 13466, “Continuing Certain Restrictions With Respect to North Korea and North Korean Nationals,”
73 Federal Register 36787, June 26, 2008. The President also issued a proclamation terminating the exercise of
Trading with the Enemy Act authorities with regard to North Korea, as they were implemented in the Foreign Assets
Control Regulations, 31 C.F.R. § 500, and the Transaction Control Regulations, 31 C.F.R. § 505. Presidential
Proclamation 8271 of June 26, 2008, 73 Federal Register 36785, June 27, 2008.
8 31 CFR § 500.586(b)(2). In its September 15, 2010, update of “North Korea: An Overview of Sanctions With Respect
North Korea,” OFAC states that after President’s Bush’s 2008 proclamation terminating the application of TWEA to
North Korea, the “Foreign Assets Control Regulations, 31 C.F.R § 500, to the extent they were promulgated under
TWEA authority, are therefore no longer in force with respect to North Korea” and that “[t]the import restrictions
found at 31 C.F.R. § 500.586(b)(2), which were promulgated under other authorities, remain in force.” OFAC
determined that this particular regulation remained applicable if a North Korean entity was under import sanctions
pursuant to Sections 73 and 74 of the Arms Export Control Act (P.L. 90-629; 22 U.S.C. 2797b, 2797c), which are
described in more detail in footnote 12 below. OFAC is preparing new regulations to implement the requirements of
the executive orders; such regulations will likely cite the International Emergency Economic Powers Act and National
Emergencies Act, authorities cited in the executive orders, as the underlying authorities.
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From late 2008 to 2010, the North Korean government made a series of provocative decisions,
including walking away from the Six-Party denuclearization negotiations, testing short-range and
long-range ballistic missiles, detonating a nuclear explosive device, violating U.N. Security
Council resolutions, presumably sinking a South Korean naval vessel (the Cheonan), and
launching artillery shells at the South Korean island of Yeongpyeong. After a six-nation, civilian-
military ad hoc group determined in May 2010 that North Korea was complicit in the Cheonan’s
sinking, President Obama invoked national emergency authorities to prohibit trade in luxury
items and to block assets of targeted individuals and entities engaged in proliferation, money
laundering, counterfeiting of goods or currency, bulk cash smuggling, narcotics trafficking, or
other illicit economic activity.9
On April 18, 2011, President Obama issued an executive order to base the prohibition on imports
from North Korea on emergency authorities, namely the International Emergency Economic
Powers Act and the National Emergencies Act, instead of other authorities. Under these acts,
direct and indirect importation of goods, services, and technology from North Korea is prohibited,
and “unless exempt, all imports into the United States from North Korea must be authorized.”10
Importing from North Korea into the United States
In considering how imports from North Korea are treated under U.S. laws and regulations, it is
necessary to distinguish between two concepts: (1) whether North Korea finished goods or
components are admissible (i.e., allowed) into the United States; and (2) the tariff treatment of
goods that are deemed to be admissible.
Admissibility: Department of Treasury Approval Required
Importing Directly from North Korea
One may not import directly from North Korea without approval from the OFAC; this applies to
all imports from North Korea. The President’s executive order of April 2011 states
Except to the extent provided in statutes or in licenses, regulations, orders, or directives that
may be issued pursuant to this order, and notwithstanding any contract entered into or any
license or permit granted prior to the date of this order, the importation into the United
States, directly or indirectly, of any goods, services, or technology from North Korea is
prohibited.11

9 Executive Order 13551, “Blocking Property of Certain Persons With Respect to North Korea,” 75 Federal Register
53837, August 30, 2010. President Obama issued this executive order as an expansion of the national emergency
declared by President Bush in 2008; in addition, he cited authorities granted his office in the United Nations
Participation Act of 1945 (P.L. 79-264; 22 U.S.C. 287c); the United Nations Security Council had called on its member
states to impose such restrictions in UNSC Resolutions 1718 (October 14, 2006) and 1874 (June 12, 2009).
10 Executive Order 13570, “Prohibiting Certain Transactions With Respect to North Korea,” 76 Federal Register
22291, April 18, 2011. The initial declaration that a national emergency exists because of activities of North Korea is
contained in Executive Order 13466 of June 26, 2008; the two subsequent executive orders (13551 and 13570) expand
on that original declaration. The President also cites Section 5 of the United Nations Participation Act of 1945 (P.L. 79-
264; 22 U.S.C. 287c) in the second and third executive orders.
11 Section 1, Executive Order 13570, 76 Federal Register 22291, April 20, 2011.
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Under 31 C.F.R. Section 500.586(b)(2), the regulation currently governing imports with North
Korea, U.S. persons seeking to import a product from North Korea must determine, and inform
OFAC, whether the product to be imported is produced by
• “a foreign person whose actions triggered” import sanctions for certain missile
proliferation activities;
• “an activity of the government of North Korea relating to the development or
production of any missile equipment or technology”; or
• “an activity of the government of North Korea affecting the development or
production of electronics, space systems or equipment, and military aircraft.”12
The regulations do not define what activities might be related to the development or production of
materials used in missiles, electronics, space systems, military aircraft, and related technology.
Despite the April 2011 executive order, some think its broad language could result in grounds to
deny all imports; others suggest that the lack of specificity is too lax and might result in
unintended imports from North Korea. The President may revise the executive order or,
alternatively, revoke the executive order and regulations at any time if he finds national
emergency conditions no longer exist. 31 C.F.R. Section 500.586(b)(2) is currently under review.
Importing Indirectly from North Korea
Importers seeking to bring North Korean goods into the United States through a third country
must have OFAC approval to do so. The President reiterated this in the executive order of April
18, 2011, stating, “except to the extent provided … the importation into the United States, directly
or indirectly, of any goods, services, or technology from North Korea is prohibited.” The
importation of finished goods made with North Korean components is also prohibited, as stated in
OFAC guidelines issued following the President’s 2011 Executive Order, which provide that
goods, services, and technology from North Korea may not be imported into the United
States, directly or indirectly, without a license from OFAC. This broad prohibition applies to
goods, services, and technology from North Korea that are used as components of finished
products of, or substantially transformed in, a third country.13

12 31 CFR § 500.586, set out in the Foreign Assets Control Regulations administered by the Office of Foreign Assets
Control (OFAC), states guidance on transactions concerning North Korean property. The import regulation is set out in
31 C.F.R. § 500.586(b)(2). The regulation, in part, cites Section 73 of the Arms Export Control Act (P.L. 90-629; 22
U.S.C. 2797b), which requires the President to impose a range of sanctions on any foreign person he finds “knowingly
exports, transfers, or otherwise engages in the trade of any MTCR [Missile Technology Control Regime] equipment or
technology that contributes to the acquisition, design, development, or production of missiles in a country that is not an
MTCR adherent” or conspires to make such a transaction, or facilitates such a transaction. Further, Section 73 requires
the President to “prohibit, for a period of not less than 2 years, the importation into the United States of products
produced by that foreign person” if he determines that “the export, transfer, or trade has substantially contributed to the
design, development, or production of missiles in a country that is not an MTCR adherent” [emphasis added]. Section
73, in turn, cites Section 11B of the Export Administration Act of 1979 (P.L. 96-72; 50 U.S.C. app. 2410b), which
similarly requires the President to impose a range of sanctions on any foreign person he finds in violation of MTCR-
related controls under that act.
Under current regulations, in the course of executing an approved transaction, a U.S. importer may not own, lease,
operate, or insure a North Korea-flagged vessel; seek authorization to operate a vessel under a North Korean flag; or
register a vessel in North Korea. 31 C.F.R. 500.586(b)(5).
13 Office of Foreign Assets Control, “North Korea: An Overview of Sanctions With Respect to North Korea,” May 6,
2011.
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OFAC confirms that it is preparing new regulations to implement the license requirements for
direct and indirect importing.14
Compared to regulatory regimes for imports from other countries of concern, the regulatory
regime for North Korean imports, as currently set out in 31 C.F.R. Section 500.586, is a minimal
one. For example, the section as a whole contains only one definition. Further, the regulation does
not expressly address the importation of components, as do the Cuban Assets Control Regulations
(CACR), which prohibit the unlicensed importation by persons subject to the jurisdiction of the
United States, including U.S. foreign subsidiaries, of merchandise that is “made or derived in
whole or in part of any article which is the growth, produce or manufacture of Cuba.”15 OFAC’s
Iranian Transaction Regulations expressly permit imports from third countries of goods
containing Iranian-origin raw materials or components if the raw materials or components have
been substantially incorporated into manufactured products or substantially transformed in a third
country by a person other than a “United States person.”16 The relatively small amount of import
trade with North Korea presumably accounts for the skeletal nature of the current regulatory
regime. If North Korea’s export sector expands significantly, an elaboration of U.S. regulatory
requirements may be required.
U.S. Customs Controls over North Korean Imports
The U.S. government depends on, and requires, an importer to ascertain the origin of the good to
be imported. 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. Finished goods of North Korean origin imported without the proper documentation or
licensing may not pose a problem for officials to identify at the border. However, products from
countries such as South Korea or China that contain North Korean components could prove to be
somewhat more difficult to detect.
CBP officials assert that their targeting, verification, and enforcement processes help to mitigate
the risk of trade violations, including the importing of illicit products and components from North
Korea into the United States.17 At the same time, because “trade is crucial to America’s economic
competitiveness,” another CBP goal is to facilitate the flow of compliant imports.18 U.S. customs
laws also place a greater responsibility on importers themselves to be aware of laws governing
imports and to exercise “reasonable care” when classifying, valuing, and determining the origin
of imports.19 These factors could create opportunities for importers or exporters to falsify entry

14 The new regulations, which will probably also identify the underlying statutory authority as the International
Emergency Economic Powers Act and National Emergencies Act, might take some time to be published. New
regulations generally are subject to rigorous interagency review and a public comment period.
15 31 C.F.R. § 515.204 (import prohibition); 31 C.F.R. § 515.329 (definition of “person subject to the jurisdiction of
the United States”). See also 31 C.F.R. § 515.410 (dealing abroad in Cuban origin commodities); § 515.536 (certain
transactions with respect to merchandise affected by 31 C.F.R. § 515.204).
16 31 C.F.R. § 560.407. In this case, “U.S. person” does not include U.S. foreign subsidiaries. 31 C.F.R. § 560.314.
Conversely, transactions relating to Iranian-origin goods that have not been incorporated into manufactured products or
substantially transformed in a third country are prohibited. 31 C.F.R. § 560.407.
17 Meeting with CBP officials, May 3, 2011.
18 U.S. Custom and Border Protection, Annual Financial Report, Fiscal Year 2010, p. 2. http://www.cbp.gov.
19 Title VI of the North American Free Trade Agreement Implementation Act (P.L. 103-182), also known as the
Customs Modernization or “Mod” Act, modernized customs operations while placing a greater responsibility on the
importer of record to take “reasonable care” when properly classifying, valuing, and determining the origin of imported
(continued...)
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documents or other records, thus possibly escaping the notice of CBP officials. The Customs
Modernization Act amended Customs’ enforcement powers, in part, by applying the penalties for
fraud, negligence, and gross negligence in Section 592 of the Tariff Act of 1930 (19 U.S.C.
Section 1592) to those importers who failed to exercise reasonable care.
When assessing entries of U.S. imports, CBP exercises a risk-management approach to assess the
millions of individual entries of merchandise entering the United States.20 CBP’s first layer of
screening involves targeting and monitoring trade patterns through risk-based analysis and
intelligence.21 Additional targeting information is gained through CBP’s online trade violation
reporting system, known as “e-Allegations.”22
Second, CBP verifies importer information by examining documentation at the border,
conducting audits, and performing additional cargo screening, if necessary.23 Most U.S. FTAs,
including the proposed KORUS FTA, require that any importer or exporter/producer in the
territory of either party maintain all records “necessary to demonstrate that a good for which the
producer or exporter provided a certification was an originating good,” and therefore qualifies for
favorable tariff treatment.24 Exporters are also required to provide records that include “the
purchase of, cost of, value of, and payment for all materials used in the imported good,” which
would seem to include all components in the supply chain.25 The recordkeeping requirement also
extends to “such other documentation as the Parties may agree to require” for a minimum of five
years.26
Third, CBP partnerships with the trade community through programs such as the Customs Trade
Partnership Against Terrorism (C-TPAT) and Importer Self Assessment (ISA) could help provide
another layer of verification. These voluntary programs require that businesses engage in cargo
and supply chain security processes that are subsequently certified by CBP officials.27 In return,
verified importers receive priority processing for CBP inspections, a reduced number of
inspections, and other benefits that often result in significantly reduced border delay times.28
Although primarily designed to eliminate terrorist threats, these trade partnership programs can

(...continued)
merchandise.
20 According to CBP’s Summary of Performance and Financial Information, Fiscal Year 2010, CBP processed over 28
million entries of merchandise in FY2010, amounting to $1.99 trillion in import value.
21 CBP’s Automated Targeting System (ATS) screens cargo to identify potential threats related to terrorism, as well as
for trade admissibility and health and safety concerns. U.S. Customs and Border Protection, How Cargo Flows
Securely to the U.S.
, http://www.cbp.gov/linkhandler/cgov/trade/cargo_security/cargo_control/cargo_flow_map.ctt/
cargo_flow_map.pdf.
22 U.S. Customs and Border Protection website, http://www.cbp.gov/xp/cgov/trade/trade_programs/e_allegations/.
23 CBP’s Summary of Performance and Financial Information, Fiscal Year 2010 indicates that CBP completed 379
audits of importers and related parties in FY2010.
24 KORUS FTA, Article 6.17.1.
25 Ibid.
26 Ibid.
27 Although originally designed to combat terrorism, these programs also serve to ensure greater compliance with U.S.
laws and CBP regulations. U.S. Customs and Border Protection website, http://www.cbp.gov/xp/cgov/trade/
cargo_security/ctpat/what_ctpat/ctpat_overview.xml. See also CBP website at http://www.cbp.gov/xp/cgov/trade/
cargo_security/ctpat/.
28 Ibid.
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also be used to verify compliance with other U.S. customs and product safety laws. Thus, it is
possible that they could reduce the possibility that North Korean components could enter U.S.
commerce through the supply chains of participating companies.
Fourth, CBP engages in enforcement actions. In the case of sanctions violations, enforcement
would include seizure of the illicitly imported merchandise. Violators could also be subject to
civil and criminal penalties.29 CBP officials assert that cooperative efforts with their South
Korean counterparts (discussed in the “Rules of Origin (ROO)” section below) further serve to
reduce the risk of illicit North Korean inputs entering the U.S. market.30
Despite all of these efforts, it is impossible for CBP to determine with absolute certainty that no
goods or components originating in North Korea are entering U.S. commerce without proper
authorization. This is particularly the case for complex products such as automobiles and
electronics, which may include thousands of components manufactured in different locations.
Exporters may not know the origin of all of the components in their products, and arguably CBP
is unlikely to be able to determine origin in the absence of a complaint.
Tariff Treatment: North Korea Denied Normal Trade Relations (NTR) Status
Finished goods from North Korea that receive an importation license from OFAC are subject to
U.S. tariffs. North Korea and Cuba are the only countries to which the United States denies
normal trade relations (NTR) status, formerly known as most favored nation (MFN) treatment.
Imports from a non-NTR country can be at a significant price disadvantage compared with
imports from NTR-status countries. The United States has denied NTR status to North Korea
since 1951, when the Truman Administration suspended NTR status to all communist countries
(except Yugoslavia) under Section 5 of the Trade Agreements Extension Act.31 Two decades later,
Section 5 was superseded by Title IV of the Trade Act of 1974, which required the President to
continue to deny NTR treatment for North Korea (and most other communist countries).32 Title
IV’s provisions with respect to North Korea continue to be in effect today.
Under Title IV, in order for the President to extend NTR treatment to North Korean goods, the
President must enter into a bilateral commercial agreement with North Korea that contains certain
required provisions, including a reciprocal NTR clause. Such an agreement requires approval by
Congress by joint resolution enacted into law.33 Moreover, in order that the President may enter
into the bilateral agreement with and extend nondiscriminatory tariff treatment to a nonmarket
economy country, a category that includes North Korea, the President must first determine that
North Korea complies with freedom-of-emigration requirements set out in Section 402 of Title

29 CBP’s authority to assess penalties for fraud, gross negligence, and negligence, including searches and seizures
derives, in part, from 19 U.S.C. § 1592, et seq.
30 Meeting with CBP and USTR officials, May 3, 2011.
31 65 Stat. 73; Pres. Proc. 2935 and Trade Agreement Letter, 16 Federal Register 7635, 7637 (1951); continued by the
Trade Expansion Act of 1962, P.L. 87-794, § 257(e)(2).
32 In more detail, Title IV of the Trade Act of 1974 requires the President, except as otherwise provided in that title, to
continue to deny nondiscriminatory tariff treatment to goods of countries that were denied such treatment at the time of
enactment (i.e., January 3, 1975), a category that included North Korea. Trade Act of 1974, P.L. 93-618, § 401, 19
U.S.C. § 2431; see H.Rept. 93-571, at 79.
33 Trade Act of 1974, §§ 404, 405, 19 U.S.C. §§ 2434, 2435.
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IV, popularly referred to as the Jackson-Vanik Amendment.34 Because none of these actions has
been taken with respect to North Korea, DPRK imports do not receive NTR treatment, and tariffs
on them are set at the highest U.S. rates that currently apply.35
Moreover, as a nonmarket economy country that is out of compliance with freedom-of-emigration
requirements contained in the Jackson-Vanik Amendment, North Korea is ineligible to participate
in any U.S. government credit, credit guarantee, or investment guarantee program, and the
President may not enter into any commercial agreement with that country.36 The denial of NTR
status also makes a country ineligible for preferential (i.e., duty-free) rates accorded to a variety
of products of developing countries under the Generalized System of Preferences (GSP) program
pursuant to Title V of the Trade Act of 1974.37
North Korea and the Global Economy38
The North Korean economy is one of the world’s most isolated. The DPRK’s stated policy of
self-reliance (juche), its suspicion of foreign countries, and the collapse of its industrial base since
the late 1980s have resulted in an extremely low level of commercial and financial relations with
other nations in the world. 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.39

34 Section 402 of the Trade Act of 1974, 19 U.S.C. 2432, requires that the President either determine that North Korea
is abiding by the statute’s freedom-of-emigration requirements or waive these requirements on an annual basis.
Congress may reject a presidential waiver by passing a joint resolution of disapproval that is enacted into public law.
Trade Act of 1974, § 402(d), 19 U.S.C. § 2432(d).
35 See Harmonized Tariff Schedule of the United States (2011), General Note 3(b), at http://www.usitc.gov/
publications/docs/tata/hts/bychapter/1100gn.pdf#page=3. North Korean goods are subject to tariff rates listed in
“column 2” of the Harmonized Tariff Schedule of the United States, which sets out non-MFN rates.
36 Trade Act of 1974, § 402(a), 19 U.S.C. § 2432(a). An additional requirement is found in Section 409 of the Trade
Act of 1974, 19 U.S.C. 2439, which prohibits a nonmarket economy country from participating in any U.S. government
credit, credit guarantee, or investment guarantee programs and prohibits the President from concluding any commercial
agreement with the country unless it is found to accord its citizens “the right or opportunity to join permanently through
emigration, a very close relative in the United States.”
37 Trade Act of 1974, § 502(b)(2), 19 U.S.C. § 2462(b)(2). The GSP program expired on December 31, 2010.
38 For more information, see CRS Report RL32493, North Korea: Economic Leverage and Policy Analysis, by Dick K.
Nanto and Emma Chanlett-Avery.
39 CRS estimates that in 2010, the DPRK exported $2.8 billion in goods to the world, of which China accounted for
$1.2 billion and South Korea for $1.0 billion. The estimate for total exports to the world was derived by summing
imports from North Korea by countries that report to the United Nations using the UN Commodity Trade database and
augmenting that with data from Global Trade Atlas for countries that had not yet reported to the United Nations. Data
for South Korean trade with the DPRK are from the South Korean Ministry of Unification and are included in the total
even though South Korea considers such trade as inter-Korean and not foreign trade.
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North Korea’s Exports to South Korea: The Kaesong Industrial
Complex (KIC)40

North Korea’s exports to South Korea have increased by nearly 25% since 2006, though at $1
billion in 2010, they are still at a relatively low level.41 Over time, a greater proportion of these
exports have been due to the activities at the Kaesong Industrial Complex. This phenomenon
accelerated in 2010, when South Korea halted virtually all non-KIC trade with North Korea
following the Cheonan’s sinking in March 2010. By the end of February 2011, almost all of
North Korea’s exports to South Korea were attributable to activities in the KIC.42
By the end of 2010, over 120 small and medium-sized South Korean manufacturing companies
were operating in Kaesong. The facility in 2010 produced $323 million in output. Most of the
manufacturers (71 firms) produce clothing and textiles. Other companies produce kitchen utensils
(four firms), auto parts (four firms), semiconductor parts (two firms), and toner cartridges (one
firm). Light industry and other manufacturers that depend on low labor costs and low-level
technology products (e.g. textiles and apparel, general machinery, some electronics, and furniture)
are among those most likely to move facilities into the complex, particularly given concerns
about the level of intellectual property rights protection in North Korea. About 10% of the
production at Kaesong is exported to third countries after clearing customs in South Korea. In
2010, the primary export destinations were Australia, the European Union, Russia, and China.43
The Kaesong complex’s future hinges on the course of inter-Korean relations and the policies of
future South Korean leaders. Since President Lee Myung-bak came into office in 2008, his
government has been ambivalent about the KIC. On the one hand, it has halted plans for a major
expansion of the complex, due in part to the marked deterioration in inter-Korean relations since
early 2008. On the other hand, the complex has continued to expand incrementally under Lee, and
his government did not close it down despite the Cheonan’s sinking and the shelling of
Yeonpyeong Island in 2010. Lee’s reluctance to shut down the KIC reflects not only the financial
cost of doing so—a closure could make South Korea’s government liable for hundreds of millions
of dollars in insurance payments to the South Korean companies that use the complex—but also
the political support that the KIC enjoys within South Korea. Lee’s term in office ends in 2013,
and by law he cannot run for reelection. A future South Korean leader could decide to dust off the
KIC’s major expansion plans or, alternatively, shut down the complex altogether.
The KIC represents a dilemma for U.S. and South Korean policymakers. On the one hand, the
project provides an ongoing revenue stream to the Kim Jong-il regime in Pyongyang, by virtue of
the share the government takes from the salaries paid to North Korean workers. South Korean and
U.S. officials estimate this revenue stream to be around $20 million per year. On the other hand,
the KIC arguably helps maintain stability on the Korean Peninsula and provides a possible
beachhead for market reforms in the DPRK that could eventually spill over to areas outside the

40 For more information, see CRS Report RL34093, The Kaesong North-South Korean Industrial Complex, by Mark E.
Manyin and Dick K. Nanto.
41 According to the Bank of Korea, South Korea’s total imports in 2010 were over $425 billion.
42 South Korean Ministry of Unification, as reported by U.S. Embassy Seoul Economic Section, North Korea Economic
Briefing
, January 21, 2011, and April 1, 2011.
43 South Korean Ministry of Unification data provided to CRS in March 2011.
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complex and expose tens of thousands of North Koreans to outside influences, market-oriented
businesses, and incentives.
As discussed below, the KORUS FTA provides for a Committee on Outward Processing Zones
(OPZ) to be formed and to consider whether zones such as the KIC will receive preferential
treatment.

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Figure 1. The Kaesong Industrial Complex and the North-South Korean Border

Source: Prepared by CRS based on ESRI Data and Maps 9.3.1; IHS World Data.

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China
Since the early 2000s, China has emerged as the key to North Korea’s economic relations with
the outside world. 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.
North Korea’s major export items to China include mineral fuels (coal), ores, woven apparel, iron
and steel, fish and seafood, and zinc and articles thereof. 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). Pyongyang reportedly has imported aquaculture
technology (mainly from China) to increase production of cultivated fish and agricultural
equipment to increase output of grains and livestock. North Korea also has imported equipment
for its coal and mineral mines. Much of the coal and mineral exports have resulted from
partnering with Chinese firms, through which the Chinese side provides modern equipment in
exchange for a supply of the product being mined or manufactured. Thus, to the extent that North
Korean content enters the global marketplace via China, it is likely to come from North Korean
energy inputs (particularly coal) or mineral deposits. This is likely to be the case unless or until
the North Korean manufacturing sector revives and begins to export to China.
One Chinese strategy with respect to the DPRK is to create an integrated industrial region
focused on Jilin and Liaoning provinces in northeastern China and the bordering provinces in
North Korea. The strategy includes building roads, investing in North Korean industries,
connecting a North Korean port to industries in landlocked Jilin province, and creating a free
trade zone.44 The two countries have been exploring the possibility of building an industrial park
similar to the Kaesong Industrial Complex close to their mutual border. If they are successful,
more Chinese companies would be engaged in manufacturing Chinese brand-name products in
North Korea and could be interested in exporting them to the U.S. market.
Of the 86 Chinese trading companies and joint ventures in North Korea announced by China’s
Ministry of Commerce, 35 are in mining, 11 are in agriculture/timber, 17 are in industrial parts
and materials, 7 are in apparel, 4 are in other consumer goods, 1 is in iron and steel, and 1 is in
automotive vehicles and parts. The other nine companies are in transportation or trading.45 North
Korean exports of apparel, other consumer goods, automotive parts, and discrete industrial parts
and materials (not products such as paint) conceivably could enter a Chinese supply chain and
end up in a product sold in the United States in which the North Korean content could be
identified. However, identifying Chinese products manufactured using ores, minerals, or coal
from the DPRK would require extensive documentation and disclosure by the manufacturer.

44 For information on Chinese investment in and strategy toward the DPRK, see Drew Thompson, Silent Partners,
Chinese Joint Ventures in North Korea
(Washington, DC: A U.S.-Korea Institute at SAIS Report, February 2011).
45 Open Source Center, Directory of PRC Enterprises in North Korea, China—OSC Report in Chinese, English 19
April 11, Product FEA20110420016995, April 20, 2011.
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The KORUS FTA’s Possible Impact
Some critics of the KORUS FTA contend that the agreement will increase the chances that North
Korean goods or components will enter the United States. Their arguments tend to fall into three
categories:
1. 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.
2. The KORUS FTA might constrain the U.S. government’s ability to impose
restrictions on imports from North Korea.
3. The KORUS FTA has insufficient “rules of origin” to determine the country of
origin of imported products.
This section examines these issues point by point.
Annex 22-B and the Kaesong Industrial Complex
During the 2006-2007 KORUS FTA negotiations, the previous South Korean government sought
to secure preferential treatment for products made in the Kaesong Industrial Complex (KIC) in
North Korea. The United States adamantly opposed this position. In the final KORUS FTA
agreement, the two sides reached a compromise on the KIC by creating a special committee to
handle the issue.46 As discussed below, incorporating the KIC into the KORUS FTA would
require the U.S. executive branch and Congress to approve such a move.
The KORUS FTA’s KIC-related provision is Annex 22-B, titled “Committee on Outward
Processing Zones on the Korean Peninsula.” It sets out a process under which the United States
and Korea may “review whether conditions on the Korean Peninsula are appropriate for further
economic development through the establishment and development of outward processing
zones.” An “outward processing zone” (OPZ) would be an area outside the FTA territory in which
a certain amount of manufacturing or processing of a good could take place for purposes of
deeming the good “originating” under the agreement and thus be eligible for preferential tariff
treatment and other agreement benefits.47

46 In contrast, under the South Korea-ASEAN FTA, for example, preferential tariffs are applied to 100 items
manufactured in the Kaesong Industrial Complex. The Korea-Singapore and Korea-European Free Trade Association
(EFTA) FTA agreements also include products from the KIC. In the negotiations between South Korea and the
European Union, Seoul requested products from Kaesong be covered by the proposed FTA. The final 2009 EU-South
Korea FTA, however, contains a provision similar to that included in the KORUS FTA. Most EU countries have
official relations with North Korea. Germany is North Korea’s largest export market in the EU. In 2010, North Korean
exports were approximately $31.4 million, primarily clothing ($19 million) and engines ($6.2 million). Global Trade
Atlas, accessed by CRS May 2010.
47 The KORUS FTA defines the term “territory,” with respect to Korea, as “the land, maritime, and air space over
which Korea exercises sovereignty, and those maritime areas, including the seabed and subsoil adjacent to and beyond
the outer limits of the territorial seas over which it may exercise sovereign rights or jurisdiction in accordance with
international law and its domestic law.” KORUS FTA, art. 1.4. Note also that in defining the term “national” with
respect to Korea, the KORUS FTA provides that “[a] natural person who is domiciled in the area north of the Military
Demarcation Line on the Korean Peninsula shall not be entitled to benefits under this Agreement.” Id.
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To this end, the United States and South Korea would establish a Committee on Outward
Processing Zones on the Korean Peninsula comprising officials of both countries. The kinds of
people who will serve on the committee has not yet been determined. The committee would
initially meet on the first anniversary of the entry into force of the KORUS FTA and at least once
annually thereafter or at any other time mutually agreed upon by the committee. The committee is
to identify geographic areas that may be designated OPZs and establish various political and
economic criteria, including labor and environmental standards, that must be met before “goods
from any outward processing zone” may be considered originating goods for FTA purposes. The
committee would also determine whether the proposed OPZ has met the committee’s criteria. In
addition, the committee “shall also establish a maximum threshold for the value of the total input
of the ‘originating final good’ that may be added within the geographic area of the outward
processing zone.”
Committee decisions reached by “unified consent” would be recommended to the United States
and South Korea. The two countries would then be responsible “for seeking legislative approval
for any amendments to the Agreement with respect to outward processing zones.” 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.”48
To the extent that the United States maintains an import embargo on finished goods of North
Korea and goods made elsewhere with North Korean components, the United States would first
need to deem OPZ goods admissible before the question of applicable tariff treatment arises.
Further, because Congress has express constitutional authority to impose duties under Article I, §
8, cl. 1, of the U.S. Constitution, Congress must either itself authorize specific tariff rates to be
imposed on particular products or grant the President the authority to proclaim them.
As discussed earlier, goods from countries that are subject to Title IV of the Trade Act, such as
those of North Korea, may only be accorded NTR (MFN) treatment under the specific
requirements of that title.49 Unless Congress by statute removes a country from the Title IV
regime, as it has done with regard to countries entering the World Trade Organization, the
President must abide by Title IV requirements in order to grant NTR tariff status to a Title IV
country. Further, because Congress has provided that imports that are not subject to Title IV or
other statutory restrictions are entitled at most to NTR tariff status under § 136 of the Trade Act of
1974, 19 U.S.C. § 2136, the extension of preferential tariff rates to imports from any country
must be expressly authorized. Any grant of presidential proclamation authority in KORUS FTA
implementing legislation will likely apply only to “originating goods” of the territory of South
Korea as that term is defined in the implementing legislation. Thus, presidential authority to
proclaim preferential rates with regard to goods other than those that would currently qualify as
“originating” under the FTA would need to be provided in a separate enactment.50

48 Office of the U. S. Trade Representative, “Outward Processing Zones, Kaesong, and the U.S.-Korea Trade
Agreement, Frequently Asked Questions,” at 2.
49 It may be noted that if the amount of permitted processing in an OPZ is to be set at a maximum threshold and the
threshold is low, it is likely that the finished product would not qualify as a North Korean-made product for purposes of
Title IV, but would instead be a product of South Korea or the United States. This situation, however, would not affect
the need for new legislation to authorize the President to proclaim preferential tariff rates for goods that would not
currently qualify as “originating goods” under the FTA, as discussed in the text of this report.
50 An example of a post-FTA delegation may be found in P.L. 104-234, which amended the United States-Israel Free
Trade Agreement Implementation Act of 1985, 19 U.S.C. § 2112 note, to authorize the President to proclaim duty-free
(continued...)
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Some observers, particularly U.S. opponents of the KORUS FTA, have criticized the agreement
for including Annex 22-B and have called for the agreement to be renegotiated so that the annex
is deleted and/or products made in the Kaesong Industrial Complex are explicitly excluded from
the terms of the agreement. Twice before—in the spring of 2007 and in the fall of 2010—South
Korea agreed to modifications involving other portions of the KORUS FTA that were requested
by the United States. The KORUS FTA’s supporters have rejected the argument that a further
modification is needed on a number of grounds, principally that the South Korean government is
unlikely to consider such a request and that existing U.S. rules are sufficient to restrict imports
from North Korea.
Admissibility of Goods
The question has been raised whether the KORUS agreement could constrain the United States’
ability to restrict imports from South Korea (or other countries) of finished goods that contain
North Korean components. As discussed below, the KORUS FTA contains provisions that make
this prospect highly unlikely.
Article 2.8.1 of the KORUS FTA incorporates an obligation that the United States and South
Korea currently have under Article XI:1 of the General Agreement on Tariffs and Trade 1994
(GATT), a World Trade Organization (WTO) agreement, not to adopt or maintain any quantitative
prohibition or restriction on the importation of each other’s goods.51 The obligation covers
prohibitions or restrictions other than duties, taxes, or other charges and includes such measures
as quotas or import licenses. Import prohibitions or restrictions may not be applied to “the goods
of the other Party,” a category that would include not only originating goods, but also any good
that qualifies as a good of South Korea under U.S. non-preferential rules of origin.52 Thus, goods
covered by Article 2.8.1 could include final goods of South Korea manufactured with components
from a third country. The obligation in Article 2.8.1 would apply, however, “[e]xcept as otherwise
provided” in the agreement.
One such exception may be found in Article 2.8.4(a), which provides that, in the event that “a
KORUS Party adopts or maintains a prohibition on the importation from … a non-Party of a
good, no provision of this Agreement shall be construed to prevent the Party from … limiting or
prohibiting the importation of the good of the non-Party from the territory of the other Party.”53
This provision contemplates that a country may impose or maintain an import embargo against

(...continued)
treatment for goods of the West Bank, the Gaza Strip, or a “qualifying industrial zone,” as the term is defined in the
statute, provided the goods meet detailed qualifications spelled out in the statute. See also H.Rept. 104-495, at 2, for a
discussion of the need for new presidential proclamation authority to extend the preferential tariff benefits of the U.S.-
Israel Free Trade Agreement to articles of the above-mentioned areas.
51 General Agreement on Tariffs and Trade 1994, art. XI:1, at http://www.wto.org/english/docs_e/legal_e/06-gatt.pdf.
52 The agreement defines the term “goods of a Party” as “domestic goods as these are understood under the GATT 1994
or such goods as the Parties may agree, and includes originating goods of that Party.” KORUS FTA, art. 1.4. Regarding
the difference in treatment of originating goods and other goods of Parties to the North American Free Trade
Agreement (NAFTA), for example, U.S. Customs and Border Protection has noted that “[e]ven though a good may be
sufficiently processed in Canada, Mexico or the United States to be marked with that country of origin, it may not be
sufficiently manufactured to ‘originate’ under the rules of origin for NAFTA tariff treatment purposes.” .” U.S.
Customs & Border Protection, Importing into the United States 51 (2006 ed. at http://www.cbp.gov/linkhandler/cgov/
newsroom/publications/trade/iius.ctt/iius.pdf).
53 KORUS FTA, art. 2.8.4(a).
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the goods of a non-signatory country and that the embargo may be implemented without violating
the agreement even though it may affect trade with the other KORUS FTA Party. 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.54 Further, because Article 2.8.4 would
apply with respect to restrictions or prohibitions on the importation of goods of any third country,
it would apply with respect to all U.S. import embargoes, including, among others, those with
Cuba and Iran.55
The United States has long taken the position that an FTA provision of this type protects U.S.
trade sanctions programs. Although Article 2.8.4 does not expressly state that a “good of the non-
Party” includes a non-Party component used in the manufacture of a finished good in another
country, the United States has traditionally understood the term “good” in this context to include
not only final products of the non-Party but also non-Party components used in third-country
production. For example, when the U.S.-Canada Free Trade Agreement (CFTA) was submitted to
Congress for approval in 1988, the Cuban Assets Control Regulations—as they continue to do
today—made it unlawful for a person subject to U.S. jurisdiction, unless authorized by the
Treasury Department, to import merchandise of Cuban origin or merchandise “made or derived in
whole or in part of any article that is the growth, produce or manufacture of Cuba.”56 In
submitting the agreement to Congress, the Administration emphasized that the CFTA would not
affect the existing Cuban sanctions program, stating that the CFTA rules of origin “would not
operate to override” the above-quoted regulation and adding that the CFTA contained a
provision—similar to Article 2.8.4 of the KORUS FTA—that permitted the United States and
Canada to impose restrictions on the importation of products of a third country.57 The United
States took the same position with respect to the North American Free Trade Agreement
(NAFTA), noting that a similar NAFTA provision “permits the United States to ensure that Cuban
products or goods made from Cuban materials are not imported into the United States from
Mexico or Canada.”58
Chapter 6 of the KORUS FTA further separates admissibility from tariff treatment by providing
that “whether a good is originating is not determinative of whether the good is also admissible.”59
This statement appears in a note to Article 6.1, the KORUS FTA provision containing the basic
requirements for what constitutes an “originating good.” Thus, it would appear that if a good with
some North Korean content were to qualify as an “originating good” under the agreement, this
status would not necessitate that it be admitted into the territory of the United States or South
Korea.

54 If the United States were to impose an import prohibition or restriction on a non-Party good, however, the United
States and Korea, at the request of either, would need to “consult with a view to avoiding undue interference with or
distortion of pricing, marketing, or distribution arrangements in the territory of” Korea. KORUS FTA, art. 2.8.5.
55 See Cuban Assets Control Regulations, 31 C.F.R. § 515.204; Iranian Transaction Regulations, 31 C.F.R. §§ 560.201,
560.407.
56 See 31 C.F.R. § 515.204(a)(2010) for the current provision.
57 United States-Canada Free Trade Agreement, Statement of Administrative Action (CFTA SAA), H.Doc. 100-216, at
177.
58 North American Free Trade Agreement, Statement of Administrative Action (NAFTA SAA), H.Doc. 103-159, at
498.
59 Art. 6.1, n.1.
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Further, given that national security considerations may be a factor in restricting imports from
North Korea, the “essential security” exception of the KORUS FTA, set out at Article 23.2 of the
agreement, may also come into play. Indeed, the United States considered that the security
exceptions of the CFTA and the NAFTA could be used to justify its import embargo against Cuba
in the event of a challenge.60 The KORUS FTA security exception states, in pertinent part, that
“[n]othing in this Agreement shall be construed … (b) to preclude a Party from applying
measures that it considers necessary for the fulfillment of its obligations with respect to the
maintenance or restoration or international peace or security or the protection of its own essential
security interests.”
Although the United States has considered clauses of this type to be self-judging—that is, not
subject to third-party or arbitral scrutiny61—the breadth of such a clause may lead it to be invoked
in situations that adversely affected trading partners might not necessarily view as security-
related.62 The KORUS FTA provides, however, that if the essential security exception is invoked
as a defense by a country in a KORUS FTA dispute settlement proceeding—be it a dispute
between the United States and South Korea under the State-State provisions of Chapter 22 or a
dispute brought against a Party by an investor of the other Party under the investor-State dispute
provisions of Chapter 11—“the tribunal or panel hearing the matter shall find that the exception
applies.”63 In other words, assume that South Korea or a South Korean investor alleged in a
dispute settlement proceeding that the United States had implemented a particular sanction
against North Korea in a manner that violated a KORUS FTA obligation owed either South Korea
or the investor. If the United States defended its measure before the panel or tribunal on the
ground that it was covered by the agreement’s “essential security” exception, the arbitral tribunal
or dispute panel presumably could not examine whether the U.S. measure fell within the scope of
the exception. Rather, it would instead be required to find that the exception could be used to
justify the measure in question. Further, it is also possible that dispute settlement proceedings
may not be instituted at the outset if, in informal consultations, the responding Party conveys to
the complainant that it intends to invoke this exception in any such proceeding.

60 CFTA SAA at 177; NAFTA SAA at 498. The NAFTA SAA states that in negotiating the security exception to the
NAFTA, “the United States made clear that it would be invoked, if necessary, to prevent any circumvention of the
Cuba sanctions program.” NAFTA SAA at 498. In 1962, the United States invoked Article XXI of the GATT, the
agreement’s national security exception, to justify the Cuban trade embargo before GATT Contracting Parties. WTO,
Analytical Index: Guide to GATT Law and Practice 605 (updated 6th ed. 1995).
61 See, e.g., NAFTA SAA at 666 (“The national security exception is self-judging in nature, although each government
would expect the provisions to be applied by the other in good faith”).
62 See generally John. H. Jackson & Andreas F. Lowenfeld, Helms-Burton, the U.S., and the WTO, ASIL Insight (Mar.
1997), at http://www.asil.org/insight7.cfm; Hammes L. Schloemann & Stefan Ohlhoff , “Constitutionalization” and
Dispute Settlement in the WTO: National Security as an Issue of Competence
, 93 Am. J. In’tl L. 424 (1999).
63 KORUS FTA, art. 23.2, n. 2. For further discussion of dispute settlement provisions in the agreement, see CRS
Report R41779, Dispute Settlement in the Proposed U.S.-South Korea Free Trade Agreement (KORUS FTA), by
Jeanne J. Grimmett. It should be noted that it is U.S. policy not to grant a private right of action in U.S. courts under
free trade agreements. In other words, a private individual or firm would not have a cause of action under the
agreement, nor could the individual or firm sue any U.S. department or agency, state, or local government on the
ground that an action or inaction of the governmental entity was inconsistent with the agreement. See, e.g., United
States-Peru Trade Promotion Agreement Implementation Act, P.L. 110-138, § 102(c), 19 U.S.C. § 3805 note.
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Rules of Origin (ROO)64
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.65 ROO are important because they are used to determine
the country of origin of imported products for a variety of governmental purposes. Customs
officials use them to enforce trade restrictions, properly assess tariffs, apply trade remedies, and
collect statistics. Other commercial trade policies are also linked to ROO, such as country-of-
origin marking and government procurement. ROO are fairly straightforward when a product is
“wholly obtained” from one country.66 However, when a finished product’s component parts are
manufactured in many countries, as is often the case in today’s global trading environment,
determining origin can be a complex process.67 The automotive sector is a prime example because
the global supply chain is extensive. A single passenger vehicle can incorporate as many as
15,000 individual components.
For the present discussion of imports from North Korea, the KORUS FTA’s ROO are relevant
only in those cases where an importer has received permission from OFAC to bring in a South
Korean good that contains North Korean components. However, the North Korean content would
be considered as non-originating—in other words, not of South Korean or U.S. origin—and thus
would not help to qualify the finished good to receive the benefits of the FTA.
The KORUS FTA’s rules of origin are examples of preferential ROO, which are used to
determine the eligibility of products to receive preferential treatment (duty-free status or reduced
tariffs) as a result of an FTA.68 One of the primary trade policy goals of preferential ROO is to
exclude products from countries that are not signatories of the FTA. A second goal is to limit the
impact of the FTA on any domestic industry sector that either FTA signatory regards as
particularly import-sensitive.69 Therefore, in order for goods to receive favorable tariff treatment,
importers must be prepared to demonstrate that their products meet certain criteria. Preferential
rules of origin are individually negotiated and tailored to meet the needs of each party to the
agreement; they vary from FTA to FTA.
Regional value content rules in the KORUS FTA specify that a percentage of inputs must be
sourced from either the United States or South Korea. Thus, the KORUS FTA contains incentives
that could encourage manufacturers to use parts, labor, and other inputs from either the United
States or South Korea rather than buying components from North Korea (assuming they are
admissible), China, or other markets. The strength of these incentives depends, in part, on the size

64 For more information, see CRS Report RL34524, International Trade: Rules of Origin, by Vivian C. Jones and
Michael F. Martin. This report is out of print but available from the authors.
65 Public Citizen, “Korea FTA: More North Korean “Kaesong” Sweatshop Goods, New Cash for the Kim Dictatorship
and Weakened U.S. National Security,” Undated Factsheet.
66 CRS Report RL34524, International Trade: Rules of Origin, by Vivian C. Jones and Michael F. Martin. This report
is out of print but available from the authors.
67 Ibid. See also LaNassa, Joseph A. “Rules of Origin and the Uruguay Round’s Effectiveness in Harmonizing and
Regulating Them,” The American Journal of International Law, 90:4 (October 1996), pp. 625-640.
68 The other kind of rules of origin are non-preferential ROO, which are used to confer normal trade relations (i.e.,
nondiscriminatory or NTR) tariff treatment and to determine the country-of-origin of goods for labeling purposes.
69 In the U.S.-South Korea FTA, specific ROO apply to textiles and apparel. Other means that are used to mitigate the
adverse effects of an FTA include staging of tariffs and temporary safeguard measures. These measures appear in the
proposed South Korea-U.S. FTA under Chapter Two, Annex 2-B and Chapter Ten, respectively.
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of the two countries’ tariffs before the FTA goes into effect. When external tariffs are low, the cost
for an FTA manufacturer of not meeting the ROO is small; when a tariff is higher, there is a
greater incentive for a manufacturer to satisfy the ROO to save on tariffs.
As one example, under the KORUS FTA, a specified subset of costs of producing a passenger car
or truck must originate in either the United States or South Korea in order to benefit from the
lower (preferential) tariffs.70 If the FTA’s ROO requirements are met, cars imported from South
Korea would no longer be subject to the 2.5% U.S. NTR duty on these products. South Korean
light truck manufacturers71 could gain an even greater price advantage if they meet the KORUS
FTA rules of origin, while manufacturers located in China, Japan, or Europe would still be
obligated to pay the higher 25% U.S. NTR tariff rates. There might also be similar gains for
manufacturers in other industrial sectors.
CBP officials note that Chapter 7 of the KORUS FTA, “Customs Administration and Trade
Facilitation” enhances an already mutually beneficial cooperation between U.S. and South
Korean customs officials.72 This chapter mandates the sharing of information and intelligence,
including confidential information when either signatory suspects unlawful activity. Chapter 7
also provides for sharing technical advice, conducting joint training programs, and enforcing
regulations that would make the enforcement of the mutual trading relationship more efficient.73
Since goods from the KIC must also pass through South Korean customs,74 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.
If Members of Congress are not satisfied with these provisions, they might seek to direct CBP
officials to discuss with South Korean customs officials the possibility of requiring additional
certification from South Korean exporters to the United States. Congress could also consider
directing the CBP to conduct a greater percentage of audits of importers that apply for preferences
under the KORUS-FTA, either during the transition period or for the life of the agreement.
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

70 Flexibility is extended to automobile assemblers, permitting them to use one of three methods to demonstrate that
their product meets the regional value content requirements of the KORUS FTA. One method—the net cost method—
requires that 35% of a specified subset of costs of producing an auto be from the United States or South Korea. The
35% requirement is not based on the entire content of an auto.
71 As of 2011, South Korean auto producers were not making light trucks. Of course, this may change in future years.
72 Meeting with CBP officials, May 3, 2010.
73 KORUS FTA, Article 7.5.
74 In private conversations with CRS, South Korean officials say that the fact that there is only one border crossing
between the KIC and South Korea makes it easier to monitor what comes in and out of the complex.
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Imports from North Korea: Existing Rules, KORUS FTA, Kaesong Industrial Complex

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. At present, because North Korea exports a minimal
amount of manufactured goods to the outside world, the application of U.S. restrictions against
North Korean imports have not been significantly challenged. However, this situation may
change if at some future date North Korean industry revives and its manufacturers become more
integrated into the global economy. The most likely ways this integration would occur would be
through increased economic ties between the North Korean and Chinese provinces straddling the
DPRK-Chinese border or through a decision by the South and North Korean governments to
significantly expand the Kaesong Industrial Complex.
If either or both of these events occur, the possibility of circumventing U.S. import restrictions
against North Korea could become a bigger problem than it is today. 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. An example of the
challenge faced is the automobile supply chain, in which Chinese or South Korean producers
could source one of thousands of components from a low-wage North Korean producer and then
seek to evade U.S. customs authorities by not reporting the item to OFAC or CBP. In the case of
South Korea, these imports could receive preferential treatment if the KORUS FTA is passed and
if the imports meet the agreement’s rules of origin. The ability of the United States to enforce its
restrictions would then depend to a large extent upon the level of U.S.-South Korea customs
cooperation—which arguably would be enhanced by the KORUS FTA—and the severity of the
penalties charged for non-compliance with U.S. import restrictions.

Author Contact Information

Mark E. Manyin, Coordinator
Dick K. Nanto
Specialist in Asian Affairs
Specialist in Industry and Trade
mmanyin@crs.loc.gov, 7-7653
dnanto@crs.loc.gov, 7-7754
Jeanne J. Grimmett
Michaela D. Platzer
Legislative Attorney
Specialist in Industrial Organization and Business
jgrimmett@crs.loc.gov, 7-5046
mplatzer@crs.loc.gov, 7-5037
Vivian C. Jones
Dianne E. Rennack
Specialist in International Trade and Finance
Specialist in Foreign Policy Legislation
vcjones@crs.loc.gov, 7-7823
drennack@crs.loc.gov, 7-7608


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