The rule of origin section of the FTA specifies the minimum content of a product that must originate in either the U.S. or Korea for the products to be eligible for duty-free or reduced duty treatment.
Specifically, the KORUS FTA provides that 35% of the components used to manufacture products (under the build-up method/net cost method) or 55% of the components of the final product (using the build-down method) must originate in one of the two countries to be eligible for the FTA's preferential treatment. Each methodology's benchmark percentage is supposed to be equivalent to each other to avoid any circumvention.
Some opponents have claimed that the EU has received a better deal than the U.S. has, because the Korea-EU FTA stipulates that foreign contents should not exceed 45% of the price of the product. This is simply wrong. A 45% maximum foreign content rule under the Korea-EU FTA corresponds with the minimum 55% domestic contents rule under the KORUS FTA (in build-down method). In addition, it should be noted that the EU's standard foreign content rule was 40% instead of 45%.
Duty Drawback is a system commonly used in many countries, including the U.S., to promote exports. Under a duty drawback system, the government repays certain duties it collects on imported products that are used as components in products that are then exported.
Duty drawback has a long history in U.S. trade law, dating back to the first tariff act of the U.S. in 1789. The purpose is to provide a level playing field to U.S. exporters, permitting American businesses to compete in foreign markets without the handicap of including the duty paid on imported merchandise in its costs.
Duty drawback is a legitimate and widely-used program in international trade. The World Trade Organization specifically exempts duty drawback from subsidy-related challenges. The KORUS FTA and many other FTAs do not have any specific provisions on duty drawback, since there is nothing special or unique about it.
Conversely, the Korea-EU FTA does have some duty drawback provisions, which specifically allow the current regime in both economies to continue. The Korea-EU FTA has also provided for the possibility of a cap on duty drawback amounts beginning in the fifth year of implementation. However, the cap would be triggered only in the exceptional case of a huge import surge and sourcing pattern change. To deal with the possibility of an import surge in the automotive trade, the KORUS FTA's accompanying agreement announced in December 2010 has introduced special motor vehicle safeguard procedures.