Manufacturer of Steel Pipe Products Pays $5.4 Million in Fines for Alleged Violation of FCPA

Tenaris S.A., global manufacturer of steel pipe products in the oil and gas industry, entered into a Deferred Prosecution Agreement (DPA) with the Securities and Exchange Commission (SEC), whose terms include payment of $5.4 million in disgorgement and prejudgment interest for violations of the Foreign Corrupt Practice Act (FCPA). The SEC alleges that Tenaris’ employees located in Uzbekistan bribed Uzbekistan government officials during a bidding process in 2006 and 2007 to supply pipelines for transporting oil and natural gas. According to the DPA, the SEC alleges that the company used confidential information gained from the bribed officials to revise its own bids to ensure that Tenaris made the best bid, thereby guaranteeing that the Uzbekistan government awarded the contracts to Tenaris. According to the DPA, Tenaris earned close to $5 million in profits for these contracts.

Tenaris discovered the FCPA violations by Uzbekistan personnel during an in-house worldwide review of its operations and controls. The company immediately self-reported to SEC, permitting the company to participate in the first Deferred Prosecution Agreement. Robert Khuzami, Director of the SEC’s Enforcement Division stated:

The Tenaris foreign bribery scheme was unacceptable and unlawful, but the company’s response demonstrated high levels of corporate accountability and cooperation. . . . Effective enforcement of the securities laws includes acknowledging and providing credit to those who fully and completely support our investigation and who display an exemplary commitment to compliance, cooperation, and remediation.

Under the terms of the DPA, the SEC will not prosecute the company for FCPA violations provided that Tenaris enhances its FCPA and anti-corruption policies and procedures. Specifically, the company must:

• implement due diligence requirements when retaining and paying agents;
• train employees on FCPA and anti-corruption laws
• require certification of compliance; and
• report any complaints, charges or convictions against Tenaris or its employees for any anti-bribery or SEC violations.

Tenaris is incorporated in Luxembourg and its American Depositary Receipts (TS) are listed on the New York Stock Exchange. This is another example of how a non-U.S. company must ensure that it has procedures in place to comply with the U.S.’s FCPA.

The U.S. GAO Recommends Changes to FDA’s Handling of Imported Seafood

The U.S. Government Accountability Office has concluded in Report GAO-11-286 that the Federal Drug Administration (FDA) must improve its oversight of imported seafood. The GAO study was conducted at the request of several members of Congress because of concerns that the FDA was not doing enough to ensure the safety of imported seafood against residues of unapproved drugs used by foreign seafood farmers.

Farmed fish (aquaculture) account for about half of the seafood imported into the U.S. Fish grown in confined aquacultured areas can have bacterial infections, which may require foreign farmers to treat the fish with antibiotics not approved by the U.S. The concern is that the residues of some drugs in the imported seafood can cause cancer and antibiotic resistance when eaten by U.S. consumers. Specifically, the GAO was tasked with assessing whether (1) the FDA’s current program could prevent imports of seafood containing residues from unapproved drugs and (2) whether the Memoranda of Understanding (MOU) between the FDA and the National Marine Fisheries Service (NMFS) intended to enhance seafood oversight and leverage inspection resources was functioning.

The GAO concluded that the FDA did not provide enough oversight of imported seafood and that the agency was unable to ensure that seafood did not contain harmful residue from antibiotics and other drugs. The GAO also concluded that the FDA and NMFS did not implement any guidance for staff or create standard operating procedures, as required under the MOU between the agencies. Finally, the GAO concluded that the agencies did not conduct enough inspections of foreign seafood suppliers.

Based on the findings of the GAO, it recommended that the Secretary of the Health and Human Services direct the FDA to:

1. Study the feasibility of adopting other practices used by other entities, such as requiring foreign countries that want to export seafood to the United States to develop a national residues monitoring plan to control the use of aquaculture drugs;

2. Develop a more comprehensive import sampling program for seafood by more effectively using its laboratory resources and taking into account the imported seafood sampling programs of other entities and countries; and

3. Develop a strategic approach with specific time frames for enhancing collaborative efforts with NMFS and better leveraging NMFS inspection resources.

Importers of seafood should monitor closely the progress of these recommendations because they could lead to new regulations for seafood imports.

The report can be found here.

European Union Proposes Changes to GSP

The European Commission (EC) announced its plan to modify its Generalised System of Preferences (GSP), which would limit specific tariff preferences to the poorest of developing countries. The EC’s proposal would cut GSP benefits, currently provided to 176 countries and territories, to approximately 80 countries considered the most in need. Under GSP, eligible goods manufactured in a GSP country and imported into the European Union (EU) (and other developed countries) are given a reduced or duty-free rate of duty. Under the proposal, countries considered an advanced developing country, which are now competitive, would no longer be eligible for tariff preferences under GSP.

The EC will take into account a number of factors when determining which countries will lose its GSP eligibility. Specifically, countries falling into the following categories will no longer be eligible for GSP:

1. Countries classified by the World Bank that have a high or upper middle income per capita for the past three years. The EC has indicated that countries such as Kuwait, Russia, Saudi Arabia and Qatar fall into this category.

2. Countries that are members of a Free Trade Agreement with the EU, or have autonomous arrangements that provide equal or better tariff preferences than those provided under GSP. The Market Access Regulation for countries with an Economic Partnership Agreement or the special regime for Balkan countries are examples in this category.

3. Countries that enjoy an alternative market access arrangement for developed markets. The EC has indicated that countries such as Antarctica and American Samoa fall into this category.

The EC points to changes in the marketplace over the past twenty-five years to justify its proposed changes. Such changes include the emergence of more advanced developing countries that are globally competitive; the fact that the poorer countries are lagging behind the rest and the overall downturn in the global economy. The EC also acknowledged that the most advanced emerging economies accounted for approximately 40% of GSP imports into the EU, further hurting the lesser developed countries.

The EU has not yet completed its analysis of which countries will lose or keep GSP benefits. If the EC’s proposal is adopted by the EU, such changes to GSP will take effect by 2014. See http://trade.ec.europa.eu/doclib/docs/2011/may/tradoc_147893.pdf to read the official proposal.

Changes to CAFTA-DR in the Works

In an attempt to promote U.S and regional jobs in the textile and apparel industry, the U.S. Trade Representative announced several changes to the Dominican Republic-Central America-United States Free Trade Agreement (CAFTA-DR). During the Free Trade Commission meeting earlier this year, the signatories to CAFTA-DR discussed ways to encourage regional trade and economic integration by competing with the established textile and apparel supply chains in Asia. The signatories seek to encourage a growing textile and apparel supply chain within the Western Hemisphere that will rival China and other Asian countries.

Among the significant changes proposed are the following:

1. Certain monofilament sewing thread will be required to originate or be produced in the United States or the CAFTA-DR region for goods to qualify for preferential tariff treatment. The sewing thread industry still exists in the United States, primarily in plants located in North and South Carolina. The hope is that the industry will increase with this new requirement.

2. There will be an increase to the cumulation limits to encourage greater integration of regional production through limited reciprocal duty-free access with Mexico, and potentially Canada, to be used in Central American and Dominican Republic apparel. This increase to the annual limits will account for the addition of the Dominican Republic. These limits permit importers to enter specific quantities of designated apparel products into the United States from Central America and the Dominican Republic that contain inputs from Mexico and possibly, Canada.

3. There will be changes to the “short supply” list, including how elastomeric yarns, knit waistbands and knit-to-shape components are treated on that list. Short supply, which is formally known as the Commercial Availability Provision under CAFTA-DR, provides a list of fabrics, yarns and fibers that the signatories have determined are not available in commercial quantities in a timely manner from suppliers in the United States or other member countries. In those cases, components from non-participating countries may be used in apparel, and the end product will be eligible for duty-free treatment.

According to the USTR, U.S. exports to the CAFTA-DR region comprised 16% of the total U.S. textile and apparel exports in 2010. In fact, U.S. textile and apparel exports to CAFTA-DR countries grew by 25% in 2010, exceeding the growth to the rest of the world by 6%. Conversely, U.S. imports of CAFTA-DR textile and apparel products increased by 14% in value in 2010.

FDA Issues Interim Final Rule for Importers of Food

Pursuant to the Food Safety Modernization Act (Pub. L. 111-353), the Food and Drug Administration (FDA) amended its regulations, requiring importers of food for both people and animals to report the name of any country to which the food has been refused entry. The Act directed the FDA to shift its focus to preventing contaminated and adulterated food from entering the U.S. market, rather than on reacting to food safety issues after they occur. The FDA believes that receiving information on whether another country has refused entry to the food will assist the FDA to identify imported food that may pose health and security risks to U.S. consumers.

Section 304 of the Act, which requires a report of “any country to which the article has been refused entry,” amends section 801(m) of the Federal Food, Drug, and Cosmetic Act (21 U.S.C. § 381(m)). Section 801(m) was originally added by the Public Health Security and Bioterrorism Preparedness and Response Act of 2002 (the Bioterrorism Act). Under the Bioterrorism Act, food importers were required to submit certain information about the food in advance of the shipment into the United States. The FDA was permitted to refuse entry of the imported food if it did not receive adequate prior notice from the importers. Advance notice is to be submitted electronically to FDA/Customs. The Food Safety Modernization Act adds the additional requirement of providing whether another country refused admission to the food.

This interim final rule is effective July 3, 2011. Comments from the industry on the interim rule are due no later than June 6, 2011.

A copy of the Federal Register Notice can be found at: http://www.gpo.gov/fdsys/pkg/FR-2011-05-05/html/2011-10955.htm

Commerce Department Seeks Industry Help on Regulatory Cooperation between U.S. and EU

As part of the U.S.-EU High Level Regulatory Cooperation Forum (“U.S.-EU Forum”), the Commerce Department has asked the exporting industry to provide comments on ways for the United States and European Union to reduce or eliminate regulatory differences that impact international trade of goods between their borders.

The International Trade Administration (ITA) of the Commerce Department has concluded that the greatest impediment to more open foreign markets for U.S. exporters and investors is not customs duties or quota, but rather the differences in regulatory measures within the U.S. and EU. The ITA has recognized that such differences in regulations may not be warranted as they increase costs for U.S. producers and consumers without much benefit. The ITA has defined such regulatory measure differences as:

• Standards developed by a government and used in regulation;
• Standards developed by other bodies at request of government and used in regulation; and
• Proposals to provide a presumption of compliance to technical requirements developed by a government.

The Obama administration has set goal of doubling U.S. exports in the next five years. A large part of that strategy is to increase exports to the 27 EU member countries, which currently account for 19% of total U.S. exports. Although bilateral trade between the U.S. and EU was over $500 billion in 2010, U.S. exporters continue to complain that regulatory differences between the U.S. and EU hinder trade. For example, U.S. exporters commonly encounter divergent standards or technical requirements for certain products. A U.S.-origin product may meet strict U.S. standards, but not meet EU standards, making it more difficult and costly for U.S. companies to enter the EU market.

The U.S.-EU Forum and ITA recognize that cooperation between the trading partners will not only lessen the burden on U.S. exporters and thus on consumers, but it will also help governments. The ITA has suggested that when regulators in different countries are permitted to share information on specific regulatory issues, they are more likely to promulgate similar rules and “realize common public policy objectives.”

To meet these goals, the ITA is requesting that U.S. exporters submit comments describing how they believe there is an opportunity to facilitate trade without compromising health, safety or environmental concerns of the trading partners. Because of the large volume of trade between the U.S and the EU, the ITA would like to receive comments from all product sectors. Comments are due electronically to http://www.regulations.gov no later than June 2, 2011 and should be submitted under ITA-2001-0006.
See http://edocket.access.gpo.gov/2011/pdf/2011-10713.pdf for Federal Register notice and http://www.whitehouse.gov/omb/oira_irc_europe for information on the U.S.-EU regulatory cooperation initiative.

Are You Filing a Valid Protest with CBP?

Last month the U.S. Court of International Trade sided with the importer in Estee Lauder v. United States, Slip Op. 11-23 (CIT March 1, 2011), in a decision that should remind a company fighting with U.S. Customs and Border Protection (CBP) how important it is to sufficiently describe products at issue in a protest.

Estee Lauder protested how CBP liquidated entries of its cosmetic kits. CBP classified the kits according to their individual components, rather than as the single component that gives the kit its essential character under GRI 3(b). In its protest, the company asserted that under GRI 3(b), the kits should be classified under HTSUS heading 3304, a duty-free provision for beauty or make-up preparations. Although the protest identified the contents of only one type of cosmetic kit, Estee Lauder also named entries containing a second type of kit. The second type of kit, which was not described in the protest, included a container for holding make-up brushes and was classified under HTSUS heading 4202, dutiable at 20%.

Pursuant to CBP’s request, Estee Lauder provided samples of both types of kits. CBP denied the protest by non-response under the accelerated disposition procedure. Upon denial, the company filed suit with the CIT, challenging the classification of the kits. CBP moved the court to dismiss the case for lack of subject matter jurisdiction, arguing that Estee Lauder failed to file a valid protest because the second type of kit was not specifically described in the protest.

By statute and regulation, a protest is valid when it “set[s] forth distinctly and specifically . . . each category of merchandise affected” and contains “a specific description of the merchandise affected.” 19 U.S.C. § 1514(c)(1) and 19 C.F.R. § 174.13(a). The U.S. Supreme Court has explained that this requirement exists to “compel the importer to disclose the grounds of the objection at the time when he makes his protest.” Davies v. Arthur, 96 U.S. 148 (1877). A protest must show the importer’s intent and adequately notify Customs of the protest’s “true nature and character.” Id. A century later, the Customs Court also explained that “[h]owever cryptic, inartistic, or poorly drawn a communication may be, it is sufficient as a protest . . . if it conveys enough information to apprise knowledgeable officials of the importer’s intent and the relief sought.” Mattel v. United States, 72 Cust. Ct. 257, 262 (1974).

The CIT denied CBP’s motion to dismiss, holding that Estee Lauder sufficiently described the kits in the protest and filed valid protests. Although the court agreed with CBP that it was unclear which items were included in the protested kits when comparing the protest description with the entry documents, the court found that this discrepancy was not “an insurmountable obstacle” to CBP deciding the protest. The CIT held that “[p]rotest sufficiency does not turn on whether Customs can decide the entire claims based solely on information contained in the papers submitted.” Slip-Op 11-23. Rather, “the protest is the tool whereby the collector seeks the precise facts.” Id. (citation omitted).

What can we take away from this case? Although Estee Lauder successfully defended the government’s attempt to kick the case out of court for lack of jurisdiction, it may have avoided a jurisdictional argument all together had there been no question about the merchandise included in the protests. Estee Lauder now must begin the fight on the substance on its argument: what is the correct classification? The company basically added an additional layer of litigation because it filed an unclear protest.

A good protest thoroughly explains why the classification it seeks is correct as a matter of law and fact, and why the classification CBP applied at entry was incorrect. One should not simply ask for reliquidation under the tariff provision you think is right without providing arguments why you are right. It is important to:
• Describe the product
• Set forth the specific issue
• Provide and analyze the law
• Apply the law to your facts
• Explain why your classification is correct
• Explain why CBP is wrong
• Conclude

Following these simple rules will lead to a better and more successful protest.

Expansion of Documentation Permitted to Substantiate Duty-Free Claims under FTAs

U.S. Customs and Border Protection (CBP) recently issued a memorandum to its field regarding documents used to verify duty-free treatment of textile and wearing apparel under free trade agreements (FTAs). In this new memo, CBP has stated that it will now accept supporting documentation beyond a manufacturer’s affidavit to substantiate a trade preference claim. There had been inconsistent treatment among the ports regarding what documents were accepted in FTA verifications. Some ports were flexible, while other ports would accept only a sworn affidavit from the foreign factory. The confusion likely stemmed from a 2007 memorandum regarding manufacturer’s affidavits. The 2011 memo addresses this problem, while expanding the types of documents permitted to substantiate a duty-free claim under a FTA.

Most important, this directive signals flexibility in what documentation Customs will accept in FTA verifications. It should also prevent Import Specialists from the continued denial of claims based predominately on the format of the manufacturer’s affidavit. Of course, regardless of whether an importer relies on an affidavit or other documentation, the following information is still required:

• Statement of person with direct knowledge of the production;
• Identification of the actual production location;
• Legible, printed name of contact person, including telephone number, mailing address or email address of that person;
• Description of the goods, including fiber content, yarn count, fabric type, and commercial invoice or purchase order, as applicable.

Flexibility should help reduce risk to an importer. There is exposure to an importer when it is unable to substantiate a duty-free claim under a trade preference program to an Import Specialist’s satisfaction. Goods imported under a FTA are conditionally duty-free, meaning that if Customs denies the FTA claim, the goods will no longer be duty-free. CBP would rate advance the goods, seeking duty owed plus interest, as though they were not imported under a FTA. However, by that time, which can be several months after the entry of the goods, the merchandise typically has already been sold—thereby eliminating the ability to pass along the additional cost in duty to the customer.

The moral of the story is whether using a manufacturer’s affidavit or other document to substantiate duty-free treatment under a FTA, an importer must ask its manufacturer’s the right questions and must maintain good records to supply to CBP.

Final Rule Regarding MIDs for Textile and Apparel Importers

Importers of textile and apparel products may face higher levels of reasonable care now that U.S. Customs and Border Protection (CBP) has adopted (with some changes) the interim amendments to its regulations relating to the country of origin of textile and apparel products. Specifically, CBP eliminated the Textile Declaration, which used to accompany textile and apparel imports, but now requires importers to provide a manufacturer identification code (MID), defined as the company performing the operations that confer the country of origin of the imported article under sections 102.21 or 102.22. The MIDs must appear on CBP Form 3461 (Entry/Immediate Delivery), CPB Form 7501 (Entry Summary) and all electronic data submissions requiring manufacturer information.

CBP has stated that obtaining the MID will assist CBP, who has the responsibility of preventing entry of goods with false origin information, to verify the country of origin, leading to better enforcement of trade in textile and apparel products. This may be true, but this amendment also imposes increased obligations on the textile and apparel importer to exercise reasonable care to ensure that it is providing accurate manufacturer information. Under the revised regulations, CBP has the power to reject the entry, or take other appropriate actions, which may include civil penalties under Section 1592, if CBP is not convinced that the importer exercised reasonable care in providing the MID.

There are several situations where meeting this requirement may prove difficult for importers. For example, it may be difficult to determine the MID in those situations where the textile or apparel product is made in multiple countries. In these cases, it is imperative for the importer to ask at the time of ordering for the name and address of the manufacturer, information about the origin of fabrics and information about the work performed by the manufacturer. If CBP seeks additional information about the MID, CBP will expect the importer to produce documentation to demonstrate the information it provided is accurate. Failure to do so may constitute a failure of exercise of reasonable care and lead to civil penalties.

Second, verifying MID information may also be difficult where the U.S. importer is purchasing from a seller who is not the manufacturer, but rather serves as the intermediary and may not want to disclose the MID for fear that the buyer may contact the manufacturer directly and cut the intermediary seller out of the transaction. CBP has stated that this is not a sufficient reason to provide incorrect MID information. Importers are required to know the manufacturer, regardless of whether they are purchasing directly from the manufacturer or through an intermediary. Failure to provide MID, or providing inaccurate MID for this reason could lead to civil penalties.

Finally, under section 102.21(e)(2), the country of origin of some products depends upon where “the fabric comprising the good was both dyed and printed when accompanied by two or more of the following operations….” Under this scenario, it will be difficult to determine the origin-conferring operation if more than one manufacturer performs these operations within one country. CBP has indicated that in this situation, it will consider the entity performing the final step of these origin-conferring operations as the MID. CBP has recommended that importers seek a ruling if the company is unsure about which company confers the country of origin.

The Impact of the Food Safety Modernization Act on Importers

To Inspect, or not to inspect… that is the question. Earlier this year, President Obama signed into law the Food Safety Modernization Act (FSMA or the Act), with the goal of shifting the focus of the Federal Drug Administration (FDA) from to responding to food contamination problems to preventing them. Yet, this week, the president’s budget proposal includes cuts to nearly all food inspection programs, including overseas inspections of foreign food manufacturers that supply U.S. importers of food. Does anyone else see the contradiction here? FSMA, which amends the Federal Food, Drug and Cosmetic Act, may have a huge impact on importers of food products. Overall, the Act contains five major elements: (1) a mandate to the FDA to establish prevention-based controls for the food industry; (2) inspections and compliance, including specifications on how the FDA should inspect food producers; (3) imported food safety, including requirement that food importers must verify that their foreign food suppliers possess sufficient preventive controls to ensure safety; (4) mandatory recall authority to the FDA for all food products and; (5) partnership among federal, state, local and foreign agencies to work together to enhance food safety. Of significance to food importers is the third element above—imported food safety—and how the requirements under that section will increase the burden, both in time and money on importers of food products. Under FSMA, food importers must have internal controls that ensure that the food they are importing into the United States is safe. One of the largest potential burdens on importers under this new requirement is the Foreign Supplier Verification Program (FSVP). Under the FSVP, importers need to verify that their foreign suppliers also have adequate public health protection controls in place that meet the U.S. standards under the new law. The FDA describes such verification as “risk-based” that should focus on validating that imported food was not contaminated or adulterated in any way and that the imported food was produced in compliance with proper FDA controls. However, left open for interpretation is what constitutes “risk.” Is it country of origin based? Is it food product based? Another open issue is what an importer needs to do if it finds that the supplier does not have adequate controls. Is it permitted to import food from that supplier while the supplier improves its controls and procedures? Or, must the importer stop production at that plant? Does it depend on what the problem was? What happens if the importer decides to continue to import while the foreign manufacturer improves its procedures and something is contaminated—is the importer liable too? Finally, the FDA has some additional duties under FSMA too. It now has the power to conduct foreign inspections and can deny an entry of a shipment of imported food if the manufacturer does not permit FDA inspection. This brings us back to the beginning. The whole purpose of the law is to protect the public, which does involve cooperation between importers and the FDA, and between importers and their foreign suppliers. However, given that the Obama administration has just proposed to cut the FDA budget for foreign supplier inspections, it is likely that the FDA is going to struggle to do its part under the Act, thus placing even more burden on the food importer.

April 2011 - Preliminary Answers

Determining potential answers for the broker's exam questions after the test is different in a few key ways from taking the test, but none is more key than the fact that we have more than four hours. That means that we can take the time to research as much as we need to in order to get the most accurate (though still unofficial) document possible to all of you. This first attempt is not 100% complete, but this will be corrected and more answers added as new updates are posted.

Click here for our preliminary unofficial exam answers.


As always, remember that these answers represent only our opinion. The official answers will come from Customs and Border Protection in a few weeks and will be posted on their site. In other words, we probably answered the majority of the questions correctly, but these answers do not guarantee whether or not you've passed; it merely is presented as a helpful tool for broker students who are (quite understandably) eager to have any idea of where they stand.

If you would like to share your answers, explanations and comments, we invite you to post them as comments to this blog; however, we ask that comments be professional and to the point. We cannot respond to all of the comments, but this forum will provide you an opportunity to converse with each other.

Happy browsing!

US-Korea Trade Agreement Moves Forward, Could Signal More Trade Liberalization

By Edward Steiner

(Sandler, Travis & Rosenberg, P.A.)

The following article is excerpted from North American Free Trade & Investment Report (NAFTIR), also published by Thomson Reuters. Since 1992, key players in law, business, and government have relied on NAFTIR to stay on top of the legal and regulatory developments that critically impact companies involved in cross-border trade and investment in Mexico, the U.S. and Canada. For more information or to request a sample issue, go to:

http://www.wtexecutive.com/cms/content.jsp?id=com.tms.cms.section.Section_1013_sub_options

Also of interest is Mexico, Tax, Law & Business Briefing http://www.wtexec.com/mextlbtp.html

Even before the effects of the November midterm elections are being felt and the new slate of largely Republican members has been ushered in, the Obama administration is already reprioritizing its agenda and focusing on compromise. Trade policy, relegated to back burner status for much of the past two years, is re-emerging as an area in which the two parties can find a semblance of common ground.

Politics aside, trade is an important part of the American economy. In 2008, exports alone sustained over 10 million domestic jobs – jobs that often earn 13% to 18% more than the national average. The administration has launched a National Export Initiative (NEI) to double exports and add two million jobs within the next five years, and trade agreements are necessarily part of that initiative.

The recently agreed U.S.-South Korea free trade agreement (KORUS) could be the jewel in the NEI crown and a win, to some extent, for both sides of the aisle. The FTA with South Korea, America’s seventh-largest trading partner, would be the largest such agreement since NAFTA in 1994 and would eliminate tariffs on a majority (over 95%) of consumer and industrial goods within a five-year period. Now comes the hard part – the agreement has to move through the legislatures in both countries. Though there is optimism regarding passage of the agreement, there is also a not insignificant amount of opposition among lawmakers in both the U.S. and Korea, and finally implementing the long-stalled pact is far from a pro forma exercise.

U.S.-Korea Trade in Focus

The South Korean economy is the fourth-largest in Asia and the twelfth-largest in the world. It is home to multinational companies such as Samsung Electronics Co. and Hyundai Motor Co., which undoubtedly boost Korean export numbers. South Korean exports account for about half of the country’s gross domestic product. The primary products Korea ships abroad are semiconductors, automobiles and parts, computers, telecom equipment, petrochemicals and textiles. Many of these products arrive on the shores of the U.S., Korea’s second-largest export market.

Largely as a result of these high-value, high-tech products, the size and health of South Korea’s exports continue to grow, with November shipments to the U.S. alone increasing by 25.2% compared to 2009. November was the 13th month in a row Korea’s export sales increased, earning the country a $39.11 billion trade surplus since January. Exports are also benefitting from a weaker won, making South Korean goods cheaper on the international market.

U.S. exports to South Korea have been unable to maintain volume parity with U.S. imports from that country. While the U.S. enjoyed a $7.1 billion service trade surplus with Korea in 2008, in bilateral goods trade the U.S. ran an $11 billion deficit in 2009 and a $6.6 billion shortfall in the first nine months of 2010. The primary products the United States currently exports to South Korea are corn, petrochemicals, organic chemicals, industrial machines, semiconductors, and civilian aircraft and related parts. The National Association of Manufacturers (NAM) notes that manufactured goods account for over 80% of total U.S. goods exported to Korea and that these shipments sustained 230,000 U.S. jobs in 2008.

A study by the United States International Trade Commission (USITC) claims that gross U.S. goods exports to South Korea will increase by about $11 billion as a result of tariff cuts under the pending FTA alone. Imports, on the other hand, are expected to rise only by about $6.7 billion, helping to improve the U.S. trade deficit with Korea. Ironically, government analysis also predicts that an overall increase in trade as a result of KORUS may in fact cause the U.S. trade deficit with the rest of the world to rise.

Cars and Beef

The United States and South Korea concluded FTA negotiations in 2007, but concerns among U.S. lawmakers about access to the Korean market for automobiles and beef have stalled efforts to implement the agreement. Of the big three U.S. automakers, Ford was the most vehement in opposing the agreement, running advertisements noting that for every 52 Korean cars sold in the U.S. only one U.S. car is sold in Korea. Chrysler expressed similar concerns while General Motors, owner of South Korea-based Daewoo, did not comment. A study conducted by the United Auto Workers echoed Fords’ concerns. The UAW claimed that 70% of the 2009 U.S. trade deficit with South Korea - $8.9 billion – was due to the deficit in automobile sales.

An agreement reached in early December 2010, however, has some of these earlier critics rethinking their stances. Ford now supports the Korea FTA and, breaking with labor unions’ traditional opposition, so does the UAW, which claims the agreement will increase U.S. auto exports.

The December agreement includes some significant changes related to automobiles. The United States can keep its 2.5% auto tariff for five years, while Korea must immediately cut its auto tariff from 8% to 4%. U.S. 25% truck tariffs can be maintained until the eighth year after implementation of the FTA and must be phased out by year ten, while South Korea will cut its 10% U.S. truck tariff immediately. Finally, Korea must also immediately cut its tariff on electric cars from 8% to 4%, with both countries required to phase out such tariffs by year five. The new agreement also allows U.S. carmakers to sell in the Korean market up to 25,000 cars that fail to meet strict Korean safety standards as long as the autos meet U.S. standards. The obligation of U.S. car companies to abide by Korean fuel economy and greenhouse gas emission targets will also be eased, allowing U.S. autos that fall within 19% of the standard. Finally, the U.S. can levy a safeguard against any surges of autos from South Korea for up to ten years after all tariffs on a given product have been phased out.

The progress made on autos was not mirrored in the negotiations on U.S. beef products. Specifically, South Korea will maintain its import ban on U.S. beef sourced from cattle over 30 months old, which was first imposed because of a 2003 case of mad cow disease in Washington state. U.S. beef industry groups have indicated that this situation is not overly worrisome, as a 2008 U.S.-Korea protocol is already bolstering beef exports to Korea, which are expected to rise even further with the phase-out of the 40% Korean tariff under the FTA. However, Sen. Max Baucus (D-Mont.) said he is “deeply disappointed” with the lack of progress on the current ban, and he and other legislators from heavily agricultural states have indicated that they may not support the FTA until their concerns are addressed.

Outside of automobiles and beef, the KORUS agreement includes substantial long-term benefits for many other sectors of the U.S. economy. Perhaps most valuably, U.S. service companies will enjoy increased access to the $560 billion Korean services market, an industry in which the U.S. already enjoys a trade surplus with Korea. This includes accounting, health care, education, legal, finance and telecommunications services, areas in which the U.S. excels. In agriculture, U.S. food processors, ranchers and farmers will enjoy increased access to the Korean market, as high Korean tariffs will be eliminated along with other non-tariff barriers. With respect to manufactured goods, the National Association of Manufacturers expects the already large volume of U.S. manufactured goods exported to South Korea to increase by over one-third. Other notable provisions of KORUS include increased access to the Korean government procurement market, improved enforcement of intellectual property rights in Korea, and a requirement that Korea uphold and respect fundamental labor laws in such a way that ensures a level playing field for U.S. workers.

Edward Steiner is Director of Trade and Legislative Affairs for Sandler, Travis & Rosenberg, P.A., resident in the Washington, D.C., office. Mr. Steiner consults for a diverse client base of private industry, trade associations and foreign governments on a wide range of trade compliance issues including: consumer product safety, food safety, environmental protection and labor standards.

Congress, Santa Claus and Scrooge

Tis the season for children of all ages to make their wish list for Santa. On the top of some lists is the passage of the Omnibus Trade Act of 2010.

The Omnibus Trade Act of 2010 (H.R. 6517) was passed by the House on Wednesday. The bill extends several trade preferences programs and temporarily modifies duty rates on specific articles. If passed, the Omnibus Trade Act of 2010 contains several important trade provisions that include:

• extension of the Andean Trade Preferences Act (ATPA) and Generalized System of Preferences (GSP) until June 30, 2012.

• extension of the key Trade Adjustment Assistance (TAA) provisions until June 30, 2012

• various miscellaneous tariff bill (MTB) provisions.

The TAA, GSP and ATPA are scheduled to expire on December 31, 2010 unless they are extended. The bill must be passed by the Senate before it can be signed into law; however, there is some speculation that the Senate might not pass the legislation. With Congress ready to end the session for the holidays, some members aka Scrooges vow to keep it going through the weekend. Will Santa deliver the passage of H.R. 6517 or will it be left on the wish list for next year along with the Korea, Panama and Columbia Free Trade Agreements?


Note from the Wizard:
The Wizard is taking a leave from Oz to follow the yellow brick road, so this will be the Wizard’s last posting on Boskage Trade News blog. It’s been a pleasure to write this blog and interact with the readers for the last two years.

“Un” Happy Holidays for Internet Counterfeiters

After the big sales on Black Friday following Thanksgiving Day, retailers claim to have the best deals of the season available for online shoppers on Monday, also known as Cyber Monday. Online shoppers looking for bargains didn’t find them on 82 commercial websites found to be offering illegal counterfeit goods and copyrighted works. As part of Operation In Our Sites coordinated by the National Intellectual Property Rights Coordination Center (IPR Center) seizure orders were executed against these 82 domains on Cyber Monday.

The government operation targeted online retailers of counterfeit goods, which included sports equipment, footwear, handbags and athletic apparel. Illegal copies of copyrighted DVDs, music and software were also targeted. Federal agents made undercover purchases from various online retailed suspected of selling counterfeit goods. Some of the goods were shipped directly to the U.S. from other countries using international express mail. Once the goods were confirmed to be counterfeit, seizure orders were obtained. When accessing these websites now, users will see a banner notifying them that the website/domain has been seized by federal authorities.

Protection of intellectual property encourages creativity that is essential to continued growth and success of our economy. Without protection, companies and individuals may not be as willing to invest the time and money necessary to develop innovative new products that enhance, and in many cases, save our lives. Without proper enforcement, manufacturers may produce lower cost inferior goods by violating the trademark, copyright and patent laws. Some of these inferior goods such as pharmaceuticals could be hazardous to consumer’s health because they are not manufactured under the same regulations and processes as the patented or trademarked goods.

The IPR Center and the Department of Justice Task Force on Intellectual property (IP Task Force) work to eliminate the growth of intellectual property violations. They encourage involvement from the holders of IPR to assist them in the fight against this growing problem. To learn more about these efforts, visit the IPR Center at http://www.ice.gov/iprcenter/ and the IP Task Force at www.justice.gov/dag/iptaskforce/.

President Announces Agreement on US-Korea FTA

Last week, the U.S. and Korea resolved the automotive and agriculture issues that stalled the last round of discussions. Farmers will see an increase in exports of agricultural products and American automotive manufacturers will have more access to the Korean market, which will keep more Americans working. The new agreement reduces the duties on U.S. automotive imports into Korea from 8% to 4%, with complete elimination of duties by the fifth year. Because of reduced tariffs, the agreement is expected to increase annual exports of U.S. goods by up to $11 billion and support at least 70,000 American jobs. South Korea will have greater access to U.S. markets and our products. Reduced tariffs will make American goods more affordable for personal and business use in Korea. Supporters of the agreement hope that the required changes will be made quickly so it can be submitted to Congress early in 2011 and passed by Congress in the spring.

Click HERE to read more about the agreement.