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E X E C U T I V E O F F I C E O F T H E P R E S I D E N T T H E U N I T E D S T A T E S T R A D E R E P R E S E N T A T I VE

WASH I N G T O N , D.C. 2 0 5 0 8 October 7,2011The Honorable John B. LarsonU.S. House of RepresentativesWashington, D.C. 20515Dear Congressman Larson:During the October 5 Ways and Means Committee markup of the United States-Korea FreeTrade Agreement (KORUS), at which my General Counsel, Tim Reif, was a witness, you askedMr. Reif several questions pertaining to the relationship of the KORUS to U.S. sanctions onNorth Korea, to the treatment of products produced in the Kaesong Industrial Complex located inNorth Korea, to the application of rules of origin under the KORUS, and to concerns withtransshipment of goods. In addition to the responses Mr. Reif provided during the markup, I ampleased to provide more detailed written answers to the questions you raised.

What impact will the FTA have on U.S. sanctions on North Korea?Answer: Nothing in the KORUS changes U.S. sanctions on North Korea, including theprohibition on direct and indirect importation of goods, services, and technology fromNorth Korea. U.S. Customs and Border Protection (CBP) will continue to deny entry togoods that do not comply with U.S. sanctions, including unlicensed imports of goodswith North Korean content, regardless of the percentage. When implemented, theKORUS will strengthen CBP's ability to enforce sanctions through enhanced informationsharing provisions and strengthened cooperation with South Korean Customs authoritieson enforcement issues, including with respect to these restrictions.Can goods from Kaesong come into the United States under the FTA?Answer: All goods from North Korea, including those containing parts or componentsmanufactured in North Korea (such as in the Kaesong Industrial Complex), are prohibitedfrom entering the United States unless exempted from regulation by Congress or licensedby the Treasury Department' s Office of Foreign Assets Control (OFAC). OFAC willissue an import license only if it is determined that the importation is consistent with U.S .law, national security, and foreign policy objectives, as well as our internationalobligations. Neither the rules of origin provisions, nor any other provision of theKORUS, change U.S. sanctions on North Korea, including the prohibition on direct andindirect importation of goods, services, and technology from North Korea. This meansthat South Korean finns cannot avoid U.S. sanctions by including parts or componentsfrom North Korea in their exports to the United States and claiming preferential tarifftreatment under theXORUS.How is the United States going to ensure that Korean products containing Kaesongcomponents don't enter the United States?Answer: Before arrival into the United States, information on all imports is run throughCBP's Automated Targeting System. CBP collects information about potential North

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Korean transshipment from numerous sources including information provided by otherU.S . government agencies, foreign governments, and the trade community, informationgathered during previous enforcement actions, and information collected during post importation verifications and summaries of goods and uses this information to target itsenforcement activities at preventing North Korean goods and parts from entering theUnited States.CBP has several offices including the NTAG (National Targeting Analysis Group) andthe CTAC (Commercial Targeting Analysis Center) devoted to these efforts. Theseoffices analyze trade patterns and information gathered through the process describedabove in order to target CBP's activities at potential shipments of North Korean goods.Moreover, CBP officials also cooperate extensively with their South Korean counterpartsto determine whether any South Korean companies are potentially transshipping NorthKorean goods or goods containing North Korean parts or components to the UnitedStates. For example, the United States and South Korea have concluded a CustomsMutua1 Assistance Agreement (CMAA), which allows the United States to requestassistance from South Korea to verify that an export from South Korea has been lawfullyimported into the United States. The United States may also request that South KoreanCustoms conduct surveillance of modes of transport or goods destined for the UnitedStates that are suspected of violating U.S. law.If CBP receives information that a shipment poses a risk of containing North Koreangoods or parts or components while the shipment is in transit or once it has reached aU.S. port, CBP will detain the shipment for inspection and verification of the origin of thegoods and parts or components. CBP's inspection may include physical inspection of thegoods, review of the relevant entry and supporting documentat ion including invoices, andtransportation records. CBP will not release the shipment unless it concludes that it doesnot contain North Korean content or that it is permitted to enter the United Statespursuant to a license granted by Treasury or an exemption from regulation by Congress.Further, in order to make a claim of origin, an importer, exporter, or producer mustcertify that the good has met the rules of origin and other provisions in the KORUS.Consistent with the KORUS, U.S. law provides for strong verification procedures andimposes a number of recordkeeping and other obligations on those making a claim,helping ensure that individuals who make false claims of origin are held accountable.Civil, administrative, and criminal penalties may apply under both customs and sanctionslaws . CBP may apply civil or administrative penalties against the company that importedthe product for violation of customs laws and regulations . Penalties include assessmentof monetary fines and forfeiture of the merchandise. CBP will refer cases to U.S.Immigration and Customs Enforcement (ICE) where criminal penalties may apply. Inaddition, if an importer violates U.S. sanctions, Treasury may impose civil penalties orrefer the case to the U.S. Department of Justice for criminal prosecution.Furthermore, when implemented, the KORUS will strengthen CBP's ability to enforcesanctions through enhanced information sharing provisions and strengthened cooperation

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with South Korean Customs authorities on enforcement issues, including with respect tothese restrictions.I f goods from Kaesong were going to be covered by the FTA and afforded duty relief, whatwould need to happen? An executive order? A resolution? Legislation?Answer: Goods produced in the Kaesong Industrial Complex (KIC) do not receive anybenefits under the KORUS. Kaesong is not mentioned in the Agreement.More generally, the possible future treatment of special geographic zones called"Outward Processing Zones" (OPZs) is discussed in an annex to the KORUS. Under theannex, the United States and South Korea agreed to establish a Committee, comprised ofgovernment officials of both the United States and South Korea, to meet one year afterthe KORUS enters into force.This Committee would identify geographic areas that may be designated as OPZs.Kaesong is not identified as an OPZ, and therefore the Committee would need todesignate it as such. The Committee would review whether conditions on the Koreanpeninsula would be appropriate for further economic development through theestablishment and development of OPZs. If the Committee determined those conditionswere appropriate, the Committee would establish the criteria that must be met before anygood from an OPZ could be eligible for preferential tarif f treatment under the KORUS.After this process and assessment, the Committee would make a recommendation to theSouth Korean and U.S. governments. Such a decision to issue a recommendation has tobe reached by consensus - it could only occur if the U.S. government fully agrees. Giventhe United States' longstanding and serious concerns with respect to North Korea, theU.S. Committee members would not agree to such a recommendation withoutfundamental changes in North Korea.Finally, if the governments agreed with any recommendation to extend preferential tarifftreatment to an OPZ, they would then need to seek legislation in order to implement thatrecommendation. In other words, Congress maintains final authority over this issue.Congress would have to pass legislation, and the President would have to sign thatlegislation into law, for any extension of preferential tariff treatment to goods produced inan OPZ to take effect.What steps are being taken to ensure that Chinese manufacturers don't transship goodsthrough Korea in order to obtain duty relief under the FTA?Answer: The KORUS rules of origin were carefully constructed on a product by productbasis and in close consultation with stakeholders to ensure that only goods produced inthe United States or South Korea benefit from the tariff preferences under the Agreement,and contain strict customs enforcement provisions designed to prevent transshipmentfrom China or anywhere else. CBP will use all of the tools at its disposal to enforce theseprovisions and to ensure that the benefits of the Agreement accrue only to U.S. andKorean producers and workers. If CBP finds any false claims of origin, it will take swift

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action to recover duty losses, pursue penalties as appropriate, and establish enforcementcriteria to prevent future potential fraudulent claims.Under the KORUS, CBP can take several other courses of action, including but notlimited to: conducting comprehensive cargo exams or importer audits and performinglaboratory analysis on the contents of imports. Under the KORUS, CBP will conductextensive verifications as warranted of imports for which preferential duty treatment issought to ensure that they legitimately qualify under the Agreement. With regard totextiles, CBP can visit South Korean textile factories to validate a fac tory's productioncapability as well as compliance of the goods with the requirements of the KORUS. I f afactory does not have the facilities to produce goods or documentation to support aKORUS claim, CBP can deny preferential treatment on future shipments. If CBPdetermines that a par ticular importer is illegally transshipping Chinese goods or violatingthe law in some other way, it may also deny entry to goods from that producer. Inaddition, under the KORUS, the United States may request that South Korea examinetransshipped textile or apparel goods whether or not a claim for preferential tarif ftreatment has been made.

I hope these answers are helpful to you as you consider the KORUS. The Agreement will bringsignificant economic and strategic benefits to the United States, take our relationship with a keyally to a new level, and enhance our leadership and credibil ity in the Asia-Pacif ic region. I lookforward to working closely with you as the Agreement advances.

Imbassador Ron Kirk l