Tax & Accounting Blog

China-Korea FTA

Blog, Global Trade, ONESOURCE March 25, 2016

2015 marked the Harvest year for China’s Free Trade Agreement (FTA) Strategy, and in June of this year China will be initiating FTA’s with both South Korea and Australia. The FTA’s between two of the world’s leading economies is expected to boost China’s growth and provide a much needed stimulant for the Asia Pacific Region.

China is already one of South Korea’s largest trading partners and largest export markets and the successful implementation of this FTA will be the green light needed to boost both countries economic growth.

China and South Korea wrapped up FTA negotiations this month; negotiations that had started back in May of 2012. The agreements made between these two leading Asian economies means the eventual elimination of tariffs covering approximately 90% of the goods in their bilateral trade.

This FTA between China and South Korea is a comprehensive agreement where it will not only impact the trade environments, but also provide benefits to consumers, enterprises, and countries; ultimately a benefit to the entire continent.

According to the statistical data provided by the China State Council Development Research Center, it is estimated that this FTA will boost China’s GDP growth by 0.34% and boost South Korea’s GDP by 0.97%.

Under this trade agreement, within 10 years after FTA implementation, China is expected to remove tariffs on 71% of South Korean goods and South Korea is expected to remove tariffs on 79% of Chinese goods.

Within 20 years after this FTA implementation, South Korea is expected to eliminate tariffs on 92% of all Chinese goods, and China is expected to remove tariffs on 91% of all goods from South Korea.

Depending on the industry and product, excluding highly sensitive protected goods, all products under this FTA will achieve a 0 import duty until the tariff elimination period is completed. This tariff elimination is expected to provide commodity exporters with price competitiveness in the import market.

For Chinese consumers, certain household electrical appliances, common chemicals, apparel items, and certain Korean produce will be less expensive. For example, certain household electrical appliances will see the current 15% import tariff eliminated in the next 10 years. Bath and skin care products will also see a reduced tariff of 20-35% in the next 5 years.

For Korean consumers, certain agricultural and aquatic products, household electrical appliances and apparel from China will see a significant price reduction. Tariff rates of 20-30% on certain poultry items will also be eliminated in the next 20 years. Additionally, refrigerating and heating equipment made in China will see reduced tariff rates from the current 8% to 0% in the next 10 -20 years.

RVC and Change in Tariff

In order to enjoy this preferential tariff treatment, the key for enterprises will be to master the rules of origin and get familiar with the validation policies of their governments. The Korea-China FTA establishes rules that determine whether products qualify for originating status and can therefore enjoy the benefits of the agreement.

Product specific rules have two main components for determining the status: Regional Value Content (RVC) and a Change in Tariff Classification (CTH). If products fail to meet these rules, they may be ineligible for preferential treatment. For instance, in the agricultural industry, fresh produce and fishery products must meet “wholly obtained or produced” status, whereas processed products are required to comply with a change in tariff heading (known as CTH).

Most steel, petrochemical and electronic products are subject to similar tariff requirements, namely a change in the first four or six digits of the HS code. Some exceptions allow a minimum RVC of 40%. Passenger vehicles (HS 8703) face even more complications; they must satisfy both a CTH and a minimum of 60% RVC threshold in order to receive preferential tariff treatment in China.

Customs validation policy is another critical point in the process of Certificate of Origin (COO) utilization. During the import clearance phase, governments normally focus on documentation review as a first step of authority verification. For example, they may inquire as to how a company arrived at preferential determination in the form of requesting the decision steps of HS codes classification, the conditions of direct transportation and the validations of the COO information. In addition to the document review, the South Korean government is very strict with audits and is known as being one of the most aggressive FTA validation countries in the world

Auditors require importers to link the certification for origin to exporter sales orders, sales orders to production, production to purchasing information and purchasing information to supplier origin status evidence.

 Conclusion

Overall, there is no doubt that the China and South Korea FTA will significantly lower duties on bilateral imported goods, help boost business exchange, and ultimately benefit final consumers. Nevertheless, the new FTA utilization and aggressive FTA validations by the South Korean government may make things difficult for both importing and exporting companies. How companies prevent FTA compliant risks and prepare for future audits is a future topic that is worth an in depth analysis.

 

Reference List

China Customs,2015. China’s FTAs with South Korea and Australia Initializing, Cover Story, Journal for China Customs.