November 21, 2013 8:37 am

Tougher South Korea customs checks strain US trade deal

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South Korean customs authorities are ramping up scrutiny of US imports in a move that may see fewer American manufacturers benefit from the low tariffs promised by last year’s trade pact between the two countries.

The much-vaunted US trade deal came into force in March 2012 following a prolonged debate in both nations over its ratification, and cut tariffs across a range of goods so long as a certain amount of production costs are incurred in the US.

But a growing number of US exporters in the automotive, chemicals and agricultural sectors are complaining of a sudden increase in rigorous audits by customs officials seeking evidence that their products qualify for US “country of origin” status.

“In the past five weeks, the number of calls I’ve got on this has skyrocketed,” said Amy Jackson, president of the American Chamber of Commerce in Korea.

“The documentation being requested is completely out of line with international norms . . . Tariff reduction is the fundamental benefit of the trade deal, and if the Korean authorities are going to deny those benefits, this will be a huge problem for the US government.”

Ahn Byung-ok, an official responsible for “country of origin” questions at the South Korean customs service, confirmed that it was carrying out an investigation into US car imports, and that it was focusing in particular on imports by the Japanese groups Toyota and Nissan from their factories in the US.

The trade agreement stipulates that at least 35 per cent of a vehicle’s net production cost must be incurred in the US, if it is to qualify for US “country of origin” status.

Two people close to the situation said that Toyota had already been informed of a preliminary finding against it, but Mr Ahn denied this, adding that he had no knowledge of similar investigations in other sectors. Toyota and Nissan declined to comment.

Ms Jackson said the targeting of non-US groups suggested “a political miscalculation that the US government and [the American Chamber of Commerce] wouldn’t intervene on their behalf . . . but they will get the same protection as any other manufacturer”.

This follows a warning last month over Seoul’s trade deal with the EU from Karel de Gucht, European trade commissioner, who said that he was “very concerned indeed” about South Korean progress in meeting commitments to ease regulations on European financial groups.

The government is worried about tax revenues . . . so they are trying to raise revenue by investigating companies

- Song Won-gun, Korea Economic Research Institute

Such complaints contrast with the ostensibly trade-friendly stance of Park Geun-hye, the recently elected South Korean president who has continued previous governments’ efforts to liberalise trade relationships. Seoul is pursuing trade agreements with countries including China, Indonesia and Australia, and is mulling entry into the US-backed Trans-Pacific Partnership.

But Song Won-gun, a research fellow at the Korea Economic Research Institute, said that the customs authorities’ drive could be linked to a government initiative to bolster state finances. Ms Park’s administration is struggling to meet her pre-election pledge to boost welfare spending by Won135tn ($127bn) over the next five years.

Last month the national tax service said it planned to raise Won149.5bn in penalty revenues next year, up from a target of Won71.6bn for this year. “The government is worried about tax revenues, which are not sufficient to cover government expenditure, so they are trying to raise revenue by investigating companies,” Mr Song said

In the year to the end of March, during which period the trade pact was in effect, South Korean exports to the US rose 4 per cent to $60.2bn, according to US customs data, and exports in the opposite direction declined 7.4 per cent to $41.4bn.

Additional reporting by Song Jung-a and Kang Buseong

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