Sneak Preview: Rules of Origin and the Kaesong Industrial Complex: South Korea's Uphill Battle Against the Principle of Territoriality

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By: Pierce Lee

This article is a case study about the rules of origin (ROOs) dealing with products undergoing outward processing (OP) in the Kaesong Industrial Complex (KIC). OP refers to temporary exportation of goods for further manufacturing. As the word “temporary” indicates, the finished goods are usually imported back to the home country for domestic consumption or permanent exportation.

The KIC is an outward processing zone (OPZ) in North Korea in which South Korean companies have set up manufacturing plants and employ North Korean labor. The KIC plays a crucial role in inter-Korean relations, but its expansion has been limited because the products undergoing OP in the KIC are often determined to have originated in North Korea and are subject to high tariffs. To address this situation, the South Korean government has entered into many free trade agreements (FTAs) containing special provisions modifying the preferential ROOs applicable under the respective FTAs so that Kaesong products become eligible for duty-free treatment or preferential tariff rates.

A close observation of those so-called “outward processing provisions” raises several questions that are not only important for inter-Korean relations but also for international economic policy. These questions address whether those OP provisions are consistent with the laws of the World Trade Organization (WTO); whether the WTO imposes limitations on the amount of discretion exercised by countries when adopting preferential ROOs under FTAs; and whether it is required or desirable to derogate from the principle of territoriality when determining the country of origin.

This article contains some preliminary discussions on these issues but does not provide definitive answers. Rather, it aims to set out the background information about the KIC and raise some important legal and policy issues related to ROOs governing OP.

The full article will be available soon at Pierce Lee: 39 N.C. J. Int'l L. & Com. Reg. 1 (forthcoming Fall 2013).

Posted by Stephen A. Moore on Mon. October 28, 2013 8:00 AM
Categories: North Korea, South Korea, World Trade Organization

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