[Exclusive] After Tariffs, Origin Is Next... U.S. Crackdown on Transshipments Puts Korean Exporters "On Alert"

Origin Determinations Hinge on Chinese Materials and Processing
Exporting SMEs Face a Greater Burden to Prove Origin
Tariffs Vary by Up to Eightfold Depending on Origin
U.S. Steps Up Crackdown on Rerouted Exports and False Origin Declaratio

Following the U.S.-China summit, the two countries extended their tariff truce through January next year, but U.S. trade pressure on China continues to affect exporters. In addition to tariffs, the United States is scrutinizing the origin of products manufactured in third countries using Chinese raw materials and components, as well as whether they were transshipped. This is adding to confusion and the burden of proof for Korean exporters.

According to documents submitted by KOTRA to the office of Assemblywoman Jo Jiyeon of the People Power Party, KOTRA received a total of 16,351 consultations on export difficulties from small and midsize companies from January through August this year. Of these, 3,085 involved tariffs and customs clearance, accounting for 19% of the total. That is roughly one in every five export-related consultations.

Last March, a Korean plastic resin manufacturer, Company S, was preparing to export biodegradable plastic resin (PBAT) to the United States after building a factory in Vietnam. However, because it imported Chinese raw materials and processed them in Vietnam, the final tariff rate depended on whether the product was recognized as originating in Vietnam. Under the rates at the time, the total tariff would have been 51.5% if the product were deemed to be of Chinese origin, but could have been 6.5% if it were ruled to be of Vietnamese origin. In other words, the tariff burden could differ by about eightfold depending on the origin determination.

Origin determinations can also be unclear when only some processing takes place in China, even if the raw materials are not Chinese. Company D, a Korean food-ingredient manufacturer, sought advice from KOTRA while considering a plan to export liquid allulose made in Korea to the United States after crystallizing it in China. KOTRA advised that the product was likely to be recognized as Korean-origin because the processing in China would not substantially change its chemical properties or tariff classification. After seeking an advance ruling from U.S. Customs and Border Protection (CBP), Company D received a final determination in September that the product was of Korean origin.

One particular challenge for companies is that the United States' non-preferential rules of origin do not set uniform criteria. Instead, determinations take into account a product's name, characteristics and intended use, as well as its production process. Companies must assess their sources of raw materials, processing stages and tariff rates in each country, and consider multiple export scenarios. Smaller companies, which are more likely to lack dedicated trade and tariff staff, find it difficult to respond on their own without expert consulting.

U.S.-China trade war image. The Asia Business Daily DB

The United States has recently been closely scrutinizing cases in which Chinese products are exported through third countries to circumvent trade measures, or their origin is falsely declared. In August, the White House released a report dubbed the "Transshipment Fraud Report," classifying countries by transshipment risk and announcing plans to use artificial intelligence (AI) to detect suspicious cargo, as well as to step up tariff assessments and import restrictions when violations are uncovered.

The concern is that stepped-up verification of this kind may not be limited to exports to the United States. Since the start of U.S. President Donald Trump's second administration, the United States has signed reciprocal trade agreements (ARTs) with 10 countries, including Taiwan, Malaysia and Indonesia. The agreements include provisions banning imports of goods made with forced labor, countering non-market practices by third countries, and cracking down on origin and tariff evasion.

Although the agreements do not name China directly, analysts say they are largely aimed at countering China, given references to "countries of concern" and "non-market economies" and the United States' existing measures against China. As a result, Korean companies exporting to these countries must now provide more detailed evidence of the share of Chinese raw materials and components they use, their production processes and their supply chains.

Han Areum, a senior researcher at the Korea International Trade Association, said, "When exporting to countries that have signed reciprocal trade agreements with the United States, companies also need to assess the risks associated with using Chinese raw materials and components and with transactions or cooperation involving Chinese companies." She added, "If origin reviews and crackdowns on tariff evasion are stepped up, exporters could face a greater burden in tracing and documenting their supply chains."

Oh Taekyung, a project manager at KOTRA's Overseas Business Consulting Support Center, said, "The United States' non-preferential rules of origin require a determination based on multiple factors, making it difficult for companies to predict the outcome on their own." He added, "We support companies by assessing the possibility of obtaining advance rulings based on their individual procurement and production scenarios."

This content was produced with the assistance of AI translation services.