Are the Outward Processing Provisions in the South Korean Free Trade Agreements Consistent with the Law of the World Trade Organization?

Abstract

In recent years, the Republic of Korea (South Korea) has entered into many free trade agreements (FTAs) that contain special provisions—outward processing (OP) provisions—that extend the benefit of preferential tariff rates to the products manufactured or processed in the Kaesong Industrial Complex (KIC). OP refers to the temporary exportation of goods for additional processing and the KIC is an outward processing zone in the People’s Democratic Republic of Korea (North Korea) where South Korean companies are allowed to establish manufacturing plants and to employ North Korean labor. As “temporary” indicates, the finished goods are always imported back to South Korea for domestic consumption or permanent exportation. Currently, South Korea does not impose any tariff on North Korean products because the South Korean government regards inter-Korean trade as “trade within a nation.” Other countries, however, do not consider the two Koreas as one customs territory and treat products that have been processed in the KIC as North Korean goods. This treatment of products that have been processed in the KIC as originating in North Korea harms the exporters of goods processed in the KIC because North Korea is not a member of the World Trade Organization (WTO) and therefore products originating in North Korea are not entitled to most-favored nation (MFN) rates of duty. In order to solve this problem, South Korea has included OP provisions in its FTAs with other nations. These OP provisions explicitly stipulate that goods that undergo processing in the KIC originate in South Korea, and are thus afforded the preferential rates under the FTAs. This article addresses the main concern with regard to these OP provisions: whether South Korea’s FTA partners have violated the MFN principle by applying the OP provisions to products processed in the KIC, reducing tariffs on Kaesong products, while not offering similar benefits to the products undergoing OP in other countries. This article argues that a WTO member nation could file a successful complaint against South Korea’s FTA partners because the South Korean OP provisions are discriminatory, and thus in violation of the MFN principle. Additionally, neither South Korea nor one of its FTA partners has any successful defense, including a defense under WTO Article XXIV.