334 ITAC (5) on Distribution Services for Trade Policy Matters, Advisory Committee Report, April 25, 2007.
335 Mun, written submission to the USITC, May 4, 2006.
336 The products covered in this assessment represent 100 percent of U.S. exports to Korea in the GTAP
“leather products” sector and 100 percent of U.S. imports from Korea in the GTAP “leather products” sector for 2006.
337 Includes leather and leather goods, as well as footwear, travel goods (e.g., luggage, handbags, purses, wallets, duffle bags, and briefcases), and other articles characteristic of the leather trade but also made from materials such as textiles and plastics. Included are tanned hides and skins, leather, and composition leather (HS headings 4104–4115); saddlery and harness (4201); travel goods (4202); articles of leather or
composition leather for industrial and technical uses (4204) or other uses (4205); footwear (HS chap. 64);
watch straps of nonmetallic materials (HS subheading 9113.90); and personal travel sets (9605.00). Excludes leather apparel (4203), which is included with textiles and apparel.
338 Korea has a uniform “base rate” of duty of 5 percent for tanned hides and skins, leather, and composition leather of HS headings 4104–4114; 8 percent for travel goods of heading 4202, leather articles of headings 4201, 4204, and 4205, and waterproof footwear of heading 6401; and 13 percent for all other footwear of HS chap. 64.
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In its report, the ITAC on Distribution Services for Trade Policy Matters (ITAC 5) stated that the U.S.-Korea FTA contains “a serious deficiency with respect to the rules of origin for textiles and apparel.”334 The report stated that the committee opposes the yarn-forward rule of origin in the agreement, stating that a yarn-forward rule “retards rather than promotes textile and apparel trade” with U.S. FTA partners. The report added that the FTA contains no additional flexibility such as a cumulation provision permitting the use of nonoriginating inputs in the production of qualifying apparel and that the FTA contains a 10-year duty phaseout for many key apparel categories. The report noted that the United States should abandon “counterproductive” and “flawed” rules governing trade in textiles and apparel that hinder trade and investment while doing nothing to improve the competitiveness of the U.S.
textile industry.
The Korea International Trade Association (KITA) in a written submission to the Commission stated that there is no basis to claims made by the U.S. textile industry that Korea would sell textiles and apparel in the U.S. market at below-market value following implementation of the FTA.335 KITA said Korea’s textile and apparel industry has shifted from producing low-value, low-quality goods to producing high-end, high-technology, and high-value-added goods. KITA also said the Korean government has taken steps to ensure that transshipments of textiles and apparel from China or any other country do not become a problem for any potential FTA partner. It stated that Korea has in place an advanced customs administration system to prevent such acts, and is willing to work with the U.S.
government to prevent illegal transshipments under the FTA. In addition, KITA stated that, upon implementation of the FTA, Korea’s textile exports will not compete directly with U.S.
goods, but with products from third-country markets.
339 The 17 tariff lines (20 lines in the 2007 HTS) cover rubber or plastic protective footwear and certain athletic and other footwear with rubber or plastic soles and fabric uppers (HTS subheadings 6401.10.00, 6401.91.00, 6401.92.90, 6401.99.30, 6401.99.60, 6401.99.90, 6402.30.50, 6402.30.70, 6402.30.80, 6402.91.50, 6402.91.80, 6402.91.90, 6402.99.20, 6402.99.80, 6402.99.90, 6404.11.90, and 6404.19.20).
340 The tariffs would remain unchanged during years one through eight, and then be reduced in four equal annual stages, becoming free at the beginning of year 12. U.S. imports from Korea of rubber footwear covered by the 17 U.S. rate lines fell by 98 percent from $145.8 million in 1996 to $2.8 million in 2006.
Official statistics of the U.S. Department of Commerce.
341 Textile travel goods are covered in FTA chap. 4, which contains the rules of origin and other
provisions specifically applicable to textiles and apparel. A summary of these provisions appears in app. D of this report.
342 Many recent U.S. FTAs apply a more restrictive “fabric-forward” rule of origin to textile travel goods, whereby imports of such goods from the FTA party must be made from inputs produced in the FTA region from the fabric stage forward to qualify for tariff preferences. For a textile travel good to qualify for FTA preferences under a fabric-forward rule, the production of the fabric used in the travel good, as well as cutting and sewing, must occur in the FTA parties. A representative of the U.S. travel goods industry contends that a fabric-forward rule “essentially renders the agreement useless for U.S. travel goods firms.”
Pittenger, written submission to the Commission.
343 Pittenger, written submission to the USITC, June 27, 2007.
344 Impact relative to an estimated 2008 base. See chap. 2 of this report for additional information regarding the economy-wide analysis.
345 U.S. imports of leather goods from the world in 2006 totaled $27.1 billion, of which $19.0 billion (70 percent of the total) consisted of footwear and $6.8 billion (25 percent) consisted of travel goods. Official statistics of the U.S. Department of Commerce.
346 U.S. leather goods imports from Korea declined by 90 percent from $546 million in 1996 to
$54 million in 2006.
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would grant immediate and reciprocal duty-free market access for tariff lines covering all leather goods, except for 17 U.S. tariff lines covering “sensitive” rubber footwear from Korea.339 U.S. tariffs on the sensitive footwear, which range from 20 percent to 64 percent AVE (based on 2006 trade), would receive a nonlinear phaseout over 12 years.340
The FTA rule of origin for the sensitive rubber footwear would, as in other U.S. FTAs, be similar to that under NAFTA, requiring a good to have a regional value content of not less than 55 percent of the appraised value of the article, which would effectively limit the use of nonoriginating uppers because of the high labor content associated with stitching. All other footwear would receive a more flexible rule of origin based on assembly also found in other recent U.S. FTAs, in which qualifying footwear could contain nonoriginating uppers and other materials as long as it is assembled in the FTA parties. A flexible process-based origin rule would apply to textile and nontextile travel goods,341 requiring that the goods be cut or knit to shape, or both, and sewn or otherwise assembled in the FTA parties.342 A trade report notes that more than 80 percent of all travel goods sold in the United States in 2006 were textile travel goods.343
The Commission’s economy-wide analysis of the long-term effects of tariff and TRQ liberalization estimates that the FTA would likely result in an increase of $81–104 million (104–133 percent) for U.S. imports of leather goods from Korea and approximately
$60–71 million (53–63 percent) for U.S. exports of leather goods to Korea.344 The results largely reflect Korea’s small and greatly diminished share of U.S. imports of leather goods, as well as the high import share in key domestic markets for leather goods.345 Once a major world exporter of leather goods, Korea supplied just 0.2 percent ($54 million) of total U.S.
imports of leather goods in 2006.346 U.S. imports of leather goods come mostly from China, which supplied 71 percent ($19 billion) of the total in 2006. Imports now supply 98 percent
347 ITAC (13) on Textiles and Clothing, Advisory Committee Report, April 27, 2007, 5.
348 A trade source estimates that U.S. consumers spent a record $20.7 billion on travel goods in 2006.
TGA, “U.S. Travel Goods Sales Hit Record in 2006,” May 8, 2007.
349 ITAC (13) on Textiles and Clothing, Advisory Committee Report, April 27, 2007, 6; Pittenger, written submission to the USITC, June 27, 2007; and U.S. industry representative, telephone interview by
Commission staff, July 11, 2007.
350 The Berry Amendment (10 U.S.C. 2533a) requires the Department of Defense to give preference in procurement to U.S.-made goods, including apparel, tents and tarpaulins, and fabrics, including all fibers and yarns used in them and goods made from them (e.g., backpacks, hiking packs, duffle bags, and related textile travel goods). According to Robert Panichelle, chief, Field Clothing Division, Defense Supply Center Philadelphia, the Berry Amendment has been “construed as being applicable to footwear.” CRS, “The Berry Amendment: Requiring Defense Procurement to Come from Domestic Sources,” April 21, 2005; Pittenger, written submission to the USITC, June 27, 2007; U.S. industry representative, telephone interview by Commission staff, July 11, 2007; and Panichelle, telephone interview by Commission staff, August 2, 2007.
351 Burke, written submission to the USITC, March 24, 2006; Pittenger, written submission to the USITC, June 27, 2007; and U.S. industry representative, telephone interview by Commission staff, July 11, 2007.
352 A representative of U.S. rubber footwear producers states that, “given the fact that Korean wage rates are significantly higher than those of other Far Eastern rubber footwear competitors, the [domestic] industry is satisfied that the extended and nonlinear phaseout set forth in [the FTA for sensitive rubber footwear] will not pose a threat to the continued operation of domestic manufacturing.” Cooper (counsel), written
submission to the USITC on behalf of the Rubber and Plastic Footwear Manufacturers Assoc., May 23, 2007.
353 U.S. industry representative, telephone interview by Commission staff, June 14, 2007.
354 Data on Korean production applies to the “tanning and dressing of leather, luggage, and footwear.”
National Statistical Office, Republic of Korea.
355 U.S. industry representative, telephone interview by Commission staff, June 14, 2007.
356 Korean imports of leather goods in 2006 were broken down as follows: $472 million for tanned hides and skins, leather, and composition leather (HS headings 4104–4115); $552 million for travel goods (4202) and other leather goods classified in HS chap. 42, except leather apparel (4203) and miscellaneous goods (4206); and $836 million for footwear (HS chap. 64). Global Trade Information Services, World Trade Atlas
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of the U.S. footwear market, with China accounting for 85 percent of the import volume.347 Imports supply more than 95 percent of the U.S. travel goods market,348 as the domestic industry has “transitioned from one of domestic manufacturing to one of primarily importing, warehousing, and distribution companies.”349 The small volume of U.S.
production of footwear and travel goods tends to serve niche and high-end domestic markets;
the U.S. Armed Forces, as governed by the Berry Amendment;350 or quick response requirements of the domestic market.351
The impact of the FTA on U.S. imports and production of leather goods would likely be further limited by the general erosion of Korea’s global competitiveness in leather goods.352 A trade source noted that manufacturing costs in Korea are too high for it to compete successfully in the global footwear market, which has led to a relocation of its footwear production to China and other lower-cost exporting countries353 as well as to a 40 percent decline in Korean production of leather goods during 2000–06.354 The trade source stated, however, that Korea is still a center for “very vigorous product development,” manufacturing technology, and production of components for footwear.355
The impact of the FTA on U.S. exports of leather goods to Korea will likely be small in absolute value and quantity terms, given the relatively small volume of U.S. leather goods exports to Korea. Korea was the seventh-largest export market for U.S. leather goods with 4.9 percent ($107 million) of total U.S. leather goods exports in 2006; most of the U.S.
exports to Korea consisted of tanned leather rather than higher unit-valued finished goods.
Nevertheless, the elimination of Korean tariffs under the FTA on U.S. leather goods will likely spur U.S. exports of leather and possibly finished leather goods to Korea, a major world market for leather goods with imports of almost $1.9 billion in 2006.356 A trade source
356 (...continued) Database.
357 Pittenger, written submission to the USITC, June 27, 2007; and Global Trade Information Services, World Trade Atlas Database.
358 ITAC (13) on Textiles and Clothing, Advisory Committee Report, April 27, 2007.
359 Pittenger, written submission to the USITC, June 27, 2007.
360 Lamar, “Re: U.S. International Trade Commission Inv. No. TA-2104-24 (May 7, 2007)–U.S.-Korea Free Trade Agreement,” written submission to the USITC, June 27, 2007.
361 Cooper (counsel), written submission to the USITC on behalf of the Rubber and Plastic Footwear Manufacturers Assoc., May 23, 2007.
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said Korea is one of the fastest-growing import markets for travel goods, with imports of such goods rising by 65 percent during the years 2004 to 2006 to $545 million.357
Views of Interested Parties
In its report, the ITAC on Textiles and Clothing (ITAC 13) stated that its members did not make a unified statement in support of or in opposition to the FTA.358 The report stated that members of footwear companies support the FTA because the rules of origin reflect their priorities—the 17 sensitive rubber footwear articles receive a “NAFTA style” rule of origin and a long, nonlinear duty phaseout, while all other footwear articles receive much more flexible rules of origin and immediate duty-free treatment. The report noted that members of the travel goods companies support the FTA because the agreement provides immediate and reciprocal duty-free treatment and flexible rules of origin for all textile and nontextile travel goods.
The Travel Goods Association (TGA), a trade association representing manufacturers, distributors, retailers, promoters, sales representatives, and suppliers of luggage and other related products, stated in a written submission to the Commission that it supports the FTA because the agreement would grant immediate and reciprocal duty-free entry to both textile and nontextile travel goods under flexible rules of origin.359 TGA added that incorporating these rules into an FTA with a major trading partner like Korea, one of the fastest-growing markets for imported travel goods, will make the FTA a “landmark agreement” for the U.S.
travel goods industry and be of potential benefit to the domestic industry.
The American Apparel & Footwear Association (AAFA), the national association of the apparel and footwear industries and their suppliers, stated in a written submission to the Commission that the FTA’s flexible and forward-looking footwear and travel goods provisions should provide new opportunities to grow the once significant, but declining, footwear and travel goods trade between the United States and Korea.360 AAFA noted that the FTA rules of origin will not only help stem the decline in footwear and travel goods trade between the United States and Korea, but also provide a mechanism to rebuild this vital relationship. AAFA added that the FTA will have a negligible impact on the individual sectors that it represents.
The Rubber and Plastic Footwear Manufacturers Association (RPFMA),361 a trade association representing the principal domestic producers of protective footwear and rubber- sole, fabric-upper footwear, stated in a written submission to the Commission that it is
“satisfied” with the phaseout schedule under the FTA for U.S. tariffs on the core products
362 RPFMA stated that all of its member companies do most of their manufacturing in the United States, but competitive circumstances have made it necessary for many of them to do a significant amount of importing. Cooper (counsel), written submission to the USITC on behalf of the Rubber and Plastic Footwear Manufacturers Assoc., May 23, 2007.
363 The products covered in this assessment represent approximately 5 percent of U.S. exports to Korea in the GTAP “chemical, rubber, plastic products” sector, and less than 1 percent of U.S. imports from Korea in the GTAP “chemical, rubber, plastic products” sector, for 2006.
364 Duties on U.S. pharmaceutical imports were eliminated in 1995 as a result of the Pharmaceutical Zero- for-Zero Initiative of the Uruguay Round Agreements.
365 Ambassador Lee, testimony before the USITC, June 20, 2007; and EIU, “Industry Briefing, South Korea: Healthcare and Pharmaceuticals Forecast,” January 5, 2007.
366 EIU, “Industry Briefing, South Korea: Healthcare and Pharmaceuticals Forecast,” January 5, 2007.
367 Ibid.
368 Ibid.
369 Includes products in HS chap. 30 (i.e., HS headings 3001, 3002, 3003, 3004, 3005, and 3006).
370 Global Trade Information Services, World Trade Atlas Database.
371 Ibid.
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of these producers.362 RPFMA noted that, under the FTA, U.S. tariffs on the core products would receive a nonlinear phaseout over 12 years; that is, the tariffs would remain unchanged during years one through eight, followed by a succession of 25 percent duty cuts in each of the following 4 years, becoming free at the beginning of year 12. It said that, given that Korean wage rates are significantly higher than those of other Asian rubber footwear competitors, the domestic industry is satisfied that the extended and nonlinear phaseout of U.S. tariffs will not pose a threat to the continued operation of domestic production of the specified rubber footwear.