Capitol Comments

U.S-Korea Trade Deal Goes Into Effect

By Jessica Franken and Dawnee Giammittorio, director of government affairs & associate director of Government Affairs INDA, Association of the Nonwoven Fabrics Industry | April 5, 2012

IRS proposes rules for medical device tax applicability; EPA identifies 83 chemicals for risk assessment and possible regulation

After years of negotiations, heated debate and political gridlock, the U.S.-South Korea Free Trade Agreement (KORUS) became official on March 15, linking America to the world’s 14th-largest economy.  KORUS is the most significant accord since the 1994 North American Free Trade Agreement with the International Trade Commission (ITC) estimating increases in annual U.S. exports by $10-11 billion.

Although it was signed in 2007, both countries did not approve the pact until late last year. President Obama campaigned against free trade agreements but has come to embrace this agreement as an important part of his National Export Initiative and the nation’s overall economic recovery. A U.S. Trade Representative spokeswoman called the deal a “historic opportunity to increase exports, support job creation, bolster both our economies and strengthen a vital strategic alliance in the Asia-Pacific.”

Under the agreement, almost 80% of U.S. exports of consumer and industrial products to South Korea will be duty free, effective immediately, with almost all remaining tariffs eliminated within five to 10 years.  The agreement also includes significant non-tariff commitments, including transparency obligations and stronger intellectual property protections.

Numerous American industries are expected to see meaningful increases in exports to Korea including makers of agricultural goods, automobiles, electronics, medical devices, paper products, machinery, chemicals, building products and environmental goods.  However, it also is anticipated to bring a surge in imports with certain parts of the U.S. textile industry expected to be some of the hardest hit.  Several domestic textile groups, in fact, were among the pact’s most vocal detractors, arguing that slashing traditionally high U.S. tariffs on textile and apparel imports will create a deluge from Korea, already one of the largest sources of U.S. knit and specialty fabrics. They also decried the agreement’s weak customs enforcement, saying it will allow for billions of dollars of Chinese goods to be illegally transshipped through Korea to the U.S.

For INDA members, the pact is something of a mixed bag. For example, U.S. imports of Korean polyester staple fibers (PSF) are expected to increase significantly (although U.S. officials announced last fall that certain imports of PSF from Korea will still be subject to a U.S. antidumping order).  However, when it comes to nonwoven roll goods, the KORUS may offer more opportunities than threat.  The U.S. is already highly competitive with Korea, having exported nearly $27 million worth of nonwoven roll goods to the Asian nation in 2010 versus some $20 million in Korean imports. This is despite the fact that U.S. shipments going to Korea face 8% duties while Korean exports to the U.S. face none. 

This trade deal, therefore, stands to improve our industry’s already strong position since all but three categories of U.S. nonwoven roll good exports to Korea will see duties go to zero as soon as the KORUS is implemented.  In fact, a 2007 ITC report predicted the greatest increases in U.S. textiles and apparel exports to Korea are “likely to be concentrated in goods for which the U.S. industry is competitive, including...industrial and specialty fabrics, including nonwoven, coated and knit fabrics...”

The International Trade Administration has created the FTA Tariff Tool—export.gov/FTA/FTATariffTool/—an online database that links to the latest U.S. tariff schedule and relevant rules of origin so that exporters can determine the exact tariff benefit for their products and the rate at which the tariff is eliminated.  Meanwhile, U.S. Customs and Border Patrol has released implementation instructions and interim regulations regarding U.S. imports under KORUS.  To view, visit: www.cbp.gov.  Importers may also send inquiries regarding specific U.S. imports directly to fta@dhs.gov.

IRS Proposes Rules for Medical Device Excise Tax
As required under The Patient Protection and Affordable Care Act (PPACA), the Internal Revenue Service (IRS) Feb. 7 released its guidance defining a “taxable medical device” subject to a 2.3% excise tax on manufacturers, producers or importers on the sale of certain medical devices made after Dec. 31, 2012.  The PPACA specifically exempts eyeglasses, contact lenses and hearing aids from the tax, while directing the IRS to flesh out a retail exemption for devices “generally purchased by the general public at retail for individual use.”

Under the proposed rule, a device will qualify for the retail exemption:  (1) if it is regularly available for purchase and used by individual consumers who are not medical professionals and (2) if the design of the device demonstrates that it is not primarily intended for use in a medical institution or office or by medical professionals.   The rule provides that the IRS will evaluate all of the relevant facts and circumstances in making its determination and specifies some, but not all, of the factors that it will consider in determining a device’s eligibility for the exemption.  The rule also contains a safe harbor provision for many over-the-counter products that would otherwise be considered “taxable medical devices,” including IVD home-use lab tests, over-the-counter devices and certain durable medical equipment, prosthetics, orthotics, and supplies for which payment is available on a purchase basis under Medicare Part B payment rules.

While the device industry has strongly opposed the excise tax and several bills have been introduced in Congress to repeal it, lawmakers are hard pressed to find $20 billion to offset the amount that the excise tax is expected to generate.  Therefore, medical device makers should plan for its implementation.

A public hearing on the proposal will be held May 16, 2012, at the Internal Revenue Service in Washington, D.C.  Comments on the proposed regulations are due by May 7, 2012.  To learn more, visit:  www.gpo.gov/fdsys/pkg/FR-2012-02-07/html/2012-2493.htm.

EPA to Conduct Safety Reviews on 83 Highly Toxic Chemicals
The Environmental Protection Agency (EPA) released a work plan March 1 identifying 83 chemicals for which it will conduct risk assessments in the next several years and possible regulation if deemed warranted.  The Agency chose the chemicals based on whether they are persistent, bioaccumulative and toxic, used in children's or consumers products, and detected in humans.  From the list of 83, EPA has targeted seven, which are used in consumer products and pose the most serious risks to human health and the environment, for assessment this year.  Those selected for immediate evaluation include: antimony and antimony compounds; HHCB (; long-chain chlorinated paraffins; medium-chain chlorinated paraffins; methylene chloride; N-Methylpyrrolidone and trichloroethylene.

Throughout the process, the EPA will provide draft risk assessments for public review and comments.   If an assessment indicates significant risk, the EPA will implement risk reduction actions. If no significant risk is found, the EPA will conclude its work on that chemical.  Additional chemicals will be added to the work plan as more data are developed and more chemicals screened.  The EPA plans to announce this spring the chemicals that it will assess in 2013 and 2014. The work plan and list of 83 chemicals is available at: http://www.epa.gov.

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