On June 30, 2007, the United States and South Korea signed the U.S.-South Korea Free Trade Agreement (KORUS FTA). If approved by Congress, it would be the second-largest U.S. free-trade agreement in terms of the value of trade affected, next to the North American Free Trade Agreement, NAFTA. The provisions concerning automobiles and auto parts are among the most controversial elements of the KORUS FTA. On December 3, 2010, the United States and South Korea reached a further agreement that modified the auto sector provisions. Nonetheless, these provisions have continued to generate considerable debate in Congress. One prominent issue in that discussion is the agreement's specific rules of origin (ROO) for automobiles and auto parts. These rules will be used to determine if automotive goods imported from South Korea are eligible to receive duty-free or reduced tariff benefits under the KORUS FTA, and whether automotive goods from the United States are eligible for corresponding benefits upon export to South Korea. This report begins with a discussion of the complex supply chains that now underlie automotive production. It then explains the procedures established in the KORUS FTA for determining whether an automotive product qualifies as being of South Korean or United States origin and compares those procedures to the rules established in the free trade agreement between South Korea and the European Union. Finally, it discusses whether the domestic content rules in the KORUS FTA could enable circumvention of the rules of origin by allowing automotive components produced in North Korea's Kaesong Industrial Complex (KIC) to enter the United States duty-free in assembled motor vehicles, and thereby receive the benefits provided by the agreement. Motor vehicle assemblers, such as Ford, Chrysler, General Motors, Honda, and Hyundai, build vehicles at final assembly plants using parts and subassemblies from an extensive global network of suppliers. Roughly 15,000 components are needed to assemble a motor vehicle. Typically, the assemblers purchase entire systems, such as seats or cooling systems, from Tier 1 suppliers, which are often multinational companies such as Denso, Robert Bosch, Continental AG, and Magna International. The Tier 1 suppliers, in turn, obtain components and subassemblies from Tier 2 suppliers, which tend to be smaller and less well known. Tier 3 auto parts companies generally supply relatively simple products, from bolts to plastic moldings, to the suppliers of more complex products. Figure 1 provides a graphic example of the diversity of parts in a typical 2011 Hyundai Sonata, which is manufactured at the company's first U.S. assembly plant in Montgomery, AL. Today, few, if any, vehicles are built entirely from parts made in any one country. More than one-quarter of the parts in vehicles assembled in the United States are imported from other countries. Due to the high level of global competition in the automobile market, automakers source parts as inexpensively and efficiently as possible. Rules of origin matter to automobile assemblers because they determine what tariffs, or tariff concessions, apply to imported inputs, and therefore can be decisive in shaping trade patterns. The leading suppliers of parts to the United States are Mexico and Canada, whose producers have free access to the U.S. market under NAFTA. In recent years, as shown in Figure 2 , a greater share of imported parts has come from China. Parts imports from South Korea account for only 5% of U.S. auto parts imports by value. The South Korean share has grown due to the establishment of South Korean-owned assembly plants in the United States, as these plants make extensive use of South Korean components. The fact that a car is assembled by a U.S. automaker does not mean that the majority of its components are made in the United States. Even the percentage of U.S. content in vehicles manufactured by the Detroit Three varies widely from model to model. Congress mandated under the American Automobile Labeling Act (AALA) that the U.S. Department of Transportation's National Highway Traffic Safety Administration (NHTSA) annually document and list the percentage by value of a vehicle's parts that originate in the United States and Canada. NHTSA also names any countries that individually supply 15% or more of the content of a vehicle model sold in the United States. Since the AALA counts U.S. and Canadian parts together, it is not possible to know the percentage of U.S. content alone. Examples of U.S./Canadian and foreign parts content in selected models appear in Table 1 . U.S. motor vehicle assembly has become increasingly international, and domestic carmakers rely more on imported parts than in the past. By one estimate for cars that were assembled in the United States, the percentage of auto parts that were imported increased from 20% in 1997 to 29% in 2005. At the same time, foreign carmakers are using more parts produced in the United States, and many foreign auto parts companies have established production in North America to be closer to their U.S. and Canadian customers. As shown in Table 1 , the domestic content of some cars sold in the United States is less than 5%, while the domestic content of others is 80% or more. For example, 60% of the parts in the Ford F-Series pickup truck, assembled in Kansas City, MO, and Dearborn, MI, are from the United States or Canada. U.S. and Canadian content in South Korean carlines range from 2% in the Hyundai Accent to 41% in the Hyundai Sonata. A free trade agreement (FTA) is a pact between two or more countries to eliminate tariff or non-tariff barriers affecting trade among these countries. Each country applies its own independent schedule of tariffs on imports from countries that are not members. An important objective of any FTA is to ensure that only products of signatory countries receive preferential tariff treatment. Rules of origin are included in all FTAs to make certain that transshipment and light processing, such as simple assembly or repackaging, are not used by third-country suppliers to circumvent higher duties. Determining the country of origin is fairly straightforward when a product is "wholly obtained" from one country. When a finished product's component parts are manufactured in many countries, however, determining origin can be a complex process. For goods to receive the more favorable tariff treatment provided by an FTA, importers must demonstrate that their products meet the eligibility criteria to receive it. Each free trade agreement to which the United States is a party has distinct rules of origin, which may differ greatly from those in other FTAs. Within an FTA, there may be different rules of origin for different industry sectors. Specific rules of origin are associated with the motor vehicle and motor vehicle parts industry, as with other industry sectors. To determine the origin of assembled autos and of auto parts such as gearboxes and steering wheels, most U.S. FTAs apply a test of regional value content (RVC). An RVC test requires that a certain percentage of the value of a manufactured product (as determined by the cost of inputs, labor, and other direct costs of processing operations) originate in the FTA region. When calculating RVC, specific equations are required to determine the value of the materials originating within the FTA countries and the value of inputs not originating within one of the FTA countries, and other costs, such as processing and shipping. Over the past two decades, the United States has concluded 11 bilateral and regional FTAs. As with other provisions, RVC requirements for automotive products vary among free trade agreements. In general, the tariff benefits provided by an FTA may create incentives for automakers, part suppliers, and all other manufacturers to source from the agreement region. Therefore, when FTAs are negotiated, representatives of the auto industry, as well as other manufacturers, consult with their respective country's trade negotiators to ensure that they will be able to meet the rules of origin established in these agreements while still maintaining their global sourcing patterns. At the same time, it is also possible that an FTA's tariff incentives may not provide sufficient inducement to alter an already-established supply chain. For example, the U.S. normal trade relations (NTR) tariff rate for imported passenger cars is an already low 2.5%, so it is not likely that an exemption from this tariff level alone would prompt manufacturers to build cars for the U.S. market within the FTA region rather than outside it. The substantially higher U.S. light truck tariff of 25%, however, could result in significant cost savings for manufacturers that build trucks for U.S. sale in the United States or in a U.S. FTA partner country. This high tariff on imported light trucks is one reason why nearly all pick-up trucks sold in the United States are manufactured in North America. Since tariff rates on automobiles tend to be higher in the markets of the United States' FTA partners than in the United States, tariff savings in the foreign market could provide an even greater incentive for U.S. automakers to meet the preferential rules of origin requirements when exporting to these trading partners. For example, NTR tariffs for automobiles in the countries that are parties to the Dominican Republic-Central America-United States (CAFTA-DR) FTA run as high as 20%. This underscores the asymmetrical benefits that can accrue to producers of vehicles in the United States if other countries' tariffs are reduced or eliminated through a free trade agreement. NAFTA has the highest RVC requirement for automotive products at 62.5%, meaning that nearly two-thirds of the value of the vehicle must originate in the United States, Mexico, or Canada for an assembled vehicle to receive the NAFTA tariff benefit. This high regional content requirement reflects the fact that the North American auto market was already highly integrated at the time of the agreement's negotiation.