Starting a Trade Business: Importing Baby Toy & Massage Machine Parts from China for Manufacturing & Re-export to China - Customs Duties & FTA Benefits for Parts Import Released

Thank you for your inquiry regarding a business model that involves starting a trading business, importing components from China, manufacturing products, and then re-exporting them to China. This is a very positive business direction that creates added value through domestic manufacturing and actively engages in international trade. As a customs broker, I will provide a detailed explanation of the overall preparation requirements, including customs duty payment for component imports and FTA benefits.

1. Customs Duty Payment and Refund Procedures for Component Imports

Even if imported raw materials are manufactured into products domestically and then re-exported, customs duties and value-added tax must fundamentally be paid when importing the raw materials. This is because the nature of customs duty follows the principle of taxation in the consuming country, and goods brought into the domestic market are subject to taxation.

• Customs Duty Payment Obligation: Imported parts for infant toys and massage devices are classified by HS Code according to Korea's tariff schedule, and customs duties are imposed based on the basic tariff rate or FTA preferential tariff rate assigned to that HS Code. Value-added tax is imposed at 10% on the customs value including customs duties. Accurate HS Code classification is the first step in determining the tariff rate and applicable laws, so it must be approached with great care.

• Possibility of Customs Duty Refund: When finished products manufactured domestically are exported, the customs duties paid upon import can be refunded. This is known as the 'customs refund' system. The customs refund system is designed to encourage exports and reduce the cost burden on businesses, returning an amount equivalent to the customs duties paid upon export.

  • Refund Types: There are broadly 'Individual Refund' and 'Simplified Fixed Amount Refund'. Individual Refund is a method where the exact amount of customs duties paid for each raw material actually used in the production of export goods is calculated and refunded. Simplified Fixed Amount Refund is a simpler method for small and medium-sized enterprises, refunding a fixed amount based on the export value. You should choose the appropriate refund method based on your business scale and management capabilities.
  • Required Documents: For a refund application, an export declaration certificate is fundamental, along with an import declaration certificate to confirm the duty paid at import, purchase details of raw materials (e.g., purchase tax invoices), and most importantly, a Bill of Material (BOM). The BOM is objective evidence of the quantity of raw materials required to produce one unit of export goods, and accurate calculation of the consumption amount plays a key role in determining the customs refund amount.
  • Manufacturer Registration: Customs refunds are generally applied for by the manufacturer. Therefore, if you are conducting manufacturing activities as a corporate entity, preparing relevant documents and establishing a system for customs refunds is essential.

2. Specific Preparations for FTA Utilization

Free Trade Agreements (FTAs) are a very important tool for securing international competitiveness through tariff benefits. The preparations for effectively utilizing FTAs at the import and export stages are as follows:

• Application of FTA Preferential Tariff Rates when Importing Chinese Components:

  • Obtaining Korea-China FTA Certificate of Origin (C/O): When importing components from China, if you obtain a Certificate of Origin (C/O) from your Chinese supplier, proving that the components are of Chinese origin and meet the Korea-China FTA rules of origin, and submit it during import declaration, you can apply FTA preferential tariff rates (0% or lower rates) to save on customs duties. This directly impacts import cost reduction.
  • Pre-preparation and Post-verification Readiness: When requesting a C/O, you must clearly specify the HS Code of the goods and the fulfillment of origin determination criteria to the supplier. Furthermore, as customs authorities may verify the appropriateness of the origin through post-verification of FTAs, it is crucial to secure and manage origin evidentiary documents such as raw material specifications and manufacturing process descriptions from the supplier in advance.

• Issuing FTA C/O when Exporting Finished Products to China after Manufacturing:

  • Fulfillment of Korean Origin Determination Criteria: When manufacturing infant toys or massage devices domestically using Chinese raw materials and then exporting them to China, it is important whether these finished products can be recognized as 'Korean origin' under the Korea-China FTA. That is, they must meet the Korea-China FTA rules of origin (e.g., Change in Tariff Classification rule, Regional Value Content rule, etc.) according to the HS Code of the finished product.
  • Favorable Impact of Chinese Raw Materials: As mentioned in the original answer, using Chinese raw materials can be favorable for issuing a Korea-China FTA C/O. For example, when fulfilling the Regional Value Content (RVC) criteria, a higher 'regional raw material ratio' is more advantageous for meeting the origin requirements. However, rather than being unconditionally favorable, the HS Code of the final product, the rules of origin, and the manufacturing process must be thoroughly analyzed.
  • Preparation of Origin Proving Documents: To prove the Korean origin of finished products, various documents such as BOM, manufacturing process flowcharts, raw material purchase details (import declaration certificate, domestic purchase tax invoice, certificate of origin confirmation, etc.), and manufacturing cost statements are required. Based on these documents, an origin statement must be prepared, and a C/O must be issued through the Chamber of Commerce or Customs Office.
  • Utilizing the Certified Exporter Program: If designated as a certified exporter of origin, the procedure for issuing C/Os for individual cases can be simplified, or for goods below a certain value, FTA benefits can be applied by self-certifying the origin without a C/O, thereby enhancing customs clearance convenience. It is advisable to aim for and prepare for this system from the initial stage.

3. Additional Considerations for Product-Specific Import and Export (Infant Toys, Massage Devices)

Due to the nature of the imported components and manufactured finished products, there are laws to consider in addition to customs duties and FTAs.

• Infant Toy Components and Finished Products:

  • Special Act on the Safety of Children's Products: Children's products (including toys) distributed in Korea must obtain KC certification. Although you are importing components, the final toy manufactured from these components must obtain KC certification to be distributed domestically. The harmfulness of the components themselves (lead, cadmium, etc.) is also important, and they must meet the standards required by the certification body. When re-exporting to China, you must also check China's own safety certification requirements (e.g., CCC certification).
  • Confirmation of Import Requirements: If the imported components fall under safety management targets according to the Special Act on the Safety of Children's Products, related requirements may need to be met even at the time of import. You must verify the regulations for the corresponding HS Code using the 'Import Requirements Confirmation' function on the Korea Customs Service's Unipass system.

• Massage Device Components and Finished Products:

  • Electrical Appliances and Consumer Products Safety Control Act: Since massage devices are electrical appliances, they must obtain KC certification (safety certification or safety confirmation) for domestic distribution. The safety of electrical components (motors, power supplies, etc.) used in manufacturing the finished product is also important.
  Radio Waves Act: If the massage device has wireless communication functions (Bluetooth, Wi-Fi, etc.), it must obtain radio wave certification (conformity assessment for broadcasting and communication equipment).
  • Medical Devices Act: Depending on the functions and efficacy claims of the massage device, there is a possibility it could be classified as a 'medical device'. If classified as a medical device, it must comply with the許可(import permit and manufacturing permit) and management regulations of the Ministry of Food and Drug Safety, which involves very complex and strict procedures. It is crucial to carefully review the advertising copy and purpose of the massage device to confirm its medical device status in advance. When exporting to China, you must also check China's electrical and electronic product safety standards (CCC) and medical device regulations (CFDA).

4. Recommendations for Successful Trading Business

I offer a few recommendations for your successful business as you start a new trading venture.

• Accurate HS Code Classification: The starting point of all trade operations is accurate HS Code classification. This significantly impacts tariff rates, import requirements, and FTA rules of origin. You must confirm and manage the accurate HS Code for each component in advance.
• Establish an Origin Management System: To continuously receive FTA benefits, origin management must be systematically conducted. It is crucial to establish an origin management system from the initial stage, including BOM management, securing origin proving documents for raw materials, and recording manufacturing processes.
• Continuous Collaboration with Experts: Customs, FTA, and product-specific regulations are very complex and change frequently. I strongly recommend continuously collaborating with trusted customs brokers and relevant experts to reduce unnecessary risks and perform efficient trade operations.

If you prepare thoroughly based on the above information, it will be a great help in successfully running your trading business. Please feel free to contact us with any additional questions.