CIIT Committee Report

III.    Benefits to a Free Trade Agreement with South Korea

Korea has grown to become one of Canada’s most important trading partners in the world. Should Canada successfully complete free trade negotiations with Korea, the resulting agreement would be Canada’s largest and most significant free trade agreement in almost 15 years.

South Korea represents a dynamic and potentially lucrative market for Canadian businesses. As Ian Burney (Chief Trade Negotiator, Bilateral and Regional, Department of Foreign Affairs and International Trade) stated, Korea has an upwardly mobile population of nearly 50 million people and a trillion-dollar economy. It is one of the most prosperous countries in Asia and is strategically located in close proximity to some of the fastest-growing regions of the world. Moreover, the Committee heard that Korean consumers are sophisticated and have the purchasing power to buy high-quality manufactured goods from Canada.

Witnesses offered the Committee a number of examples of the potential benefits of free trade with Korea and reasons to pursue an agreement. These reasons can be grouped into five specific categories: to improve market access through lower tariffs; to make meaningful progress on non-tariff market access barriers; to use access to the Korean market as a gateway into other regional markets, and to better tap into global supply chains; to open new markets and expand Canada’s export base; and finally, as a strategic reaction to the fact that some of Canada’s major international competitors have already completed, or are currently negotiating, FTAs with Korea. Each of these is discussed in turn.

A. Improving Market Access Through Lower Tariffs

A trade agreement that substantially lowers or eliminates tariffs on trade between Canada and Korea has the potential to generate considerable opportunities for Canada, simply because Korean tariffs are, on average, higher than Canadian tariffs. Joan Baron (CEO, Vice-Chair, Canadian Chamber of Commerce in Korea, Global Business Development Canada) observed that, in general, Korean tariffs are double Canadian rates and apply to four times as many products. In some cases, Korean tariffs are substantially higher than those levied in Canada.

The Department of Foreign Affairs and International Trade (DFAIT) publishes information comparing the Canadian and Korean tariff schedules for major products and product groupings. According to DFAIT, Korea’s overall applied most-favoured nation (MFN) tariff rate is 12.8%, compared to 6.7% in Canada. For industrial goods, the average applied tariff in Korea is 6.3%, compared to 3.9% in Canada. On agricultural products, the difference is even greater: in Korea, the average applied MFN tariff is 52.6% compared to 21% in Canada. Moreover, the Canadian average tariff falls to 5.2% when over-quota tariff on supply-managed products are not included.

Reducing Korean tariffs could produce significant gains for Canadian exporters. Many witnesses including Dan Moynahan (President, Platinum Tool Technologies, Canadian Association of Moldmakers) expressed their confidence that, given a level playing field, they would be able to compete with Korean products. Eliminating import tariffs in both countries would be a significant step in that direction.

According to DFAIT officials, macroeconomic modelling shows that, on the basis of tariff elimination alone, Canadian exports in 2005 could have been nearly 60% higher than was actually the case. A free trade agreement with Korea would have contributed $1.6 billion to Canada’s gross domestic product (GDP) that year.

Not surprisingly, Canadian industries which face the highest tariffs in Korea, are among those expected to benefit the most from a free trade agreement. In particular, agriculture and resource-based industries stand to gain from improved market access. For example, the average tariff facing Canadian fish and seafood producers in Korea is 18%, compared to the 2% tariff levied on those products in Canada. The Committee heard from several witnesses representing agriculture and resource industries, all of whom were supportive of a Canada-Korea free trade deal.

The forest products sector is another which could benefit considerably from a free trade agreement with Korea. Marta Morgan (Vice President, Trade and Competitiveness, Forest Products Association of Canada) testified that Korea is already a fast-growing market for Canadian forest products, and that a reduction of the 5% to 8% tariffs currently facing Canadian forest products exporters in Korea could only improve Canada’s price competitiveness in that market. Given the current weakness in the housing market in the United States (U.S.), it was suggested that a free trade agreement could provide a
much-needed boost to the Canadian forest products sector.

Agriculture and resource industries are not the only sectors where tariff reductions are expected to improve market access. Ian Burney noted that:

We also expect gains in a variety of industrial and manufacturing sectors that provide high-value jobs in Canada, including chemicals, aerospace, and urban transportation equipment, fertilizers, auto parts, pharmaceuticals, cosmetics, prefab buildings, environmental goods, and machinery and equipment, to name a few.[1]

top

B. Making Progress on Non-Tariff Barriers and Market Access Restrictions

Discussions surrounding free trade negotiations often focus on tariff reduction, the impact on goods-producing industries and the expected impact on merchandise imports and exports. However, modern trade agreements are about more than just tariff reduction. The Committee heard that a comprehensive agreement also includes provisions on a wide range of areas, including services, investment and labour mobility.

Perhaps the most common issue raised by witnesses over the course of the Committee’s hearings was the prevalence of non-tariff barriers in Korea. NTBs in the auto sector received the most attention, but witnesses identified NTBs as an issue in a wide range of industries including forestry, agri-food products and industrial goods.

However, while many witnesses identified market access barriers of particular concern, they had mixed views about what Canada’s response should be. For some, free trade negotiations were the perfect opportunity to address the more conventional NTBs that inevitably exist when two sovereign nations adopt policies independently, as well as an opportunity to shine the light on some of the more egregious barriers to the Korean market.

Other witnesses were skeptical that a trade agreement would ever be able to address NTBs to the satisfaction of their respective industries. This was a particular concern with the auto sector and will be addressed further below.

Another issue related to non-tariff barriers is improved market access in certain sectors. To the extent that free trade negotiations are successful in opening up some of Korea’s restricted sectors, there could be created significant economic opportunities for Canadians. This is especially true for Canada’s service industries.

Canada-Korea trade in services is relatively modest at present, but according to several witnesses, there are considerable market access barriers preventing further expansion of services trade between the two countries. A trade agreement that addressed those barriers could be a boon for the services sector. As Yuen Pau Woo (President and Co-Chief Executive Officer, Asia Pacific Foundation of Canada) noted:

[T]he long-term benefits of a free trade agreement with Korea, and the gains for Canada, will accrue mostly not to the resource sector, but to the financial services sector and to the other service industries, such as cultural industries and IT and technology sectors, which are very important in B.C. and in the West, but also in Ontario and Quebec.[2]

Shirley-Ann George (Vice-President, International, Canadian Chamber of Commerce) echoed these comments. She pointed specifically to Canada’s insurance services sector and high-tech sector as two examples of service industries that could greatly benefit from improved access to the Korean market, creating economic opportunities and jobs in both countries. Robert Crow (Vice-President, Industry, University and Government Relations, Research in Motion) agreed, stating that Korea could represent a considerable opportunity for his company should specific market access barriers be removed.

C. Korea as a Gateway into Asia and Access to Global Supply Chains

Korea’s expanding network of free trade agreements provides other indirect opportunities for Canadian businesses. First, Canadian companies can use Korea as a beachhead from which to pursue trade and investment opportunities in other Asian countries. Second, access to the Korean market allows Canada to more effectively participate in global supply chains.

On the first point, expanding trade into Asia is a policy priority for Canada and has been the subject of several reports by this Committee in recent years. A free trade agreement with Korea would make it easier for Canadian companies to do business in that country and could encourage Canadian foreign direct investment in that market. Through the commercial interaction that comes with closer economic ties with Korean enterprises, Canadian businesses can generate contacts elsewhere in the region. As Ian Burney observed:

[W]hen you see Canadian companies teaming up with some of the big chaebols and other big companies in Korea, these companies know very well how business is carried out in China, in Japan, and elsewhere, and they have business relationships throughout. To the extent that we can have Canadian companies team up with them to pursue opportunities in the region, I think there would be enormous advantages for Canada.[3]

Moreover, once established in Korea, Canadian firms would be able to take advantage of the rules of origin provisions in that country’s network of free trade agreements. By so doing, those companies could gain better access to other markets in Asia than would be the case if exporting directly from Canada.

On the second point, it is well-established that improving Canada’s participation in global supply chains is an international policy priority for Canada. The Minister of International Trade, David Emerson has made that point repeatedly in his appearances before this Committee. To the extent that a Canada-Korea free trade agreement improves Canada’s access to cheaper imports, Canadian companies using those products benefit from lower overall production costs. As Jean Michel Laurin (Vice-President, Research and Public Affairs - Quebec Division, Canadian Manufacturers and Exporters) noted, there is the potential for some global sourcing opportunities for companies looking to import parts or other production inputs from a lower-cost country. Moreover, imports from Korea could also benefit Canadians by lowering the cost of productivity-enhancing investments and some consumer goods.

D. Expanding Canada’s Export Base

For some, one of the advantages of a free trade agreement with Korea is that it provides an opportunity for Canadian exporters to access new markets and reduce their reliance on sales to the United States. Recent trade disputes between the two countries and a higher Canadian dollar, as well as ongoing security and border concerns, have led some Canadian exporters to look into diversifying their export portfolio.

The goal of trade diversification was especially pertinent to those witnesses representing sectors which have been the subject of U.S. trade investigations in the past. Martin Lavoie (Assistant Executive Director, Canada Pork International) noted that his organization was created for the purpose of diversifying exports away from the U.S. market. Witnesses representing Canadian beef producers and the forestry sector also pointed to the benefits of exploring other market opportunities.

E. Preserving Canada’s Access to the Korean Market

Strategic considerations are another important reason why Canada is pursuing a free trade agreement with Korea. With little reason to be optimistic about a breakthrough in multilateral talks at the WTO, there has been a proliferation of bilateral and regional trade liberalization agreements around the world. Countries are acting both offensively and defensively. On the one hand, they are looking to get a leg up on their competitors by negotiating trade agreements that offer preferential access to markets around the world. On the other, they are also signing bilateral trade deals in response to their competitors already having done so, or in an effort to prevent the erosion of their existing trade relationships.

Korea has been particularly active in negotiating free trade agreements with countries around the world. As Ian Burney noted, Korea has already implemented FTAs with Chile, Singapore, the European Free Trade Association (EFTA) and the Association of East Asian Nations (ASEAN). It is also actively negotiating with Mexico, India and the European Union. Most importantly perhaps, from Canada’s perspective, Korea has signed an FTA with the United States, although this deal has not yet been ratified and may not proceed.

For many witnesses, the fact that Korea has signed free trade agreements with several of Canada’s largest international competitors, and is actively negotiating with several others, is a potential threat to Canadian exporters. If, for example, the United States or the European Union gain access to the Korean market at better terms than Canadian exporters enjoy, then many Canadian businesses could find themselves effectively shut out of the country’s seventh largest export destination.

For example, Korea’s MFN tariff rate on fish and seafood products ranges from 10% to 20% depending on the specific product. Every country that signs a free trade agreement with Korea (and exports fish and seafood products) can sell in the Korean market tariff-free or at much lower tariff rates, depending on the terms of the agreement. Canadian exporters would then be operating at a significant disadvantage and could be effectively priced out of the Korean market.