CIIT Committee Report

IV.   Reservations About Free Trade with South Korea

A number of witnesses expressed serious reservations about a potential Canada-Korea free trade agreement. For some, Korea was the wrong free trade partner for Canada. The composition of Canada-Korea trade, the difficulties in penetrating the Korean market, and the effect of increased foreign competition in certain sectors of the Canadian economy were all excellent reasons why Canada should walk away from the negotiating table. For others, their concerns lay not in the idea of free trade with Korea, but in the specifics of the ongoing negotiations. These witnesses were supportive of free trade in principle, but also recognized that a hastily-negotiated deal - one which failed to address specific issues and concerns - could do serious harm to the Canadian economy. The major concerns raised by witnesses are summarized below.

A. Concerns about a Canada-Korea Free Trade Agreement

1. Free Trade Would Adversely Impact the Canadian Manufacturing Sector

This was perhaps the most frequent concern raised to the Committee. Several witnessed doubted that the expected benefits of free trade with Korea in other sectors would outweigh the costs of the agreement which, in their view, would be borne directly by the manufacturing sector.

Although Korean tariffs on industrial goods are higher than Canadian tariffs, many witnesses representing manufacturing industries or associated labour unions were convinced that free trade would result in a flood of imported manufactured goods into Canada and, by consequence, a loss of Canadian jobs. This concern was magnified by Korea's reputation as a difficult market for foreign manufacturers to penetrate because of the prevalence of non-tariff barriers.

It was also suggested that the timing of a free trade agreement was particularly bad for manufacturers. The manufacturing sector has lost a very significant number of jobs in recent years, owing in large part to the tremendous rise in the Canadian dollar (against the U.S. dollar). Because a higher dollar makes Canadian products less competitive abroad, signing a free trade agreement in the near future would expose the Canadian manufacturing sector to competition from Korea at a time when the exchange rate has driven up the price of Canadian goods internationally.

The Committee also heard that when manufacturing jobs are lost, they are often replaced by inferior jobs in other sectors. Several witnesses therefore called on the Canadian Government to establish an industrial/manufacturing policy to help the sector adapt to changing economic conditions and to protect these important Canadian industries.

A related issue is subsidies and other government support offered to certain industries in Korea. The Committee heard from the Shipbuilding Association of Canada as well as the Shipyard General Workers' Federation. Both groups expressed their concern about opening up trade with Korea which is not only the world's largest producer of ships, offshore oil platforms and related products, but achieved that position through considerable financial support from the Korean government. In their view, because a Canada-Korea FTA cannot possibly address the issue of Korean shipbuilding subsidies, Canada should not expose its shipbuilding industry to unfair competition from subsidized Korean products.

The debate over whether or not free trade with Korea would harm Canadian manufacturers has, to some extent, been fuelled by the ambiguous results that have come out of various economic impact assessments of a potential trade deal. Three major studies have been conducted on the projected impacts of Canada-Korea free trade, but, as the Committee learned, there is considerable debate as to the validity of their findings.

The first of these studies was conducted by Industry Canada. It focused on the impact of a Canada-Korea FTA on Canadian light vehicle production. Based on the current tariff rate on imported vehicles from Korea (6.1%), the study found that the effects on that sector would be minimal: a modest decrease in Canadian auto production and a larger increase in Korean imports. The increase in imports would come largely at the expense of imports from other countries that produce similar vehicles.

The second study was an independent analysis commissioned by the Government of Canada and conducted by Johannes Van Biesebrouck at the University of Toronto. It also focused on the vehicle assembly sector and its findings were similar to the Industry Canada study.

The third study, Employment Implications of Trade Liberalization with East Asia, was produced by Jim Stanford, an economist with the Canadian Auto Workers (CAW) union, and Daniel Poon from Carleton University. That study examined the effects of Canada's previous free trade agreements with the U.S., Mexico, Chile, Israel and Costa Rica on Canada's trade balances with those partners, and used those trends as a basis for predicting the effects of a Canada-South Korea free trade agreement.

According to the main findings of this report, a free trade agreement would result in Canada having a trade deficit with South Korea that is $10.9 billion higher (in manufacturing) than it was in 2005 ($2.8 billion). This increase in the trade deficit would cost the Canadian economy 33,358 jobs, equivalent to about a 0.2% decrease in employment over current levels. Within that total is included an expected loss of 4,061 jobs in motor vehicles and parts manufacturing.

These three studies were the source of much debate during the Committee's hearings. Witnesses from DFAIT and others such as Yuen Pau Woo were sharply critical of the methodology used in the CAW report. At the same time, however, several other witnesses believed that the conclusions of that study represented the most likely result of a Canada-Korea FTA. Similarly, Jim Stanford (Chief Economist, Canadian Auto Workers Union) and others called into question the methodology and results of the two studies commissioned by the Government of Canada.

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2. Free Trade Would Entrench Canada as a Resource-Based Economy

The Committee also heard that the present structure of Canada-Korea trade did not make that country a good free trade partner for Canada. Canada's large trade deficit with Korea was cited as a particular concern. As well, as Etienne Couture (President, Réseau des ingénieurs du Québec) noted, the majority of products imported into Canada from South Korea are high-value-added manufactured goods, while Canadian exports tend to be resource-based products.

Mr. Couture, and other witnesses, suggested that the prospect of lower Canadian tariffs on Korean manufactured goods would only widen this imbalance. They argued that Canada's trade deficit with Korea would grow larger, and that any gains in exports made by resource based industries would be more than offset by losses in manufacturing.

For some witnesses, this was the opposite of what Canada should be doing. In their view, free trade with Korea would erode the domestic manufacturing base and only entrench Canada as a provider of raw materials to the world. Teresa Healy (Senior Researcher, Canadian Labour Congress) suggested that increasing resource exports at the expense of the manufacturing sector would significantly weaken the Canadian economy. In her view, it was important for Canada instead to build its high-tech manufacturing capacity and establish a vibrant capital goods sector.

3. A Free Trade Agreement Would not Address Korean Non-Tariff Barriers

One of the main reasons many witnesses thought Canada would not benefit from free trade with Korea is because of the presence of numerous non-tariff barriers in the Korean market. As stated earlier in this report, some witnesses saw the ongoing free trade negotiations as an opportunity for Canada to address some of these issues. Others, however, had a very different perspective, particularly those representing automobile and parts producers, as well as associated labour unions. In their view, the non-tariff barriers facing Canadian automobiles and parts were pervasive, ill-defined and virtually insurmountable.

As noted by Scott Sinclair (Senior Research Fellow, Canadian Centre for Policy Alternatives), the Korean market is virtually closed to foreign vehicles because of a series of nebulous and shifting non-tariff barriers. In his view, these barriers are evident in a simple comparison of automobile trade between Canada and Korea: Korean exports to Canada outstrip Canadian exports to Korea by a ratio of 153:1.

Korea has an international reputation as a de facto closed market for foreign vehicles. As Mark Nantais (President, Canadian Vehicle Manufacturers Association) reminded the Committee, the U.S. and Korea signed two separate memoranda of understanding in the 1990s aimed at eliminating specific non-tariff barriers in Korea and encouraging two-way trade. According to Mr. Nantais, the Korean government made only minimal progress in removing some of these NTBs, but then introduced a new series of barriers, thus ensuring that the Korean market remained effectively closed.

Non-tariff barriers and auto trade have also been a major point of contention in Korea's other free trade talks; its negotiations with the U.S. were greatly complicated by this issue. The European Union has also encountered similar difficulties in its ongoing negotiations with Korea.

According to a number of auto industry representatives, given the fact that the U.S. and the EU have had little success in cracking the Korean market, there was little reason to expect that a Canada-Korea FTA would succeed where other attempts had failed. Gerald Fedchun (President, Automotive Parts Manufacturers' Association) was among those who held this view. According to Mr. Fedchun, until Korea proves that it has removed all non-tariff barriers - a proof that can only be demonstrated by significantly more balanced trade in autos between Canada and Korea - Canada should not be signing a free trade agreement with that country.

Mark Nantais indicated that Canada's proposed FTA with Korea was the only agreement the Canadian Vehicle Manufacturers' Association (CVMA) did not publicly support, for the simple reason that, in his view, a trade deal was unlikely to open the Korean market to Canadian motor vehicles.

Since lifting a complete ban on imported finished vehicles, the Korean government has used a series of very complex and reoccurring non-tariff barriers to keep their market closed. . Unfortunately, Canada's opportunities in the wealthy and vibrant South Korean market are limited by government protectionist actions.[4]

Other witnesses were somewhat less pessimistic. While they acknowledged that non-tariff barriers were an important issue, especially in the auto sector, they suggested that free trade negotiations could be a good vehicle through which to address these concerns. It was noted that the Korea-U.S. deal contains a number of provisions aimed at trade in autos, including an accelerated dispute resolution mechanism and a snap-back provision whereby if the dispute resolution mechanism determined that Korea violated its commitment to address NTBs, then U.S. tariffs would automatically return to most-favoured nation rates.

4. Canada May Not Receive the Same Level of Market Access as Other Countries

The Committee heard repeatedly that Canada should not rush into an agreement with Korea for the sake of reaching a deal. Several witnesses insisted that a Canada-Korea FTA would actually do more harm than good if it failed to restore a competitive balance in the Korean market for Canadian exporters vis-à-vis their international competitors.

This issue was of particular concern to witnesses representing Canadian agriculture and agri-food industries. Several of Canada's competitors in agri-food markets have already signed a free trade agreement with Korea - the U.S., Chile and EFTA, for example - while others are in the process of negotiating an agreement (the European Union).

The Committee heard that, should Canada complete a free trade deal that does not provide the same level of access to the Korean market as already won by its competitors, Canadian producers could find themselves at a long term competitive disadvantage in that market. In other words, the actual level of the tariff negotiated matters much less than ensuring Canadian producers have access to the Korean market at the same terms as its competitors, especially those in the U.S. In the extreme case, if Canadian products face a permanent price disadvantage, they could find themselves shut out of the Korean market entirely.

John Masswohl (Director, Governmental International Relations, Canadian Cattlemen's Association) reminded the Committee that "One of the government's stated objectives for conducting and reaching these free-trade agreements is to ensure the Canadian exporters remain competitive in markets where the United States have reached agreements."[5] He expressed concern that Canada's recently-signed free trade agreement with Peru fails to meet that objective for the beef industry. In his view, the same mistake should not be made in Canada-Korea negotiations.

Failure to achieve tariff parity not only puts Canadian exporters at a competitive disadvantage, but, as Mr. Masswohl noted, threatens the long-term viability of
value-added agri-food processing activity in Canada:

Every time the U.S. gets better access for its beef than Canada, it becomes more difficult to justify slaughtering cattle in Canada and we increase our reliance on shipping live cattle to the United States.[6]

The issue of tariff parity is not limited to like commodities, but direct substitutes as well. Dave Hickling (Vice-President, Canola Utilization, Canola Council of Canada) stated that it was important that Canadian canola seed and oil achieve the same tariff reductions - and tariff reduction schedule - as gained by soybean oil producers in the U.S. Failure to do so would limit the expected gains from free trade with Korea. Jan Westcott (President and Chief Executive Officer, Spirits Canada/Association of Canadian Distillers) made a similar point in reference to Canadian whiskies and bourbon from the U.S..

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5. Stakeholder Consultations

The subject of stakeholder consultations was also raised by several witnesses. On this topic, however, views were mixed. In general, most labour unions, federations and some public policy groups indicated that their organizations had not been consulted by federal government officials during the course of free trade negotiations. For this reason, they felt that their views and concerns would not be adequately reflected at the negotiating table.

By contrast, virtually all major Canadian enterprises, industry associations and business groups indicated that they were consulted. Indeed, most believed that the level of government consultation was more than adequate both in advance of official negotiations and during the process. This was true even in sectors like shipbuilding which have grave concerns about their future long run competitiveness with Korea. Vice-Admiral (ret.) Peter Cairns (President, Shipbuilding Association of Canada) noted that the shipbuilding industry has been well represented by Canadian trade negotiators.

This is not to say that all groups were satisfied with the results of government consultations, however. Some acknowledged that they had been consulted, but did not think that the level of consultation was sufficient. They also expressed frustration that their proposals to Canadian negotiators were not more carefully considered. As Mark Nantais stated,

We made several recommendations and put forward some very significant proposals on how we thought it would be best to approach tariff reductions, dispute resolution mechanisms and so forth. Many of them were developed by some of the most reputable trade lawyers in Canada, only to be dismissed on the basis that this is policy that we've never used before in a free trade agreement.[7]

6. Transition and Support Mechanisms

A final general concern raised by witnesses relates to the potential impact on the Canadian economy should Canada sign an FTA with Korea. Several witnesses highlighted the need for Canada to put transition measures and support mechanisms in place to help Canadian industries and workers adapt to free trade with
Korea - especially for those in the manufacturing sector. As Etienne Couture noted, one of the conditions of a free trade agreement with South Korea should be that any such agreement is:

[A]ccompanied by a formal commitment by the government to provide more support for Canadian companies, particularly ones in the industrial sector, so that they can develop greater international market presence.[8]

A number of witnesses had similar views. Jean Michel Laurin stated that future growth in manufacturing depends on the ability of Canadian companies to invest in plant modernization, employees' skills, innovation and product and market development.

Shirley-Ann George agreed. In her view, every trade deal has winners and losers; countries that are growing and adapting well to global trade are often those that have such mechanisms in place.

7. Other Concerns

While most of the major concerns raised by witnesses have been identified above, there were others that warrant mention as well. Some witnesses, like Josée Lamoureux (conseillère syndicale, Confédération des syndicats nationaux), raised the issue of labour rights, both in Canada and in Korea. Other witnesses were concerned about the presence of investor-state provisions similar to Chapter 11 of the North American Free Trade Agreement (NAFTA) in any final agreement. Some were troubled by the potential environmental impact the agreement. Finally, some were fundamentally opposed to the use of NAFTA as a template for other bilateral trade deals. They argued that Canada should instead pursue trade agreements that centre on fair trade and social justice.

B. Taking the Next Step: To Continue with Negotiations or to Walk Away?

Based on the concerns cited above, as well as the ambiguous results from the various economic impact assessments undertaken, some witnesses were either opposed outright to a Canada-Korea FTA, or their support for a deal was contingent upon several conditions that were not achievable in the near term. Simply put, they did not believe that, in the present context, the expected benefits of free trade with Korea would outweigh the costs to the Canadian economy. In their view, Canada should therefore walk away from the negotiating table.

Others who expressed reservations about free trade with South Korea did so not because they were opposed to a deal in principle, but because they doubted the federal government's ability to negotiate an agreement that addressed specific issues to their satisfaction, mostly pertaining to market access. Witnesses have provided this Committee with valuable evidence regarding these concerns.

In spite of the volume of evidence received, the Committee notes that there are still many unanswered questions about the Canada-Korea FTA negotiations and their potential impact. For one, it is difficult to form any conclusions on the value of a Canada-Korea free trade agreement on the basis of the economic impact studies that have been published. The Industry Canada study and the Dr. Van Biesebrouck study focused solely on the auto sector, implying that economic impact from minimal losses in Canadian auto production would be offset by gains in other sectors. Moreover, those studies did not study the effect of free trade on jobs in Canada.

For its part, the most widely-cited conclusion of the CAW report did not directly examine trade barriers or market access issues between Canada and Korea, but instead focused on Canada's past experience with free trade with other countries. Specifically, it observed that, on average, Canada's previous FTAs resulted in an increase in exports of 100%, and an increase in imports of 250%. The CAW study assumed that a Canada-Korea FTA would yield the same result. It also considered trade deficits in Canada to be akin to domestic jobs foregone. Finally, while the CAW study had the advantage of being much broader in scope than the other two studies, its focus was limited to the manufacturing sector. Agriculture and services - two areas expected to gain the most from a free trade agreement - were beyond the scope of the study.

Moreover, these three, and nearly all other economic impact assessments of free trade agreements suffer from two other major limitations. The first is that these analyses tend to focus exclusively on the impact of tariff reduction. This is less of a flaw as much as a technical limitation. The fundamental purpose of FTAs is to significantly reduce or eliminate import tariffs. However, as our Committee testimony has revealed, modern free trade agreements include much more than just tariff reduction. Non-tariff barriers, market access restrictions, investment protection, environment and labour agreements, intellectual property protection and government procurement are all part of contemporary trade deals. It is nearly impossible to capture these other elements of FTAs in economic models. Forecasting the effects of tariff elimination is straightforward by comparison. As Jean Michel Laurin stated:

I think probably the big problem in trying to assess the impact of that trade agreement is that it's very hard to assess what type of improved market access we'll have into Korea, because we're talking about non-tariff barriers. If you're talking about tariff barriers, you can pretty much fit them into an equation and just do an economic model and figure it out. But you're talking about non-tariff barriers, so it all depends on what type of improved access we really gain.[9]

The second, and related, limitation is that it is impossible to predict the impact of a free trade agreement without knowing what is contained in that agreement. Canada and Korea are still in the midst of negotiations; no deal has been concluded. According to Shirley Ann George, it is too early to come to a conclusion on whether or not a Canada-Korea FTA is a good or bad deal; there are far too many unanswered questions. In the absence of a final agreement, any assessment of the impacts of a trade agreement borders on conjecture.

Having weighed the evidence, this Committee believes that Canada should not, as some have suggested, walk away from FTA negotiations with Korea perhaps to revisit them at some undetermined point in the future. In our view, it would be premature to dismiss the outcome of those talks before knowing what is contained in the final agreement. Instead, we believe that Canada should continue to negotiate in good faith, with a view to maximizing the potential benefit to Canadians. Once an agreement is signed, this Committee, and Canadians in general, will be in a better position to weigh it on its merits and drawbacks.