CIIT Committee Report

V.     Policy Recommendations: Securing the Best Deal Possible

When the Committee began its study of the Canada-Korea free trade negotiations, its objective was to ensure that if Canada was successful in reaching an agreement with Korea that any such deal was in the best interests of Canadians. To that end, we have received valuable testimony regarding the potential benefits and drawbacks of a trade agreement with Korea, as well as specific issues that, if addressed in the final text of an FTA, will ensure that Canada achieves the best possible results in its ongoing negotiations.

The recommendations which follow are intended to address those issues. They range from specific proposals that would benefit individual sectors to linchpin recommendations that, in our view, are critical to ensuring that any final trade agreement is acceptable to Canadians.

A. Achieving Tariff Parity with Canada’s Major International Competitors

The Committee heard from numerous witnesses that it was important for Canada to sign a free trade agreement with Korea if only for the simple fact that several of its competitors have already done so. We were told that if Canada does not get access to the Korean market on the same terms as its competitors, then Canadian exporters will lose their foothold in that market.

At the same time, however, we also heard that Canada should not sign any deal simply for the sake of concluding an agreement. A trade agreement that puts Canada at a permanent tariff disadvantage in specific sectors vis-à-vis the U.S., Chile or any other of Canada’s competitors would have the same result.

Because Canada is not as large and powerful a market as the United States, it could prove difficult to extract the same concessions from Korean negotiators as those won by the U.S. This puts Canada’s trade negotiators in a difficult position as they are under considerable pressure to secure a deal at least as good as the Korea-U.S. FTA, but without the stronger U.S. bargaining position.

Recommendation 1:

That the Government of Canada make every effort to ensure that Canada negotiates access to the Korean market on the same or better terms as already gained by its international competitors.

One of the challenges with Recommendation 1 is that even as Canada struggles to reach a free trade deal on the same terms as Korea granted its other FTA partners, Korea is actively pursuing new deals with other countries and regions, including the European Union. If a competing market succeeds in negotiating better terms than Canada was able to achieve, then the problem of Canadian companies operating at a disadvantage reappears.

To solve this problem, several witnesses suggested that Canada negotiate a “most-favoured nation clause” (or “MFN clause”) with Korea. Under such a provision, if, subsequent to a Canada-Korea FTA, Korea negotiates an agreement with another country that offers better terms, then Canada would automatically receive those same terms.

Recommendation 2:

That, to ensure that Canadian industries are not put at a disadvantage in the Korean market in the future, the Government of Canada negotiate a most-favoured nation clause in the Canada-Korea free trade agreement.

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B. Addressing Market Access Barriers facing Canadian Automobile Manufacturers

The issue of non-tariff barriers and limited access to the Korean market for Canadian automobile and parts producers is one of the chief stumbling blocks towards achieving a free trade agreement. The Korean auto market is well-known for its pervasive but subtle non-tariff barriers that have greatly limited vehicle imports, not just from Canada but from around the world.

Witnesses did not doubt that the Government of Canada had every intention of addressing the issue of Korean NTBs at the negotiating table. Nor were they against free trade on principle. Rather, given the failure of other countries to break into the Korean market, they were skeptical that Canada’s negotiators would be successful at breaking down the wall of NTBs and that Korea would grant reciprocal access to Canadian vehicles.

For their part, DFAIT officials told the Committee that their goal was “to establish the most extensive, robust, state-of-the-art provisions Canada has ever sought in an FTA with respect to Korea's non-tariff barriers in the auto sector.”[10] They also suggested that Canada had “proposed an innovative dispute settlement mechanism for autos.”[11] Officials suggested that Canada is looking for an overall package comparable to that included in the Korea-U.S. FTA.

Based on the testimony of witnesses, we propose three recommendations that we believe are critical to ensuring that the concerns of the Canadian auto sector are addressed in any final trade agreement with Korea. The first is that Canada should not trade off accelerated tariff phase-out in automobiles for promises of market access, or for any other FTA provision. The Committee heard that the auto industry, and manufacturing in general, is struggling with several challenges, including a high Canadian dollar. Accelerated tariff reduction would only exacerbate these challenges.

Recommendation 3:

That, in the event that a free trade agreement with Korea is signed, the Government of Canada not include accelerated tariff phase-out provisions for automobiles and related parts.

The second recommendation is to include in the text of any final agreement an expedited dispute resolution mechanism that deals specifically with disputes related to the auto sector. The United States has negotiated such a provision in its free trade agreement with Korea and we believe it would benefit the Canadian auto industry if our trade negotiators sought a similar concession.

Recommendation 4:

That, in the event that a free trade agreement with Korea is signed, the Government of Canada should seek an expedited dispute resolution mechanism for disputes related to non-tariff barriers in the auto sector. Similar provisions in the Korea-U.S. free trade agreement should be used as a model.

In order to be effective, it is important for a system of consequences to be built in to a dispute resolution mechanism. Our third recommendation to help the auto sector deals with that issue. One way to impose a penalty on failure to address non-tariff barriers in autos is for Canada to negotiate a snap-back provision on its tariff reduction commitments.

A snap-back provision would work in the following way: if the dispute resolution mechanism identifies significant and proven non-tariff barriers facing Canadian autos in Korea, then Canada’s import tariff on Korean auto products would immediately “snap back” to its pre-free trade MFN rate of 6.1%. Tariff rates would remain at this higher level until such time as the non-tariff barriers are removed.

Recommendation 5:

That the Government of Canada include a snap-back provision in any free trade agreement with Korea. Under such a provision, if an expedited dispute resolution mechanism demonstrates that Korea is not living up to its commitments to eliminate non-tariff barriers in autos, then Canada would automatically revert to its Most-Favoured Nation tariff rate on Korean autos and auto parts.

C. Re-Opening the Korean Market to Canadian Beef

Regaining access to the Korean market for beef is a high priority for the Canadian beef industry. Like many other countries, Korea closed its borders to Canadian beef in May 2003 in response to concerns over Bovine Spongiform Encephalopathy (BSE). Since that time, however, more than 100 countries have re-opened their borders to Canadian beef, but Korea has not yet done so. This in spite of the fact that Canada was recently designated as a “controlled risk” country for BSE by the World Organisation for Animal Health (OIE), signalling that all countries should accept Canadian beef.

Prior to 2003, Korea was a major market for Canadian beef exporters. We are encouraged by the fact that Korea has recently been showing a greater willingness to examine lifting its prohibition. Nevertheless, we believe that any free trade agreement with Korea should be conditional on restoring full access for Canadian beef exporters to the Korean market. We are pleased to note that this opinion is shared by the Minister of International Trade who stated to this Committee that “We would certainly not be proceeding with a free trade agreement in the absence of opening up the Korean market for Canadian beef.”[12]

Recommendation 6:

That the Government of Canada make any free trade agreement with Korea conditional on restoring access for Canadian beef exporters to the Korean market.

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D. Including Geographical Indicators and Product Definitions in an Agreement

Another industry-specific concern relates to the treatment and definition of Canadian wines. Robert Keyes (Vice-President, Economic and Government Affairs, Canadian Vintners Association) noted that the Canadian wine industry is interested in establishing geographic indicators to brand the distinctiveness of Canadian wines, especially ice wines. A reference to geographic indicators in the text of a Canada-Korea free trade agreement, should one be completed, would benefit the industry. This issue was also raised by Jan Westcott with respect to Canadian whiskies.

A second issue raised by Mr. Keyes was the need for Canada to have federal legislation or regulations that defined ice wines. Currently no such definition exists. Mr. Keyes suggested that including a definition of ice wine in any Canada-Korea FTA would not only be important given that Korea is now Canada’s largest market in the world for ice wines, but also because of a rise in counterfeit products in China and other Asian markets.

Recommendation 7:

That the Government of Canada include a definition of ice wine in the text of a free trade agreement with Korea, as well as reference to geographic indicators for Canadian spirits and wine-producing regions.

E. Consideration of Transition Mechanisms and Worker Retraining Programs

Given their expectation that a free trade agreement with Korea would result in job losses and closure of manufacturing operations in Canada, a number of witnesses asked that any free trade agreement be accompanied by a formal commitment by the federal government to provide more support for Canadian companies affected by the agreement, especially those in the industrial sector. The goal of this federal assistance would be to create a mechanism that supports a transition for sectors of the economy impacted by an FTA, and to provide those sectors with the tools needed to adjust to the new economic environment.

This Committee acknowledges that such support could be valuable to Canadian industries affected by free trade agreements, but also agrees with those witnesses who were opposed to the subsidization of certain companies and industries in Canada. We also concur with the Minister of International Trade, David Emerson, who himself was not opposed to financial assistance but stated that it was “not something you would offer before you could demonstrate there was a unique case for than particular sector.”[13]

Given that Canada has not yet signed an FTA with Korea, it would be difficult at this point to say which Canadian industries would be adversely affected by such an agreement and to what degree. We thus recommend:

Recommendation 8:

That, in the event that a free trade agreement with Korea is signed, and once the details of that agreement are known, the Government of Canada study the expected impact on all major sectors of the Canadian economy and, if warranted, consider providing financial transition support to any sector adversely affected by the agreement.

As mentioned earlier, the rise in the Canadian dollar has contributed to significant job losses in manufacturing and many believe a free trade agreement with Korea would compound that challenge. Teresa Healy noted that workers displaced by closures and layoffs and those who go on to find another job suffer an average decline of over $10,000, which is 25% of a typical manufacturing wage. She suggested that this performance was at least partly the result of a lack of government funding and support for worker training, as well as a lack of encouragement for industry to do the same.

The fact that displaced workers in manufacturing earn less in their new jobs does speak to the need for more effort to be put into worker retraining. From 2001-2006, nearly half of all net jobs created in the Canadian economy have been in sectors in which average wages are comparable to or higher than those in manufacturing. Displaced workers in manufacturing may not be in a position to take advantage of the job opportunities which exist elsewhere.

Recommendation 9:

That, in light of recent job losses in Canadian manufacturing and the potential effect of a Canada-Korea free trade agreement on employment in that sector, the Government of Canada explore the adequacy of existing worker retraining programs, both in terms of effectiveness as well as funding levels.

F. Developing Export Markets through Trade Promotion

A free trade agreement has the potential to improve access to the Korean market and to help Canadian companies to compete for business in that country. However, the Committee also heard that trade liberalization is not the only means by which other countries develop international markets for their exporters. Many of Canada’s competitors in markets like Korea also benefit from significant government support in international trade promotion. We believe that Canada should consider this approach as well. In our view, a strong trade promotion strategy and effective marketing campaigns have the potential to build the Canadian brand abroad and could be an effective means by which to develop international markets for Canadian exports. Such a strategy could run parallel to a policy of seeking out free trade agreements, or as an alternative in cases where an FTA may not be practical, desirable or easily achieved.

Recommendation 10:

That the Government of Canada seriously consider pursuing alternatives to the NAFTA free trade model, for example, by investing in a vigorous trade promotion strategy that builds the Canadian brand abroad.