Canada and South Korea announce they have concluded a free-trade deal
Monday, Mar 10, 2014 04:00 am
SEOUL, South Korea - Prime Minister Stephen Harper and his South Korean counterpart announced early Tuesday their two countries have concluded a free-trade agreement that the government boasts will be a major boost for Canadian exporters in the fast growing Asian market, but which detractors fear will damage Ontario's key economic auto industry.
The announcement ends almost a decade of on-and-off talks and represents Canada's first free-trade agreement with an Asian-Pacific country, a region of the world the Conservative government has targeted as essential for the country's economic well-being.
Once in force, it will eliminate virtually all tariffs between the countries, with Korea cutting 81.9 per cent of duties upon the first day of the deal coming into force, and Canada removing 76.4 per cent of levies. Some tariffs, particularly in agriculture, will take more than a dozen years be fully phased out, however.
Government documents noted that Canadian firms stand to make gains because South Korean tariffs currently average about three times Canada's — 13.3 per cent as opposed to 4.3 per cent respectively.
Officials say the pact is fully fleshed and not an agreement in principle, as was the case with the European Union deal, and could come into effect within a year.
The agreement is also different is that it does not involve sub-national procurement, so Ottawa will not require provincial approval. Media was briefed on the details simultaneously in Ottawa and Seoul on Monday night ET.
Stakeholders representing the aerospace, pork and beef industries present at the Ottawa briefing were enthusiastic with what the elimination of South Korean tariff potentially could mean for their producers.
According to the government release, the deal is expected to increase Canadian exports to South Korea by 32 per cent and expand the economy by $1.7 billion.
"This is indeed a pivotal deal for our country," Harper said Tuesday.
"The support it has represents the belief of Canadian entrepreneurs that we can compete with the world's best, and win."
The biggest winners from the Canadian side will likely be in the agriculture sector, particularly beef and pork, the forest industry and seafood exporters, all of whom face stiff tariffs for shipping into the Korea market of 50 million people.
But Ottawa was already bracing for blow-back from Ontario and the domestic auto sector, which will see a 6.1-per-cent duty on Korean exports of Hyundai and Kia vehicles eliminated over two years once implemented, making the strong-selling brands even more competitive in the Canadian market.
The ink on the agreement was barely dry early Tuesday when Ford Canada Ltd. issued a statement saying it could not support the free trade pact. The automaker said that under the agreement, it believes ”South Korea will remain one of the most closed automotive markets in the world.”
Ontario had asked Ottawa to at least match the U.S. negotiated deal with Korea by securing a five-year phaseout of tariffs, and to include a "snap-back" provision by which tariff reductions could be rolled back if it was shown that Seoul was using non-tariff barriers to thwart Canadian exports of autos and parts into the country. But the deal fell short on both counts.
Ford of Canada Ltd. said previous South Korean free trade pacts signed with the United States and European Union ”have failed to reverse this one-sided automotive trade flow.”
The automaker said South Korea maintains a closed market through non-tariff trade barriers and ‘‘actively intervenes in its currency to unfairly subsidize its exports.”
‘‘Ford has proven that it can compete and win in the global marketplace when there is a level playing field,‘‘ said president and CEO Dianne Craig. ”But no Canadian manufacturer can compete with a market controlled by non-tariff barriers and currency manipulation.”
On Monday, Ontario Premier Kathleen Wynne, who was aware of the details, said she was of mixed minds on the agreement.
"In terms of the agri-food sector, we are very optimistic about the opportunities that a Canada-Korea deal might provide," she said. "We do have reservations about the auto sector."
Material provided by the federal government estimated that damage to the Ontario auto sector would be limited to about 0.2 per cent of production, or 45,000 vehicles annually, noting that 88 per cent of cars produced in Canada are for export.
The government also believes that Canadian automakers will be able to increase its exports, which are currently practically non-existent, noting that since the European Union and the U.S. signed their pacts, shipments have doubled in a few years. South Korea's eight per cent duty on autos disappears on the first day of the treaty's implementation.
Harper spoke about criticism of the deal from some automakers.
"First of all, I note that there are supportive voices in the auto sector. The opinion is not unanimous. The government's commitment to the auto sector I think was made very clear in our most recent budget," the prime minister said.
"With regard to particular critics, let's talk about Ford specifically. Ford supported the Korea-U.S. free-trade agreement. Thereby, Ford got access to the United States and has access through the United States to the Korean market.
"What we are doing here is allowing other Canadian companies and other Canadian sectors to have the same access that Ford already has. So it is, I don't think, realistic for a company to think it will have one set of rules for it and another set of rules for the entire rest of the Canadian economy."
While the agreement touches virtually every sector of the two nations' economies, officials have long acknowledged that finding the acceptable trade-off between auto access that Korea insisted on, and the access for pork and beef exports Canada wanted, was the most the most difficult.
Supporters of the agreement have argued that it was critical for Canada to conclude the talks quickly given the competitive advantage enjoyed by the U.S., Europe and Australia from having implemented trade pacts with Korea.
According to federal estimates, Canadian exports to South Korea have fallen by $1.5 billion, or 30 per cent, since the U.S. pact went into force in the spring of 2012.
Even so, Canada didn't get the same deal as the U.S. was able to negotiate. Korean tariffs of up to 25 per cent on high end pork will take up to 13 years to be fully eliminated.
Canada Pork International Jacques Pomerleau said the simple fact was that Canada doesn't have the same clout as its bigger southern neighbour.
"We didn't have the same power to get the better treatment to what they gave the Americans," he said. "(But) the worst case could have been no deal at all. Then we would have been unhappy forever."
Even with the agreement, industry spokesmen cautioned that the U.S. has a four-year head start on Canada and that it will take time to catch up, or recoup market share.
For instance, Jim Quick of the Aerospace Industries Association of Canada said his sector has seen shipments to Korea plummet from about $180 million to $34 million after the U.S., Europe and others signed their deals.
Alberta's minister of international and intergovernmental relations Cal Dallas used Twitter to draw attention to an earlier Facebook post from the past weekend in support of the agreement, which at that time had not been announced.
"With more than $615 million worth of exports to South Korea, a free trade agreement with South Korea is a natural fit for Alberta," Dallas wrote.
Currently, South Korea enjoys a significant trade advantage with exports of $6.3 billion in 2012 to Canada, and imports from Canada totalling only $3.7 billion.
The successful conclusion, the second significant deal within a year, likely sends a signal to other potential free-trade partners that Ottawa is currently negotiating with, including India, Japan, and the countries of the TransPacific Partnership, that it is a serious negotiator, said Paul Evans, director of the Institute of Asian Research at the University of British Columbia.
"It may signal that the Conservatives are in a position where they are going to make some of the hard trade-offs" that will be needed to close the bigger deals, he said.
— With files from Julian Beltrame in Ottawa