B.C. Business Matters:
Jock Finlayson >>
Canada-South Korea Free Trade Agreement (CSKFTA) is Good News for BC
The conclusion of protracted negotiations to establish a free trade agreement with South Korea is a positive step for British Columbia. South Korea is the fourth largest destination for BC’s merchandise exports (after the US, China and Japan), so improved access to its market will be helpful for a number of the province’s export industries. The agreement also lays the foundation for an expansion of services trade, business travel, and investment between the two countries.
BC’s trade with South Korea has doubled since 2004. Table 1 below provides data on the province’s merchandise exports to Korea. Resource-based goods predominate – just as they do in the case of the province’s global exports – with coal and metals/minerals being particularly important.
Table 1: BC Exports to South Korea, 2004 and 2013
(millions of current dollars)
|Pulp and paper||101||227|
|Other metallic minerals||205||141|
|Agricultural and seafood products||54||33|
|Machinery and equipment||29||17|
Source: BC Stats, Annual BC Origin Exports, February 2014.
South Korea is a big economy – the fourth largest in Asia – and is home to a substantial and growing population of affluent consumers. South Korea today is better thought of as an “advanced” rather than an “emerging” economy. It is a member of the Organization for Economic Cooperation and Development – a leading international institution made up of rich countries. At purchasing power parity exchange rates, Korea’s per capita gross domestic product stands at US$33,200, compared to US$43,100 for Canada and US$52,800 for the United States.
The main elements of the CSKFTA include the following:
Tariff elimination: Canada will benefit from the removal of Korean tariffs on more than 80% of product lines subject to duties on the day the agreement enters into force. Once the agreement is fully implemented, this will rise to 98% of Korean product lines. Canada will eliminate its tariffs on most product lines right away and phase out remaining tariffs in subsequent years. Since existing “most-favoured-nation” tariffs in South Korea are more than three times higher than those in Canada, the CSKFTA schedule of mutual tariff removal is advantageous to Canada. South Korea is Canada’s fourth biggest export market for forestry products ($500 million per year). With the elimination of tariffs, there is considerable scope to expand Canadian exports of lumber and other wood products – particularly since Korea’s consumption of forestry-related goods exceeds $6 billion per year. The same goes for agricultural and seafood products. Canada currently supplies just 3% of the $1.5 billion worth of seafood products that Korea imports each year. With tariffs phased out, Canadian companies will be better positioned to help satisfy growing Korean demand for seafood products.
Rules of origin: The agreement has detailed provisions to ensure that goods subject to preferential tariff treatment contain specified minimum amounts of Canadian or Korean value-added. Thus, products whose value is largely comprised of inputs imported from third countries will not qualify for the reduced/zero tariffs mandated by the agreement.
Services: CSKFTA also liberalizes market access for providers of services (e.g., communications, financial services, education, professional and technical services, etc.) A “negative list” model has been adopted, whereby service industries will enjoy unfettered market access and non-discriminatory treatment unless they are part of the list of exceptions appended to the agreement. CSKFTA will make it easier for temporary business visitors to travel between the two countries.
Investment: The agreement offers protection to foreign investors from each country in the other’s market by prohibiting discriminatory treatment. Globally, South Korea is an increasingly important source of direct foreign investment. Canadian businesses have invested approximately $600 million in Korea to date. There is ample scope for a larger flow of two-way direct investment.
Standards: The agreement calls for greater transparency and cooperation between the two countries on regulatory and product standards.
A contentious element in the talks concerned the phasing out of Canada’s 6.1% tariff on imports of Korean-made automobiles. Some members of the Canadian automotive industry worry that tariff removal will trigger a surge in vehicle imports from Korea. But a 6% tariff hardly strikes one as a major trade barrier. In the past year alone, the depreciation of the loonie against the US dollar and some offshore currencies arguably has had a bigger impact on the relative cost competitiveness of many Canadian manufacturers than a 6% duty.
CSKFTA is Canada’s first trade agreement with an Asian country. It signals that Canada is making progress in diversifying trade and strengthening commercial ties with offshore markets. The agreement also addresses the competitive disadvantage that Canadian companies have faced as a result of both the United States and the European Union having previously concluded bilateral free trade agreements with South Korea. Since these agreements came into force, Canada has lost ground in the Korean market and our exports to Korea have fallen even as US and EU exports have climbed.