Canada-South Korea FTA Good Deal for Niagara

March 11, 2014 – St. Catharines – Member of Parliament Rick Dykstra is welcoming the Canada-South Korea Free Trade Agreement as positive news for Niagara. “Our government, including Ed Fast, Minister of International Trade, worked hard on this agreement.”

Upon full implementation of the agreement, Korea will remove duties on 98.2% of its tariffs covering virtually off of Canada’s imports.  Given that the average of Korea’s tariffs are currently three times higher than Canada’s (13.3% vs. 4.3%), tariff elimination will be particularly advantageous for Canadian businesses exporting to the Korean market.  The agreement is projected to increase exports by 32% and boost the Canadian economy by $1.7 billion annually.

The automotive manufacturing industry will also see major benefits from the agreement.  Upon coming into force, Canadian exporters will see South Korean tariffs immediately removed from

  • All light vehicles (8% tariff); and
  • All automotive parts (tariffs ranging from 3-8%)

Canadian automotive manufacturers will benefit from tariff-free market access in Korea before our U.S. and E.U. competitors despite existing agreements.  Included in the agreement are equivalency provisions for key U.S. or E.U. vehicle safety standards that will allow for easier entry of Canadian-made vehicles into the South Korean marketplace.  In addition and unlike the agreements between Korea and the U.S. or E.U., Canada has secured a permanent mechanism for accelerated dispute settlement and favourable safeguard provisions.

For information on the effects on specific sectors, go to: international.gc.ca

The agreement also provides opportunity for Niagara’s burgeoning biomedical and bioscience sector.  Upon coming into force, all South Korean tariffs in the life sciences sector, some reaching as high as 50%, will be eliminated in 10 years.  This includes current tariffs on pharmaceuticals, of which over 60% will be eliminated immediately, while the remaining pharmaceutical tariffs are to be phased out over 5 years.

“It has always been a part of our government’s plan to expand manufacturing opportunities by investing in the biotechnology sector, for example, the Cairns Family Health and Bioscience Research Complex and BioLinc at Brock”, said Dykstra.  “This agreement will certainly help facilitate opportunities in this direction.”

Niagara’s wineries will benefit from improved access to the South Korean marketplace as well.  Ice wine represents the large majority of wine exported to South Korea and will see the immediate elimination of tariffs upon the agreement coming into force. For the remaining wine exports, tariffs ranging from 15-30% will be eliminated within three years.

South Korea is the world’s 15th largest economy and 4th largest economy in Asia, with an annual GDP of $1.1 trillion and a population of 50 million people.
For more information, please go to:  pm.gc.ca

BACKGROUNDER

CANADA-KOREA FTA – AUTOS – HIGHLIGHTS

  • Canada has ensured the total package of outcomes and tools in this Agreement are as good and in some cases better than those achieved by the US and EU and our other key competitors, in all areas including autos.
  • Canada got an excellent deal for our auto sector, which, along with the CETA outcome, provides automakers in Canada an advantageous platform for expanding their global exports.
  • for example:
    • Canadian automotive producers will have immediate duty free access to the South Korea market. That’s immediate duty-free market access compared to a 5 year phase-out period in KORUS and up to 5 years in KOREU.
    • Canada will have the same safeguards against import surges than the US got, plus permanent specialized dispute settlement procedures that are as fast (in fact, one day faster) than the procedures in KORUS which can expire after 10 years.
    • The outcome on safety standards will allow Canadian manufacturers the ability to export an unlimited number of cars to Korea. Moreover, there are no volume limits on exports as is the case in KORUS.
  • The Canada-Korea Free Trade Agreement conclusion is supported by the Japanese automakers present in Canada – Honda and Toyota – as well as the Global Automakers of Canada and the Canadian Association of Manufacturers and Exporters.

BACKGROUND

  • The auto terms of Canada’s Agreement with Korea are commensurate with those obtained by the US, and KORUS was endorsed by representatives of the Detroit 3 manufacturers.
  • Korea has not agreed to include fixed retaliation (KORUS “snapback”) in the EU-Korea FTA or any other agreement. However, the practical value of this KORUS provision is tempered by the following facts: that the US MFN auto tariff is only 2.5 percent, that tariff could not be “snapped” back in the first four years of the agreement, and this provision will sunset if it has not been triggered within 10 years of KORUS coming into force (i.e., by 2022). Therefore, the absence of a duplicate “snapback” provision in the CKFTA is largely optical, and in any case is more than offset by the value of permanent accelerated dispute settlement provisions obtained by Canada (the KORUS accelerated dispute settlement provisions can expire after 10 years). However, to the extent that it’s of any practical value, Canada will benefit indirectly from the KORUS provision since in practice it would be very difficult for a non-tariff measure to be administered in a way that discriminates between Canadian and US-built vehicles, given the extremely high degree of auto production supply chain integration in North America.
  • The protective effect of Canada’s 6.1% tariff on auto imports from Korea is diminishing dramatically, as it is expected that 50% of Korean-cars sold in Canada this year will enter Canada tariff-free from the US under NAFTA. It is untenable in the meantime, for Canadian exporters’ to face an un-level playing field tilted in favour of their US competitors as a result of KORUS.
  • In order to adjust to a tariff-free competitive environment, it could be argued that the Canadian arms of the Detroit 3 manufacturers have had the 2 years since KORUS came into effect (March 2012), plus the estimated one year it will take for Canada to implement the CKFTA, plus the 3 years of tariff phase out under the CKFTA. That’s six years in total, and effectively one year more protection than KORUS’s 5 year phase-out of the 2.5% US tariff.
  • The reality is the most effective way to counter non-tariff barriers is through trade agreements with strong and effective enforcement mechanisms.  We have successfully negotiated those mechanisms in this agreement.

Negligible Impact on Canadian Auto Production

When it comes to the potential impact of this agreement on auto production in Ontario, every credible study that has been carried out make clear that the impact on Canadian production and therefore auto manufacturing jobs in Canada would be minimal.

A highly credible 2012 study by Dr. Van Biesebroeck of the University of Toronto (available here) concluded that the elimination of Canada’s 6.1 percent tariff on vehicles imported from South Korea will have a very limited impact on Canadian production and jobs – in the order of 0.2% of production, or fewer than 4,500 cars out of a base of around 2 million units.

South Korean auto imports growing significantly

That fact is that the most recent trade statistics, according to the Global Trade Atlas, made it very clear that the Free Trade Agreements signed by the US (KORUS, 2012) and the EU (KOREU, 2011) has been beneficial for the auto sectors in both the US and the EU, and put all Canadian exporters at a competitive disadvantage relative to their US and EU counterparts.

In the auto sector, since the implementation of KORUS, U.S. auto exports to Korea have more than doubled (from $340 million in 2011 to over $800 million in 2013). Meanwhile, EU auto exports to Korea have doubled (from $2 billion in 2010 to $4 billion in 2013) since KOREU.

Further, Ford themselves has just recently announced they set an annual sales record for Korea in 2013 and closed the year as Korea’s fastest-growing brand (see report)

This follows Ford’s setting of an annual sales record in Korea in 2012 (see report)

THE OUTCOME

The Canada-Korea Free Trade Agreement’s automotive provisions feature robust outcomes across many areas, including tariffs, non-tariff issues, standards-related measures, specialized dispute settlement procedures and safeguard provisions to protect against import surges.

The Agreement secures Canada’s position in the South Korea automotive products market, where competitors such as the United States and the European Union already benefit from preferential access as a result of their respective free trade agreements.

The Agreement’s outcome on automotive products will re-establish a level playing field in the South Korean market by providing comparable and in some cases stronger outcomes that those found in South Korea’s other free trade agreements.

The Agreement’s key automotive-sector features include:

Tariffs: South Korea’s 8 percent auto tariff will be eliminated immediately upon the Agreement’s implementation (compared to a period of five years under KORUS and up to five years under the EU-Korea FTA), while Canada’s smaller 6.1 percent tariff on imports of South Korean passenger vehicles will be phased out in three annual cuts.

Rules of origin: The Agreement includes rules of origin for vehicles that provide Canadian vehicle manufacturers the ability to source inputs from the United States and still benefit from the Agreement when exporting their vehicles to South Korea. Neither KORUS nor the EU-Korea FTA provide for such “cumulation.”

Accelerated dispute settlement*: The specialized dispute settlement provisions in the Agreement will ensure that any dispute related to motor vehicles will be dealt with as quickly as in KORUS and on a faster timeline than in the EU-Korea FTA. Furthermore, the Canada-Korea Free Trade Agreement’s accelerated dispute settlement procedures are permanent, whereas the equivalent KORUS provisions can expire after 10 years.

Transitional safeguards: The Agreement includes safeguard provisions equivalent to those found in KORUS for motor vehicles, and extends these provisions to all products.

Internal taxes: The Agreement’s MFN (Most Favoured Nation) provision ensures that Canada benefits not only from existing KORUS provisions but also from any future improvements to the South Korean internal taxation regime for motor vehicles and automotive parts made for any third party.

Emissions and fuel economy standards: The Agreement’s outcome ensures that Canada will benefit, now and in the future, from the best treatment that South Korea provides to any other trading partner.

Safety standards: The equivalency provisions in the Agreement will give Canadian automakers preferential access to the South Korean market for cars built to key U.S. safety standards (as most Canadian manufacturers currently do) or EU safety standards (as is necessary to export vehicles to Europe and to many other markets) and will not be subject to any numerical limits as in KORUS. Provisions on new vehicle technologies and compliance testing procedures will also help to facilitate access to the South Korea Market.