On March 11, 2014, Canada announced that it had concluded negotiations with South Korea to enter into a bilateral free trade agreement. The Canada-Korea Free Trade Agreement (the "CKFTA") is Canada's first free trade agreement in the Asia-Pacific region. Once in force, this trade agreement with Canada's third-largest merchandise trading partner in Asia will significantly open Canadian and South Korean markets to bilateral investment and import/export opportunities.

The CKFTA is the ninth free trade agreement that the Canadian government has concluded in the last seven years, demonstrating the government's continuing commitment to reducing trade barriers. As indicated in a previous Tax Law update, Canada also recently reached an ambitious agreement-in-principle with the European Union on a Comprehensive Economic and Trade Agreement, which, once in effect, will liberalize trade between Canada and the European Union's 28 member countries.

Background

With a population of 50 million and a GDP of US$1.1 trillion, South Korea's rapid growth over the last 30 years has positioned the country as the world's 15th largest economy. In parallel, during the course of the CKFTA negotiations, South Korea also concluded free trade agreements with the United States and the European Union, and a recent drop in Canadian exports to South Korea has been attributed to the free trade agreement in force between South Korea and the United States since 2012. The conclusion of CKFTA negotiations is therefore particularly welcome news for some sectors. The CKFTA will place Canadians on equal footing with their American and European competitors, and, in some circumstances, even provide Canadians with an advantage.

The Agreement

The underlying principle of the CKFTA is the removal of almost all discriminatory treatment of goods so as to facilitate free trade between Canada and South Korea. From its first day in force, the CKFTA will eliminate many of the existing duties on tariff lines between the countries, with 81.9 percent of South Korean duties and 76.4 percent of Canadian duties removed. Once fully implemented, duties between the two countries will be practically non-existent, with 98.2 percent of Canadian tariff lines and 97.8 percent of South Korean tariff lines eliminated.

As South Korean duties are currently notably higher than Canadian duties, the elimination of most of South Korean duties will be particularly beneficial to Canadian exporters. South Korean exporters targeting Canadian markets will also gain a significant advantage. Certain key aspects of the CKFTA are highlighted below on a sector-by-sector basis.

Agricultural and Agri-Food Products

Immediately upon implementation, South Korea will eliminate 86.8 percent of duties on tariff lines, and Canada will eliminate 50.7 percent. Over the course of a progressive implementation schedule, Canada will eliminate an additional 36.3 percent of duties on agricultural products, and South Korea will remove duties on a number of tariff lines, including beef and pork products. The elimination of tariffs on agricultural and agri-food products was a Canadian priority and should provide a boom to Canadian agricultural and agri-food product exporters in South Korean markets.

The Automotive Industry

A key priority in the CKFTA negotiations was the automotive sector, with both countries aiming to increase their vehicle and automotive parts manufacturers' access to the other country's markets. The result of extensive negotiations on this topic is that, from the date of the CKFTA's entering into force, South Korean tariffs will be eliminated on all automotive parts and on all light vehicles. Canada, on the other hand, will eliminate its tariffs on passenger vehicles, light vehicles, and automotive parts on different schedules for each respective category, over a period ranging from three to five years, with a significant proportion of Canadian tariffs for automotive parts being removed when the CKFTA comes into force.

The speedy elimination of Canadian tariffs has been the subject of great concern in the Canadian automobile manufacturing sector. Rules of origin concessions that allow Canadian manufacturers to classify manufactured products as Canadian even if they have non-Canadian constitutive parts are generally seen as concessions that offset the tariff elimination, as is an expedited dispute resolution process. The Canadian government is also emphasizing that the CKFTA's immediate elimination of South Korean tariffs offers Canadian exporters expedited access to South Korean markets compared to their U.S. and European competitors, whose trade agreements with South Korea only provide for a gradual reduction of tariffs. From the South Korean automotive industry's perspective, tariff reduction under the CKFTA will significantly increase access to Canadian markets, and will reduce the cost of imported automotive parts.

Forestry and Wood Products

South Korea is the Canadian forestry industry's fourth most important export destination, and this industry will benefit from the elimination of all tariffs on all forestry and wood products within ten years. Upon implementation, over 57 per cent of South Korean duties on forestry and wood product tariff lines will be eliminated, with an additional set of duties eliminated at three years and the balance thereafter.

Industrial Products

The CKFTA will eliminate duties on over 95 per cent of tariff lines on industrial goods as soon as it comes into force. At the five year point, an additional 4.2 per cent of tariff lines on industrial goods will no longer be subject to duties, with the balance eliminated within ten years. From both the South Korean and Canadian export and import perspective, this will result in a significant increase in the ease with which goods flow between the two countries.

Investment

The CKFTA ensures non-discriminatory treatment for Canadian investors in South Korea, including most favoured nation treatment, protection from expropriation, and a dispute resolution mechanism in the form of international independent arbitration. South Korean investment in Canada will continue to be subject to review under the Investment Canada Act, where applicable.

Services

The CKFTA establishes mechanisms to facilitate movement between the two nations for contract service suppliers and independent professionals, as well as their spouses, and for business visitors, traders, investors, and transferees within the same company. Service providers will also benefit from a lock-in mechanism, whereby any future South Korean liberalization that benefits Canadian service providers will become an obligation "locked-in" under the CKFTA.

Financial service providers will gain increased investment protection, be ensured best treatment status on par with any other foreign country, and have access to special dispute resolution mechanisms.

Conclusion

For South Korean and Canadian exporters/importers, and foreign direct investors in both nations, the long-awaited CKFTA offers many potential benefits. Its progressive implementation mechanisms, however, create a shifting landscape with the tariff treatment of goods changing quickly over the course of brief time intervals. To maximize access to the CKFTA's benefits and avoid unanticipated tariff treatment, the CKFTA will need be navigated carefully. More generally, both South Korean and Canadian investors interested in taking advantage of the CKFTA should ensure that they have a comprehensive understanding of the new agreement and its effect on their business strategy.