The end of last month saw the signing of the Canada-Korea Free Trade Agreement (CKFTA) following nearly ten years of negotiations. It marks Canada’s first major free trade deal in the Pacific Asia region.

The Canadian Department of Foreign Affairs, Trade and Development has highlighted benefits including job creation, increased access to Asian markets and the creation of a level playing field for Canadian businesses competing with other trade and investment partners of the South Korean peninsula. Specifically, the CKFTA will foster increased M&A activity across the Pacific by establishing and reinforcing rules that secure a transparent and stable investment milieu for companies and investors. 

The investment chapter

The investment chapter of the CKFTA includes provisions providing protection against discriminatory treatment, protection from expropriation without prompt and adequate compensation, and access to independent international investor-state dispute settlement. The agreement also offers temporary-entry provisions for Canadians, greater than those provided to South Korea’s other free trade agreement partners, which will facilitate the movement of business persons between the two countries. The CKFTA ensures that if South Korea reduces or eliminates restrictions pertaining to foreign investment, Canadian companies and investors will receive the same preferential treatment. 

Impact on M&A activity

It has been contended that a significant portion of foreign direct investment is applied to transactions involving cross-border acquisitions of existing assets (by way of M&A) as opposed to the establishment of new assets (“Greenfield” investments) For example, see World Bank Policy Research Working Paper 3192. Based on this model, as bilateral investment opportunities grow under the CKFTA, M&A activity should see a corresponding rise.

Incentives for firms contemplating M&A transactions include transfers of technology and managerial know-how as well as efficient means of enabling the flow of capital and labour. Canada could see increased foreign investment in the mining industry as well as strengthened cooperation in other key sectors including automotive parts, transportation, telecommunications, the Arctic, and financial services.

Although the CKFTA will not take effect until ratified by the legislatures of Seoul and Ottawa, the signing of the agreement symbolizes a significant step towards facilitating investment flows and, indirectly, M&A transactions between the two countries.