Nearly 10 years after negotiations first began, the federal government announced on March 11, 2014 that the Canada-Korea Free Trade Agreement (CKFTA) negotiations have come to a close. Beginning in 2005, Canada and the Republic of Korea (Korea) engaged in 14 rounds of negotiations before arriving at terms acceptable to both sides.
Canada’s existing ties with Korea, both diplomatic and commercial, are quite extensive. In 2013 the two countries celebrated the 50th anniversary of diplomatic relations, with 2013 being designated the year of Korea in Canada and the year of Canada in Korea. Korea is currently Canada’s third-largest trading partner in Asia, and Canada’s seventh-largest merchandise trading partner worldwide. The value of merchandise exports to Korea approached C$4 billion in 2012, with merchandise imported from Korea valued at C$6.4 billion. Canadian foreign direct investment in Korea was C$569 million in 2012, with Koreans investing C$5.8 billion in Canada during that same period.
Negotiations towards the CKFTA began on July 15, 2005 and proceeded well through 13 rounds of negotiations before falling into limbo in 2008, when the mad cow disease scare resulted in Korea placing a ban on the importation of Canadian beef. When the ban was lifted in 2012, the CKFTA negotiations picked up where they left off. However, during the negotiation hiatus, Korea concluded free trade agreements with the United States and the European Union. Canada has seen a marked drop in exports to Korea since the implementation of the U.S.-Korea agreement (KORUS) in 2012, and the CKFTA is expected to put Canada back on a level playing field.
The CKFTA is Canada’s first free trade deal with an Asia-Pacific country, and has been described by Prime Minister Stephen Harper as significant in its own right and as an important gateway to other markets in the Asia-Pacific region. Eagerly anticipated by the agricultural sector, pork and beef producers in particular, the main domestic opposition to the CKFTA has come from the automotive industry, which has predicted a “flood” of Korean imports, such as Kia and Hyundai, if the existing 6.1 per cent tariff on Korean automobiles is eliminated.
The CKFTA is a comprehensive agreement whose extensive scope covers trade in goods and services, investment, government procurement, intellectual property, and environmental and labour cooperation. The CKFTA will eliminate duties on all non-agricultural goods, with 90.2 per cent of Korean non-agricultural tariff lines being eliminated on entry into force, with transition periods of up to 12 years for the remainder, and 81.5 per cent of Canadian duties on non-agricultural goods being eliminated on entry into force, with the rest being reduced over a period of up to 11 years. Given that Korea’s average tariffs are three times higher than Canada’s, 13.3 per cent and 4.3 per cent respectively, the CKFTA’s tariff elimination will be a boon to Canadian exporters.
Forestry, Seafood and Industrial Goods
Upon entry into force, Korea will eliminate tariffs on more than 57 per cent of forestry and value-added wood products tariff lines, with an additional 13.1 per cent of tariff lines becoming duty-free within three years and the remaining tariff lines following within 10 years. Canadian tariffs on all forestry products will be eliminated upon implementation of the CKFTA.
Korean tariffs on certain fish and seafood products, such as frozen lobster, and fresh, chilled and smoked Pacific and Atlantic salmon, will be eliminated immediately upon the CKFTA coming into force. Tariffs on non-frozen lobster will be eliminated within three years, with 70 per cent of fish and seafood tariff lines becoming duty-free within five years of entry into force. Canada will initially eliminate 77.2 per cent of tariff lines on fish and seafood products, with the remainder scaling back over five years.
Korea has committed to eliminating 95.7 per cent of tariff lines for industrial goods upon implementation of the CKFTA, with a further 4.2 per cent becoming duty-free within five years. The products being granted immediate duty-free treatment include: aerospace industries equipment and parts, hides, skins and leathers; information communications technology; and iron, steel and nickel.
With respect to the automotive sector, Korea will immediately eliminate existing tariffs on light vehicles and automotive parts, giving the Canadian automotive sector an advantage over their American and European counterparts, as Korean automotive tariffs are to be phased out under the KORUS over a period of five years and under the EU-Korea agreement over three to five years.
Canada has agreed to eliminate its tariffs on light vehicles within three or five years, while nearly 70 per cent of Canadian tariffs on automotive parts will be eliminated when the CKFTA comes into force, with the remaining tariffs being reduced over a three- to five-year period.
The rules of origin relating to the automotive sector under the CKFTA contain “cumulation” provisions, not contained in either the KORUS or the EU-Korea agreement, allowing for Canadian vehicles to contain parts sourced in the United States. Disputes related to motor vehicles will be subject to a permanent accelerated dispute settlement procedure. The CKFTA also contains certain transitional safeguards to protect against an injurious surge in automotive exports by Korea, with no compensation required for safeguard measures instituted within two years of implementation. The CKFTA grants Canadian automakers preferential access to the Korean market for cars built either to U.S. or EU safety standards.
Upon implementation of the CKFTA, Korea will eliminate 86.8 per cent of tariffs on agricultural goods, including tariffs on wheat, rye, oats, canola, soybeans, mustard seed, frozen french fries, rye whisky, ice wine, and maple syrup. The immediate elimination of tariffs on rye, oats and soybeans for soy sauce and soy cake represents a significant opportunity for Canadian exporters, as these three products are currently subject to fairly steep duty rates: 108.7 per cent, 554.8 per cent, and 487 per cent respectively.
Korean tariffs on beef and pork, a contentious issue during negotiations, are to be gradually eliminated. For example, duties on fresh, chilled and frozen beef will be eliminated over 15 years, while fresh, chilled and frozen pork will become duty-free over a five- to 13-year period.
Canada has also secured an additional 100 tonnes of duty-free in-quota access for natural honey, which has over-quota duties of up to 243 per cent. Canada has agreed to make 50.7 per cent of agricultural tariff lines duty-free upon implementation of the CKFTA, increasing to 87 per cent over five years. Canada will not be eliminating duties on over-quota supply-managed products, nor has it agreed to any increases in tariff rate quotas for supply-managed goods.
Trade in Services
The CKFTA chapter on trade in services contains both a most-favoured nation clause, which guarantees that any concessions made by Korea in future trade agreements would apply to Canada, as well as a “ratchet mechanism” ensuring that any liberalizing measure taken by Korea that facilitates the provision of services or investment activities by Canadians in Korea becomes an obligation under the CKFTA. The trade in services chapter of the CKFTA will also contain a non-binding framework for a mutual recognition agreement relating to the establishment of common licensing and certification standards for professional services.
A special set of rules will be implemented for dispute settlement in the financial services arena, and Canadian telecommunication service providers will enjoy preferential access to Korean telecommunications networks and services.
The CKFTA also contains provisions relating to temporary entry, covering intra-corporate transferees, business visitors, traders and investors, independent professionals, and their spouses.
Under the CKFTA, Canadian investors will be ensured non-discriminatory treatment that extends into the pre-establishment phrase, as well as protection against expropriation without adequate compensation. Should disputes arise, the CKFTA contains investor-state dispute settlement provisions allowing for international arbitration by a three-person dispute settlement panel, with the panellists being appointed through an ad hoc process.
Canada has retained its ability under the CKFTA to review Korean investment in Canada pursuant to the Investment Canada Act, which will not be subject to international dispute settlement. While the CKFTA contains provisions intended to protect against the discriminatory operation of monopolies and state enterprises, these provisions will not hinder the operation of monopolies or state enterprises with public service obligations.
In the area of government procurement, the CKFTA will extend the commitments made by Korea and Canada in the revised World Trade Organization Agreement on Government Procurement (WTO AGP), which is expected to come into force in April 2014. Valued at C$105 billion annually as of 2012, access to the Korean government procurement market represents an important opportunity for Canadians.
The CKFTA will grant Canadians access to Korean central government agency contracts that are over a C$100,000 threshold, with the same threshold applying to Korean access to Canadian central government contracts. While provincial, territorial and municipal government procurement is not currently covered by the CKFTA, sub-national procurement markets are part of the commitments made by Canada and Korea in the revised WTO AGP, and will thus be incorporated into the CKFTA when the former comes into force.
The CKFTA provisions relating to intellectual property will reflect Canada’s copyright, trademark, and patent regimes, with enforcement provisions that are consistent with Canada’s existing civil and criminal remedies and the Combating Counterfeit Products Act.
Canada and Korea have agreed under the CKFTA to protect a limited number of geographical indications; the Koreans agreeing to protect “Canadian whisky” and “Canadian rye whisky,” while Canada has agreed to protect “Korean red ginseng,” “Korean white ginseng,” “Korean fresh ginseng,” and “Incheon rice” in both English and Korean.
Environment and Labour
Environmental and labour considerations will be dealt with as chapters of the CKFTA itself, rather than as side agreements. Both Korea and Canada have agreed to maintain and enforce high levels of environmental protection, and not to derogate from their environmental protection measures. Similarly, the CKFTA labour provisions will ensure that Canadian and Korean national labour laws adhere to international standards and that the parties will not derogate from such laws or policies for the purpose of encouraging trade or investment.
The completion of negotiations on the CKFTA is a crucial first step in turning around the diminished exports to Korea that has resulted from the implementation of the KORUS. While it will take some time before the CKFTA comes into force, since all aspects of the negotiations have been completed we expect the CKFTA to be implemented well in advance of the Canada-European Union Comprehensive Economic and Trade Agreement, where the parties have merely arrived at an agreement in principle.
While there is some uncertainty with respect to the Canadian automotive industry, the sectors expected to benefit from the CKFTA certainly include those constituting the bulk of Canada’s existing exports to Korea, such as fossil fuels, cereals, mineral ores, and meat. The Canadian mining industry is a sector which could see increased foreign investment resulting from the CKFTA; as reflected in the C$1.8 billion of mineral exports to Korea in 2012, Koreans have a great interest in Canadian coal, iron ore, copper, nickel, zinc, and uranium. With respect to fossil fuels, upon entry into force the CKFTA will make liquefied natural gas duty-free, a product that is not currently exported from Canada to Korea and thus represents an opportunity for exporters, as Korea imports 96 per cent of its energy and is the world’s second-largest importer of LNG. Efforts to market Canadian LNG to Korea are already well under way; on November 29, 2013 British Columbia held a natural gas forum in Seoul to promote the province’s LNG development projects.
As part of an effort to cut public-sector debt, on December 11, 2013 the Korean Ministry of Strategy and Finance announced plans to have state-owned-enterprises (SOE) reduce their debt-to-equity ratio to 200 per cent by 2017. In response to this announcement, Korean SOEs have been looking to divest themselves of assets held worldwide, something that has generated a fair amount of interest in the Korean investing public. With Korean SOEs such as Korea National Oil Corporation and Korea Gas Corporation already looking to divest themselves of Canadian oil and gas assets, along with the investment opportunities presented by the divestment of oil and gas assets by private companies such as STX Energy, the investment provisions of the CKFTA may well make Canada even more attractive to Korean investors.
Canadians looking to invest in Korea should be comforted by the recent activity on the part of the Korean government to crack down on corporate crime. For example, the chairman of the CJ Group, a Korean conglomerate, was indicted in July 2013 for tax evasion and misappropriating company assets.
Canadian businesses would do well to begin planning for the implementation of the CKFTA as soon as possible and should consult an experienced trade lawyer or consultant on how best to reap the benefits of the CKFTA.