On March 11, 2014, Prime Minister Harper and President Park Geun Hye of the Republic of Korea (South Korea) announced the successful conclusion of negotiations on a new Canada-Korea Free Trade Agreement (FTA). This agreement in principle concludes almost a decade of negotiations, and marks Canada’s first FTA in the Asia-Pacific market. Both the United States and the European Union have existing FTA’s with South Korea. Accordingly, the stated hope of the Government of Canada is that the FTA will not only secure Canada’s position in the South Korean market (projecting a 32 percent increase in exports to South Korea, currently Canada’s seventh-largest trading partner), but also serve as a “gateway” for Canadian business and workers to the Asian-Pacific market more generally.
While the final text of the FTA is still being drafted, a Final Agreement Summary of the FTA recently tabled in the House of Commons provides some insight into the scope of the agreement.1
This FTA will impact most aspects of trade between Canada and South Korea, including trade in goods and services, investment, government procurement, non-tariff barriers, intellectual property and other areas of economic activity. Key provisions are summarized below.
Between 2010 and 2012, Canada’s annual agricultural exports to South Korea averaged $708 million, led by wheat, pork, pork offal, hides, skins and furs, refined and crude canola oil, and malt and prepared foods. Currently, Canadian exports to South Korea are subject to high agricultural tariff rates, averaging 52.7 percent in 2012.
Under the FTA, Canadian exporters will receive duty-free access to South Korea for 86.8 percent of agricultural tariff lines. These tariff eliminations will be phased in over a period of years, with certain agricultural products, including wheat, rye, oats, canola, soybeans for soy sauce and soya-cakes, and beef and pork fats receiving immediate duty-free access to South Korea. In the case of fresh/chilled and frozen pork, tariff elimination will be phased in over a period of 5 to 13 years. In the case of fresh/chilled and frozen beef cuts and some processed beef, tariff eliminations will be phased in over a period of 15 years.
The FTA will eliminate tariffs on automobiles and automotive parts. Immediately upon entry into force, all Korean tariffs will be eliminated, including tariffs currently applicable to light vehicles (8 percent) and all automotive parts (3 to 8 percent). Current Canadian tariffs on Korean on light vehicles (6.1 percent) and automotive parts (0 to 8.5 percent) will be phased out over a period of 5 years.
This is perhaps the most controversial part of the FTA. For example, Unifor, Canada’s largest private sector union, has highlighted the significant trade imbalance in the auto sector between Canada and South Korea; Canada imports large volumes of Korean-made cars while only a small volume of Canadian-made cars are exported to South Korea (in fact, Unifor claims that the ratio of automotive imports to exports is 207-to-1).2 The Government of Ontario has also expressed concerns about the deal and has asked the federal government to strike a task force to closely monitor the impact of the FTA, including on the auto sector.3
On the other hand, proponents of the FTA maintain that the benefits will outweigh the costs and they point out that the agreement also includes rules of origin that recognize the integrated nature of Canada’s automotive industry’s supply chain, allowing Canadian manufacturers to source manufacturing inputs from the United States and still benefit from the FTA when exporting vehicles or parts to South Korea. Other notable aspects of the Agreement are “equivalency provisions” which will allow Canadian automakers preferential access to the South Korean market for cars built to key US and EU safety standards. In addition, the FTA will also establish an accelerated dispute settlement process for disputes related to motor vehicles.
Other non-agricultural goods
The FTA will eliminate trade barriers on the export and import of other non-agricultural goods, including but not limited to industrial goods, fish and seafood products, forestry and value-added wood products. Tariff elimination will be phased in over a period of 12 years, with 90.2 percent of non-agricultural tariff lines on Canadian products being duty-free immediately upon the FTA coming into force.
In addition, the Canada-Korea FTA addresses certain non-tariff barriers. For example, Canada and Korea have committed to encourage the use of internationally recognized standards and membership in multilateral arrangements to minimize duplicative certification and testing of products, for example medical devices. Moreover, the FTA will include provisions allowing parties to raise concerns with standards-related measures of the other party.
Services and investment
The Canada-Korea FTA chapters on services and investment will adopt a “negative-list approach”. That is, all services and investments will be subject to the FTA unless specifically listed as a reservation.
Canada will retain the ability to review certain foreign investments under the Investment Canada Act.
Like several other trade agreements, the Canada-Korea FTA will provide protection against discriminatory treatment, protection from expropriation without prompt and adequate compensation, and access to independent international investor-state dispute settlement through which investors can claim compensation for damages resulting from a breach of the investment commitments by the host state.
The Canada-Korea FTA chapter on government procurement builds on Canadian and South Korean commitments under the WTO Agreement on Government Procurement (WTO-GPA) and revised WTO-GPA, the latter of which is expected to come into force in April of this year. Under the FTA, Canadian and Korean companies will have preferential access to government procurements valued above $100,000. Notably, and unlike the Canada EU Comprehensive Economic and Trade Agreement, the government procurement chapter of the Canada-Korea FTA will only apply to government procurements at the Federal level. It will not cover provincial, territorial or municipal government procurement.
Potential business opportunities
The agreement in principle promises to create opportunities for Canadian companies exporting to, investing in or otherwise doing business abroad, and particularly in the Asia Pacific region. We would encourage companies to carefully review of the terms of the FTA once these are available and follow its implementation to ensure that they are well positioned to take advantage of any new opportunities and to face any new competitive threats.
For more information, please contact Dentons’ Trade, WTO, and Customs Group. Our in-house leading global expertise in trade, customs, and investment matters, our exceptional team of government relations and arbitration lawyers in the US, Canada and Europe, as well as our reliable local connections in numerous jurisdictions can assist you in pursuing opportunities worldwide while successfully managing regulatory compliance in multiple jurisdictions.