Unlocking Canadian-Korean Trade

On June 12, 2014 in Seoul, South Korea’s Deputy Trade Minister Kyong-Lim Choi and his Canadian counterpart, Ian Burney, Assistant Deputy Minister for Trade Agreements and Negotiations, initialed the Canada-Korea Free Trade Agreement (CKFTA). Media reports have suggested this initialing is considered to be the last step before the signature of the FTA, as it indicates that the agreement has been legally reviewed and will not be subject to any further change. According to South Korea’s Ministry of Trade, Industry and Energy, both sides have agreed to proceed with the signature of the agreement by the end of this year. Following signature, the CKFTA is expected to be ratified and come into force as soon as possible.

Negotiations on the Canada-Korea Free Trade Agreement came to a conclusion on March 11 this year, after some fourteen rounds of talks over the last nine years. The CKFTA is Canada’s first free trade agreement in Asia, and is seen as an important step forward in efforts to build closer ties with the Asia-Pacific region. The CKFTA is expected to boost Canada’s GDP by $1.7 billion, create thousands of new jobs in Canada, and enhance Canada’s global competitiveness. It will allow Canadian companies to compete on a level playing field in the South Korean market with their competitors from the United States, the European Union, Australia and other countries. Additional benefits are expected from tariff elimination on a wide range of products, including consumer goods, a stronger investment framework and preferential access to government procurement, as well as environmental and labour cooperation. Once the CKFTA is fully implemented, Korea will remove duties on 98.2 percent of its tariff lines, covering virtually all of Canada’s imports.

The conclusion of CKFTA was welcome news, especially in light of concerns raised by Canada’s auto industry who feared job losses and a growing trade imbalance, whereas credible studies have concluded that the elimination of Canada’s tariff on vehicles imported from South Korea will have a very limited impact on Canadian production and jobs. At the last Canada-Korea Forum held in the fall of 2013 in Ottawa, co-hosted by the Asia Pacific Foundation of Canada and the Seoul Forum for International Affairs, participants urged that a failure to conclude the FTA in the immediate future would risk eroding the relationship between the two countries, some calling for “now or never” approach for the CKFTA.

Over the course of negotiations, South Korea had proceeded to conclude free trade agreement with other partners including the United States and the European Union. In turn, Canadian business leaders have pleaded to the Harper government that “Canadian exporters have been at a competitive disadvantage in the Korean market” and stressed the need to strengthen Canada’s credibility in negotiations for the Trans-Pacific Partnership.

The break-through point for the CKFTA negotiations is generally traced to October 2013 when Prime Minister Harper and President Park Geun-Hye met in Bali for the APEC summit, renewing their commitment to the CKFTA and giving the necessary political impetus to their negotiators. Because of changing international context over the course of nearly a decade, and complexities of trade negotiations, intense negotiations ensued from the fall of 2013 to the eventual conclusion in March 2014. A number of chapters, including in the area of services, investment and intellectual property, had to be updated to reflect a more modern approach, as well as incorporate “lessons learned” from other FTA negotiations.

Although last year marked the 50th anniversary of the establishment of diplomatic relations between Canada and the Republic of Korea, the bilateral trade relationship only began to develop with the industrialization of Korea, the opening of the Canadian Embassy in Seoul in 1973 and the arrival of Canada’s first resident trade commissioner, Robert Lee. (The last Canadian aid – dairy cattle – went to Korea in 1972.) In the early years, Canada exported microwave telecommunication equipment, wheat, flour, potash and coking coal, and various raw and semi-processed materials. According to Lee, the sale in 1975 of Atomic Energy of Canada Limited’s CANDU nuclear plant to Korea Electric Company marked a major early success amidst intense competition from the United States and France. Korea, for its part, was exporting to Canada such products as clothing and textiles, canned mushrooms, plywood, steel, bicycles, sporting goods, television sets, radios, shoes, games and toys.

While the CKFTA has been hailed as a “historic” agreement, this is certainly not the first attempt made by the Canadian government to expand trading relations with Asia. Trudeau’s famous Third Option, coined by Minister of External Affairs Mitchell Sharp in 1972, attempted to diversity Canada’s dependency on trade with the United States by looking towards Europe and Japan. Despite such earnest efforts, it ultimately failed, partly because of Canada’s geostrategic realities and partly because of stark differences in market practices. Regardless, two-way trade between Canada and Korea continued to grow, reaching $1 billion in 1981 and steadily increasing ever since.

Today, bilateral trade between Canada and Korea has increased by almost 3000 percent to the point where South Korea is now Canada’s seventh largest merchandise trading partner. Two-way merchandise trade between Canada and South Korea reached $10.8 billion in 2013, with Canadians selling mineral fuels, oils, cereals, wood pulp and meat to Koreans and in turn, buying Korean automobiles, machinery and electronic equipment.

With an annual GDP of USD $1.3 trillion and a population of 50 million people, South Korea today is the fourth-largest economy in Asia, one of the world’s heaviest spenders on research and development. From a former aid recipient with a GDP per capita of USD $86 in the 1950s, South Korea’s export-led industrialization, most noticeably under President Park Chung-Hee, has led to an average annual growth at a rate of 6.5 percent in the last few decades. Ranging from Psy’s Gangnam Style to Korean soap operas, “Hallyu” (Korean Waves) is rapidly reaching out to all corners of the globe.

In addition to the obvious economic benefits from tariff elimination and greater competition, there are three clear strategic benefits arising from the CKFTA.

First, from the Canadian perspective, the biggest benefit of the CKFTA lies in tapping into the greater Asia-Pacific region. By 2050, Asia’s share of the global GDP is projected to exceed 50 percent. In addition to the U.S.-led Trans-Pacific Partnership initiative, net benefits are expected from a greater market access to Asia. Already, Canadian clothing brand, Joe Fresh, opened its first store outside of North America last weekend in Seoul, as a test market for the rest of Asia. In Halifax, the first-ever direct service to Asia was launched last week to land at the Incheon Airport in Korea, while Korean Air launched a dedicated cargo jet service for lobsters for import. In light of growing economic importance of South Korea and the Asia-Pacific region, it is clear that the CKFTA will create a platform for Canadian companies seeking to expand to Asia’s consumers.

Second, people-to-people exchange between Canada and Korea will continue to flourish, with subsequent enrichment in human capital. Today, there are over 200,000 Koreans living in Canada and 25,000 Canadians in Korea. Over a million people travel between Canada and Korea each year. As discussed at the 3rd Canada-Korea Dialogue on the Hill, roughly 20,000 Korean students are studying in Canada, making up the third largest international student population in the country and contributing over CAD $700 million to the Canadian economy. In the words of Korean Ambassador to Canada, Cho Hee-Yong, “Koreans are investing their most precious resource – their children – in Canada and its educational system.” In addition to the growing Canadian-Korean community, many high-caliber international students from Korea are choosing to stay in Canada upon completion of their graduate degrees through programs such as the Provincial Nominee Program. The CKFTA will make it easier for engineers, consultants and architects to freely move and work between the two countries. Unlocking the full potential of the CKFTA, therefore, will result in significant benefits due to a greater flow of human capital.

Third, positive synergies are expected from a closer cooperation between Canada and Korea in the realm of defence and security in the Asia-Pacific region. The Korean peninsula is located in the strategic centre of Northeast Asia, with the highest concentration of military and economic capabilities in the world. Ranging from Russian adventurism to communist China to nuclear North Korea, coupled by the rise of non-state actors engaging in terrorism and growing environmental challenges, there is great need for alliances between like-minded and democratic partners. The recent report by the United Nations Commission of Inquiry on Human Rights has noted that crimes against humanity are being committed in North Korea.

Having fought so hard for freedom and democracy in the Korean War, Canada has a vested interest in partnering with South Korea for peace and stability in the Asia-Pacific region. Canada, the United States and the ROK forces already have a fairly strong military relationship through the UN Command Military Armistice Commission, military training exchange program, various exercises such as Maple Flag, Key Resolve, Ulchi Freedom, and the Korean War Veterans efforts, as well as a number of agreements on sharing military intelligence.

The CKFTA is expected to stimulate much closer economic relations, which in turn may lead to enhanced cooperation on a broader range of issues, such as joint cooperation on Arctic matters, collaborating in cyber security issues, knowledge-sharing for the UN Peacekeeping Operations, enhancing regional presence through Humanitarian Assistance/Disaster Relief, and developing a “smart power” approach for regional capacity building, through principles such as Responsibility to Protect (R2P).

Just how “historic” the CKFTA will be in Canadian history and in the history of globalization remains to be seen. Undoubtedly, there will be unintended consequences and unexpected synergies as the two economies integrate closer. For the time being, we should carefully ponder about the potential of the invisible hand and get ready to see more kimchi in our grocery stores.