After a ten year rollercoaster negotiation, Canada and South
Korea ("Korea") signed the Canada-Korea Free Trade
Agreement ("CKFTA") on March 11th, 2014.
Korea is the third largest economy with whom Canada has signed a
free trade agreement ("FTA")1 . This Agreement
should help Canadian businesses by leveling the playing field with
other economies, such as the US and the EU, that are actively
pursuing the growing Korean economy.
From the Canadian perspective, the agricultural industry likely
stands to benefit significantly from increased market access. Korea
appears to be most pleased with improved market access for
automobiles.
Background of the Agreement
Korea has recently become a very popular trading partner. In July
2011, the EU-South Korea Free Trade Agreement
("EUSKFTA") came into force. In March 2012, the
Korea-US Free Trade Agreement ("KORUS")
came into force. Australia concluded negotiations on its FTA with
Korea in December 2013, and signature is expected in the coming
months.
Given the state of Korea's economy, these FTAs make good sense.
Korea has a gross domestic product of $1.1 trillion
USD2, making it the 15th largest economy in the world
and the 4th largest in Asia (behind only China, Japan and India).
It is also growing. Over the last 30 years, Korea's economy has
grown six-fold, with an impressive average annual growth rate of
6.5%.
There is a widespread belief that these recent FTAs (particularly
KORUS) have had a negative impact on Canadian exporters compared to
competitors from the US or EU. Canadian exports to Korea dropped by
approximately one-third, from $5.03 billion to $3.37
billion3, in the two years since KORUS came into force.
The Canadian government expects that the CKFTA will allow Canadian
producers to regain lost markets as well as providing new
opportunities. In particular, the Canadian government believes the
Agreement will facilitate the inclusion of Canadian inputs into
Korean products as part of their global supply chains.
There are a number of procedural and drafting issues that will need
to be resolved before final ratification of the Agreement;
nevertheless, there are reports that the CKFTA could be in
force in as little as one year from now.
Improved market access
Once the Agreement is fully implemented, Korea will remove tariffs
from 98.2% of tariff lines that cover virtually all of its imports
from Canada. In exchange, Canada will remove tariffs from 97.8% of
tariff lines. Korea's average tariffs are currently 13.3%,
while Canada's are 4.3%. Tariff removal will take some time to
materialize, and will be asymmetrical, with each party's
particular interests reflected in the timing of tariff
reductions.
To Korea, the removal of Canadian duties on Korean automobiles was
a very important goal. In 2013, approximately one-third of
Korean's exports to Canada ($2.3 billion of $7.3 billion) were
passenger motor vehicles4. Canada currently imposes a
6.1% MFN duty rate on such imports.
The Canadian tariff on Korean automobiles will be stepped down in
three phases: the first reduction when the Agreement enters into
force, with the second and third cuts in each subsequent year. By
contrast, Korea will remove its 8% tariff on Canadian automobiles
immediately upon the Agreement entering into force.
Tariff protection for the politically sensitive Korean agriculture
sector will be phased out over a longer term than tariffs applied
to Canadian manufactured goods. Once fully implemented, 86.8% of
Korean tariffs on agricultural products will be eliminated. Key
agricultural exports from Canada include beef and pork. In 2013,
Korea's total imports of these products from all sources was
approximately $2.4 billion, The opportunity for Canada to supply a
larger share of these imports is seen as beneficial for Canadian
producers. Duties on beef (fresh, chilled or frozen) currently
stand at 40-72% and will be eliminated over 15 years. For pork
(fresh, chilled, frozen), current duties of up to 25% will be
eliminated over 5 to 13 years. Korea will maintain tariff
protection on most dairy products, poultry and poultry products,
ginseng and related products, rice and rice products, refined sugar
and most tobacco products.
On the Canadian side, 87% of Canadian agricultural tariffs will be
eliminated. Duties will remain in place to protect supply managed
industries (i.e. dairy, poultry and eggs).
Other notable tariff reductions of benefit to Canadian producers
include the elimination of duties on Canadian wines and spirits,
including Canadian whisky (currently 20%) and ice wine (currently
15%). Korea has also agreed to protect "Canadian whisky"
and "Canadian rye whisky" as geographical indications
under its intellectual property laws.
Turning to metals and minerals, Korea will remove tariffs on 98.7%
of metal and mineral tariff lines upon the Agreement's entry
into force. The remaining tariffs will be eliminated within five
years. Until such time, current duties ranging up to 8% will remain
in place. Canada currently imposes virtually no tariffs on metal
imports. Any existing duties will be removed upon mutual
ratification of the CKFTA.
Provisions other than market access for
goods
In addition to tariff reduction, the CKFTA also
addresses:
- Trade in Services and Investment;
- Government Procurement;
- Intellectual Property;
- Dispute Settlement; and
- Environment and Labour.
Korea has committed to providing improved access to its
financial services sector. Given the strength of Canada's
banking industry, this may represent a substantial opportunity. In
regards to e-commerce, the parties have agreed that on entry into
force, no duties will be charged on digital products that are
transmitted electronically.
While the CKFTA has provisions relating to government
procurement, they largely affirm the parties' commitments under
the WTO Agreement on Government Procurement (including the amended
version currently expected to come into force in April 2014). The
CKFTA government procurement provisions do not apply to
sub-national procurement, so no consultation with the Provinces or
Territories was required.
In addition to the protection of certain geographical indications
relating to Canadian wine and spirits, the CKFTA also
provides that Canada will recognize and protect terms such as
"Korean red ginseng", "Korean white ginseng"
and "Korean fresh ginseng".
Canada and Korea have agreed on a flexible dispute resolution
mechanism. The system will rely on the appointment of ad hoc
panelists, rather than a fixed roster of candidates. An expedited
process is also available for two classes of goods: automobiles and
perishable goods (e.g. certain agricultural goods). The
CKFTA hopes to promote openness and transparency in the
dispute resolution process by allowing public attendance at
hearings, and allowing intervener submissions from interested
parties.
The CKFTA provisions relating to the environment and
labour largely re-affirm the parties' existing obligations in
multilateral agreements and under international standards. The
CKFTA also contains provisions that ensure that parties not
derogate from their environmental and labour obligations to promote
trade or investment.
Conclusion
The recent signing of the CKFTA opens a significant
international market opportunity for Canada, both because of the
size of the Korean economy, and its continuing rapid growth. The
CKFTA will remove disadvantages Canadian exporters have
experienced in competing with US and EU producers who already
benefit from preferential market access. The CKFTA will
similarly provide advantages for Canadian exporters over foreign
competitors from other jurisdictions that do not benefit from a
free trade arrangement with Korea.
New Canadian exporters interested in the Korean market should be
aware that they should not expect instant results from the CKFTA.
Entry into Asian markets generally requires an appreciation of
cultural sensitivities that must be respected in order to take
advantage of business opportunities. Canadian exporters should be
prepared to invest some time and effort into developing
relationships and building trust with potential Korean buyers.
1 Behind the US and Mexico through NAFTA, and given that the Comprehensive Economic Trade Agreement with the EU has not yet been ratified.
2 Per IMF, based on Gross Domestic Product by PPP.
3 Source: Statistics Canada – Canadian International Merchandise Trade Database.
4 Per Statistics Canada, based on goods classified under Harmonized System heading 87.30.
The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.
© McMillan LLP 2014