Canada and South Korea Reach Long-Awaited Free Trade and Investment Agreement

Today, Prime Minister Stephen Harper announced that Canada and Republic of Korea have reached an agreement in principle for the Canada-Korea Free Trade Agreement (CKFTA). Both parties will now seek to ratify the new agreement. While the final legal text of the agreement has not been publically released, the governments have reached agreement on all terms and have provided a briefing on the key provisions.

The agreement has been concluded notwithstanding significant opposition from some sectors of the Canadian economy, including the automotive sector which fears that the removal of duties on automotive imports will crush the recovery of that industry in Canada. On the other hand, it has been supported by most of the agricultural sector.

The agreement contains provisions on trade in goods, services, investment, and procurement. This makes it similar in nature to the Comprehensive Economic and Trade Agreement Canada (CETA) recently concluded with the European Union. For an analysis of CETA, please see our previous article.

Non-Agricultural Goods

The CKFTA will phase out 90.2% of tariff-lines initially with the elimination of all tariff lines on non-agricultural goods within 12 years. These tariff-lines will, on the whole, be reduced linearly resulting in a gradual tailing off of tariff rates over time.

Currently, industrial goods account for approximately 70% of Canada’s exports to Korea. This includes minerals, metals, life sciences, and aerospace products. The CKFTA will also provide significant market access for the forestry industry aimed at providing at least parity with American forestry products. All Korean tariffs on forestry and value-added wood products will be eliminated. Tariffs on 57% of tariff lines for wood and forest products will also become duty-free on implementation. All remaining tariffs on Canadian forestry exports will be completely eliminated within 10 years.

Agricultural Goods

The CKFTA provides for broad liberalization in the agricultural sectors. One major achievement is that all Canadian fresh, chilled, and frozen beef will be duty-free, without any volume caps, within 15 years. Furthermore, there will be a progressive liberalization of those products during the 15 year phase out period.

While being phased out, beef and pork products will be subject to a "safeguard threshold" on volume. Any exports above this threshold will be subject to higher tariff levels. However, after the 15 year phase out period has expired, all tariffs will be eliminated and there will be no "safeguard thresholds" applicable to Canadian beef and pork.

Canada claims it has fully protected the supply-managed industries of dairy, eggs, and poultry.

Automobiles

The automobile sector was a major issue of interest to the Korean government during negotiations.

Canadian tariffs will be gradually phased out over a period of 3 years (in the case of light vehicles) and 5 years (in the case of trucks and electric vehicles). Though the CKFTA will immediately eliminate all Korean tariffs on light vehicles and automotive parts, it is highly unlikely that this will increase access to the Korean market for Canadian automakers as several Korean non-tariff barriers continue to impede penetration of that market by Canadian vehicles.

The rules of origin of the agreement take into account the integrated supply chain of Canadian auto manufacturers. A manufacturer can choose any of three methodologies to justify their vehicle as originating - calculated by net cost, "build up", or transaction value. If a manufacturer elects for either of the first two methods, 35% of the value must be Canadian regional value content. If a manufacturer elects to calculate using transaction value, the Canadian regional value must make up 45% of the value of the vehicle. However, it is uncertain that the rules of origin are likely to be of any benefit to the Canadian auto sector unless the current non-tariff barriers in the Korean market for Canadian vehicles are eliminated.

Beyond the elimination of tariff lines the CKFTA also eliminates many non-tariff barriers to trade. The agreement allows for Canadian manufacturer’s to use certain key US and EU safety standards when exporting vehicles to Korea. It also provides for "most favoured nation" provisions in an attempt to ensure that Canada benefits from any future improvements to the current discriminatory Korean internal tax regime for motor vehicles and automotive parts made for any third party.

Finally, the agreement provides for a more advanced dispute settlement mechanism for disputes related to the auto sector. First, any dispute is placed on a "fast track" which guarantees the issues are addressed in a time-frame similar to that of the US-Korea Free Trade Agreement. This process is significantly faster than that used in the WTO dispute settlement process. Second, the parties agreed to include advanced safeguard provisions that allows a party to introduce safeguard measures and not pay any compensation to the other party for the first two years.

Services

The services chapter within the CKFTA is modelled roughly on the provision of CETA. As with CETA, the CKFTA will provide for "negative listing" – all services will be subject to the provisions of the agreement unless they are explicitly exempted. Furthermore, the CKFTA will include a "ratchet mechanism" which is designed to ensure that whenever either party is granted a further liberalization the measure becomes the new "standard" required by the agreement.

The agreement also includes other measures that recognize that in the modern world many professionals travel frequently and require temporary entry to conduct business. To accomplish this, the CKFTA will address the issue explicitly and contain provisions designed to facilitate business travel. The agreement will eliminate the need to obtain a labour market opinion or economic needs test before allowing entry for business persons.

Investment

The CKFTA will include an investment protection chapter providing protection to both pre-establishment and post-establishment measures. This makes the CKFTA more liberal than the investment provisions of CETA which only protect post-establishment measures.

The chapter will also include a fully developed investor-state dispute settlement mechanism. This mechanism is intended to prevent discrimination against foreign investors and the investments of foreign investors. In addition the CKFTA provides for a minimum standard of treatment equivalent to the commonly accepted standard under customary international law to provide all investors "fair and equitable treatment".

The investment chapter will also include protections against expropriation. However, exemptions apply to enable the government’s continuing ability to regulate in the public interest. As such, it is likely that there will be deference given to regulatory measures giving rise to indirect expropriations.

The investor-state arbitration procedure is similar to that used in CETA. It will include provisions intended to guarantee transparency in arbitral procedures, while also allowing for redactions and other measures to protect confidential commercial information. However, all notices of arbitration, pleadings, memorials, and final decisions will be made public. The CKFTA will also lay out a procedure and relevant criteria for interested third parties to file amicus briefs with the leave of the Tribunal hearing the case.

Procurement

The South Korean government procurement market is valued at approximately $105 billion annually. The procurement chapter of the CKFTA will be built upon the framework provided by the revised WTO-AGP which is projected to be ratified in Canada in 2014. However, the CKFTA will provide additional protection for Canadian suppliers by lowering the threshold for procurements subject to the CKFTA measures to $100,000 as opposed to the threshold of approximately $200,000 under the WTO-AGP.

The procurement chapter will only cover procurements by the Federal government. Unlike CETA, no provincial, territorial, or municipal procurements will be subject to the agreement. Further, the agreement will not be applicable to procurements conducted by either Federal Crown Corporations or by Korean State Owned Enterprises. There will also be large carve outs maintained for Canadian military and RCMP procurement for national security purposes.

Conclusion

Negotiations on the CKFTA began in 2005 and had reached advanced stages before stalling in 2008. At that time the two nations appeared to be at a complete impasse and the hopes for future progress seemed bleak. This was especially true when the United States reached their own trade agreement with Korea, which expanded American market share of key areas of interest to Canadian exporters such as beef and pork products.

However, in 2012 the Korean government lifted their nine-year-old ban on Canadian beef - a change that provided the impetus necessary to renew negotiations. Since then, the two nations have engaged in further negotiations which have finally culminated in a deal.

Currently, Korea imports approximately $3.7 billion of goods from Canada. At the same time, Korean exports to Canada total approximately $6.4 billion. Korea’s investment stock in Canada is currently $5.8 billion. This agreement, though long delayed, will provide considerable benefits to some Canadian exporters. Canadian companies doing business abroad should be carefully reviewing the text when released to ensure they are taking advantage of the opportunities presented by this trade and investment deal.

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