Canada-Korea Free Trade Agreement: Breakthrough in Asian Trade

On March 11, 2014, Canadian Prime Minister Stephen Harper and South Korean President Park Geun-hye announced the conclusion of negotiations for a free trade agreement between Canada and South Korea. After nearly a decade of negotiations that began in 2005, the parties have reached a comprehensive agreement to eliminate tariffs and reduce non-tariff barriers which have historically hindered Canadian access to the South Korean market. This agreement represents Canada's first free trade agreement with a country in the Asia-Pacific region and will benefit most Canadian sectors (e.g., industrial goods, automobiles, agriculture and processed foods, fish and seafood, wine and spirits, and forestry).

The breakthrough in the negotiations followed the implementation of South Korea's free trade agreements with the United States and the European Union. These agreements pushed Canada to conclude its negotiations with South Korea in order to restore Canada's position in the South Korean market vis-à-vis United States and European competitors who are benefiting from duty free access and other preferential treatment.

One of the more contentious aspects of Canada's agreement with South Korea is the elimination of Canada's 6.1-percent duty on imports of Korean vehicles. The Canadian automotive industry is concerned that the elimination of duties will result in a flood of Korean vehicle imports and harm to the Canadian manufacturing industry without a corresponding benefit for Canadian-produced vehicles because of the continuance of non-tariff barriers in South Korea. The agreement does not contain additional protections for Canada's automotive industry in the form of a "snap-back" provision that would allow Canada to suspend its tariff concessions on South Korean vehicle imports if South Korea does not comply with its commitments to open the South Korean market to Canadian vehicles.

Overview

The main elements of the agreement include the following:

• Tariff Elimination: Tariff elimination will apply to all goods with the exception of certain agricultural goods. Canadian exporters will benefit from the removal of duties on 81.9 percent of South Korea's tariff lines on the day the agreement comes into force and the removal of duties on 98.2 percent of South Korean tariff lines after the agreement is fully implemented. For automobiles, which have been the subject of contention, South Korea's 8-percent auto tariff will be eliminated immediately while Canada's 6.1-percent auto tariff will be phased out in three annual cuts. The agreement does not include a snap-back mechanism that would allow Canada to re-impose duties on South Korean vehicles if South Korea violates its obligations in respect of Canadian manufactured vehicles (e.g., the United States-Korea agreement contains a "snap-back" provision that allows the United States to suspend tariff concessions on South Korean vehicles if South Korea does not conform with its obligations in a way that materially affects the sale, purchase, or distribution of U.S. vehicles in South Korea).
• Timeframe for Tariff Elimination: The timeframe during which duties will be phased out depends on the product. For example, Canada will eliminate duties on imported South Korean vehicles after two years. This can be contrasted to South Korea's 15-year timeframe to incrementally eliminate duties on Canadian beef and 13-year timeframe to incrementally eliminate duties on Canadian pork. The lengthier phase-out periods for Canadian beef and pork, as compared to South Korean vehicles, has caused some concern among industry stakeholders. 
• Rules of Origin: The agreement will provide clear and transparent rules of origin to determine which products qualify for preferential tariff treatment.  For automobiles, Korea has agreed to cumulation provisions that will allow Canadian vehicle manufacturers to source inputs from the United States and still qualify for preferential treatment.
• Accelerated Dispute Settlement for Vehicles: There are specialized dispute settlement provisions in the agreement to ensure that all motor vehicle-related disputes are settled within 177 days. These provisions are permanent, unlike the corresponding provisions in the United States-South Korea agreement which can expire after 10 years.
• Government Procurement: South Korea agreed to provide Canadian suppliers with access to procurement by South Korean central government and agencies for contracts valued above $100,000. The $100,000 threshold puts Canadian businesses on equal footing with United States competitors and in a more advantageous position than the European Union and Japan.
• Standards: The agreement will encourage greater transparency and cooperation between Canada and South Korea on regulatory standards. Equivalency provisions will give Canadian automakers preferential access to the South Korean market for cars built to United States or European safety standards. The agreement also includes a Most-Favoured Nation clause for emission regulations to ensure that Canadian vehicle manufacturers benefit from any concessions granted by South Korea to another trading partner.
• Services: The liberalization of the services trade is based on a "negative list" approach (i.e., services in all sectors will be granted market access and non-discriminatory treatment subject to specific exceptions listed in the agreement).
• Investment: The agreement provides for protection against discriminatory treatment, protection from expropriation without fair and adequate compensation, and access to an international investor-state dispute settlement.
• Intellectual Property: The agreement contains provisions that protect the rights of Canadian copyright, patent, and trademark owners. The level of protection to be provided in South Korea will be in line with Canada's domestic intellectual property regime.

Next Steps

The negotiating text must undergo a legal review and ratification by both the Canadian and Korean national governments before the agreement is implemented. It is anticipated that legal review and ratification could be completed within the next several months.

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