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With South Korean deal, Canada secures free-trade foothold in Asia

Stephen Harper, left, wants to regain the $1.5-billion in exports to Korea that Canada has lost.

Choi Jae-gu/AP

Canada's first free-trade pact with an Asian nation promises to offer beef farmers, salmon fishermen and whisky makers a new toehold in South Korea by sweeping away virtually all border taxes in coming years. But it fails to secure some of the protections sought by vocal opponents in the auto industry, who immediately said Ottawa gave away too much.

Under the Canada-Korea Free Trade Agreement concluded in Seoul on Tuesday by Prime Minister Stephen Harper and South Korean President Park Geun-hye, both countries pledged to eliminate duties on 98 per cent of all goods. More than nine years and 14 bargaining rounds in the making, the deal offers what Mr. Harper called an open door "to the lucrative Asia-Pacific market for Canadian businesses." For Seoul, it is the latest in a free-trade network that includes the United States, the European Union and Australia that is positioning South Korea as a potent new trade hub in northern Asia.

Canada's current exports to Korea are dominated by coal, and the trade deal is unlikely to affect that. But it offers new opportunities at the margins, in smaller-value products, particularly from food producers. Over 15 years, it will do away with punitive Korean duties on beef, pork and seafood. It removes border taxes on a vast array of products, including whisky and ice wine, seafood, lumber and liquefied natural gas.

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It will allow Ottawa to maintain the provisions of the Investment Canada Act, which allows screening of corporate takeovers by state-owned foreign companies, and leaves supply-managed agricultural industries – in particular dairy and poultry production – untouched (although none of those products will gain duty relief in South Korea).

It stands to lift Canada's GDP by $1.7-billion, federal officials calculate. It gives the Harper Conservatives another successful trade deal, after one with the EU in October, and can further bolster the government's economic credentials. The Tories have put expanding international trade at the top of their economic agenda, and the pact with South Korea is viewed as a stepping stone for future deals in Asia, including with Japan.

But the deal will not solve the concerns of the Canadian automotive industry, which criticized Ottawa for signing a document that rapidly eliminates tariffs on Korean imports and does not include retaliatory measures the United States negotiated for its auto makers. The U.S.-Korean free trade agreement includes a so-called "snap-back" mechanism that allows Washington to re-impose a 2.5 per cent duty if Seoul violates the deal. Canada was unable to negotiate the same.

Canada's 6.1-per-cent duty on Korean cars will vanish two years after the deal comes into force, much more quickly than car companies in North America had hoped. That elicited a condemnation from Ford Motor Co. of Canada Ltd. president Dianne Craig.

"We believe that South Korea will remain one of the most closed automotive markets in the world under the deal negotiated by the Canadian government," she said in a statement.

The United States and the EU have been unable to reverse a one-way automotive trade flow, she said, because South Korea imposes non-tariff barriers on imported vehicles and intervenes in currency markets to subsidize exports and protect its domestic market. Since the U.S.-South Korea agreement was signed in 2012, the U.S. trade deficit with South Korea has increased by more than 50 per cent, Ms. Craig noted.

Still, U.S. car shipments to Korea have doubled since 2011 – albeit to a still-tiny 24,000 in 2013. And "a large increase in Korean imports into the U.S. has not occurred beyond the percentage increase in the overall U.S. market," said Sean McAlinden, chief economist at the Center for Automotive Research in Ann Arbor, Mich. "On balance, it has been positive so far."

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Canada argued that its deal offers protections roughly equivalent to what the United States secured, in part by offering a fast, 177-day resolution for automotive disputes. In addition, in an interlinked North American industry, Canada will also benefit if the United States uses the snap-back mechanism.

"They weren't going to replicate it for anybody else," a senior official said.

Other industries said car makers have seized an undue amount of the spotlight. "Canada is bigger than the automotive industry, and this deal really is a fantastic opportunity for Canada," said Joy Nott, president of the Canadian Association of Importers and Exporters, which includes the automobile industry. "I think the Canadian automotive industry will adapt."

For most of Ms. Nott's members, "this is a deal that Canada needed," she said.

After U.S. and EU deals with South Korea, Canada's trade with the country dropped by about a third, or $1.5-billion (U.S.). Exporters hope to regain that ground once the legal paperwork is drafted and presented to Parliament, which could happen in months.

Pork and beef producers applauded the agreement, but acknowledged they have work to do to recover lost sales.

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"The worst-case scenario for us would have been no deal at all," said Jacques Pomerleau, president of Canada Pork International.

But he pointed out that the United States got a better deal two years ago, including a shorter phase-out of tariffs on some key products, suggesting they had more bargaining power.

Canada was once the largest exporter of pork to South Korea. It's now fourth and falling further behind each year.

John Masswohl, director of government relations at the Canadian Cattlemen's Association said it was a "long road" to a good outcome. But, he added, "it re-establishes a basis of parity between Canadian and U.S. beef."

With reports from Greg Keenan and Barrie McKenna

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About the Author
Asia Bureau Chief

Nathan VanderKlippe is the Asia correspondent for The Globe and Mail. He was previously a print and television correspondent in Western Canada based in Calgary, Vancouver and Yellowknife, where he covered the energy industry, aboriginal issues and Canada’s north.He is the recipient of a National Magazine Award and a Best in Business award from the Society of American Business Editors and Writers. More


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