Globe and Mail, Toronto
South Korean free-trade deal is long overdue
By Barrie Mckenna
Globe and Mail Update
13 March 2011
The auto industry will object, but the benefits far outweigh any drawbacks
It is Canada’s forgotten trade deal.
Free trade negotiations with South Korea began in 2004. And nearly seven years later, there’s still no pact.
It’s not that the Harper government isn’t hot on free trade. Ottawa is forging ahead on other deals with Europe, India, Ukraine and Colombia. It’s pursuing perimeter security and regulatory harmonization talks with the United States. And it’s in preliminary talks on a possible trade deal with Japan.
Canada’s auto industry and its unionized workers hate the idea of free trade with South Korea.
But that’s not the only reason talks are stalled.
Blame it on the United States. Washington has a pending deal of its own, which would include duty-free access for Hyundai and Kia vehicles in exchange for an opening of the closed South Korean car market.
Canada is waiting to see what kind of final deal the Americans and South Koreans strike before wrapping up a deal of their own.
But that deal is stalled as well. Trade is a tough sell these days in the U.S. Congress, where the South Korean agreement and other trade deals are being held up in the Democratic-held Senate.
And it simply doesn’t make sense for the Harper government to move before the Americans because of the integrated North American auto market, argued Lawrence Herman, a trade lawyer at Cassels Brock in Toronto.
"Our deal is being held hostage by what’s happening in the U.S. Congress," Mr. Herman said.
The apparent sticking point in Canada is a 6.1-per-cent tariff, which Ottawa puts on all imported cars not manufactured domestically. If a deal is struck, South Korean cars would eventually enter the Canadian market duty-free. That would give them an edge over North American-built cars as well as over Japanese imports, which would still face the tariff.
The fear is that Hyundai and Kia would flood the Canadian market. And that poses a problem for the Detroit Three auto makers and the Japanese transplants, along with their Canadian parts suppliers and employees.
It’s hard to imagine the elimination of the tariff alone would have a significant impact on the market. The South Koreans are already grabbing market share in Canada - even with the tariff hit. Since Canada began negotiating with the South Koreans in 2004, Hyundai and Kia have doubled their vehicle sales. The two South Korean auto makers sold 172,389 cars and trucks in Canada last year, up from 85,075 in 2004. (Some of those vehicles enter Canada duty-free because they are made in the U.S.)
The comatose South Korean talks don’t sit well with many Canadian exporters.
"Perhaps the automotive industry has time to wait. We do not," representatives of Canada’s pork industry complained last week in a letter to Prime Minister Stephen Harper. "Our third biggest export market is at risk. We do not need more process. We need action."
South Korea puts a 22.5-per-cent tariff on Canadian pork. Even with the tariff, Canada exported $100-million worth of pork to South Korea in 2010.
Pork producers complain that other countries are doing free trade deals with South Korea and will gain a substantial advantage in that market if Canada continues to dither. Europe and Chile already have free trade with South Korea.
Pork producers want Mr. Harper to carve out the auto sector and complete a free trade with the South Koreans.
That might not be the best way to do trade deals, which often involve complex trade-offs between sectors.
Notwithstanding the objections of the auto industry, it’s hard to imagine what Canada has to lose. Canada isn’t about to start exporting a significant number of cars to South Korea. That battle was lost a long time ago.
The tariffs that would be lost seem minimal. Ottawa collects roughly $100-million a year in tariffs on South Korean cars.
By not doing a deal now, we’re depriving all Canadian exporters - and not just pork producers - of access to potential new markets worth hundreds of millions of dollars. And consumers are paying more for cars.
The stakes are high. South Korea is a $1-trillion economy and Canada’s seventh-largest trading partner. Canada exports more to South Korea than it does to either India, Brazil, Italy or France, and nearly as much as it does to Germany. And we’re currently in a trade deficit.
The benefits of a deal clearly outweigh the cost of further delay.
It’s about time Canada pulled out a pen and signed on the dotted line.