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Canada-Korea Free Trade Agreement: The Forgotten Talks?

Thursday, December 20th, 2012
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If the Americans sometimes call the Korean War their “forgotten war,” then the Canadians might label the proposed free trade agreement (FTA) with South Korea the “forgotten talks,” considering how long they have languished. In 2004, Ottawa first broached the idea. But that seed has yet to bear fruit. Several of Canada’s leading experts on their country’s economic links with South Korea explain the issues.

To start, on November 19, 2004, Prime Minister Paul Martin of Canada and his Republic of Korea (ROK) counterpart, Roh Moohyun, announced that their coun tries would aim for an FTA. Then on July 15, 2005, trade ministers from Ottawa and Seoul formally launched the talks. The me dia in Canada was initially eager, but prog ress stalled in 2008, causing the issue to fade from public view here. By 2011, South Korea was the seventh largest export mar ket for Canada, while the latter ranked only as the 22nd largest export market for the former.

Watching this loss of momentum was Professor Yves Tiberghien, a political econo mist at the University of British Columbia who specializes in Northeast Asia, spanning the USKorea FTA and Canada’s attempt. Re cently, the Canadian parliament recognized his talent when it invited him to testify on the ongoing CanadaJapan Economic Part nership Negotiations (EPA). He often holds discussions with Canadian government of ficials or in Asia and was last in Korea a year ago as an East Asia Institute (Seoul) research fellow.

Tiberghien explains that developments boiling across the Pacific had the Canadi ans asking, “What’s your beef ?!” He asserts, “This is a key story. In the spring of 2008, massive grassroots protests erupted in South Korea against US beef. They engulfed even middle and high school students. Many students and nongovernmental organiza tion leaders held candlelight vigils. Protest ers had huge public support and President Lee Myungbak’s approval rate collapsed to below 30 percent.”

The specific issue was “concerns in South Korea for health questions, triggered by the bovine spongiform encephalopathy (BSE) crisis. But an earlier crisis was about oppo sition to geneticallymodified foods where the concerns were both health and environ mentrelated. But lacking proof of danger, “the movement was more a diffuse opposi tion to the opacity of beef approval regula tions and to industrial and feeding practices that led to the BSE crisis.” Tiberghien recalls, “As the government tried to handle the crisis rapidly for nation al security and owing to the crucial impor tance of relations with the US, the protest movement amplified…against the lack of consultation in the Lee administration and its autocratic topdown ways. It became a clash between the young civil society of South Korea and the old bureaucratic ap paratus.”

Therefore, “US beef was held up for a long time. Then, finally, as the government did everything to finish the South KoreaUS free trade agreement, which hung in the balance, it forced a beef agreement in par liament with a few concessions on the age of cattle to reopen the market. Canadian beef suffered collateral damage caught in the larger battle, Ottawa submitted a complaint to the World Trade Organization (WTO) in 2009. By 2011, it became clear that South Korea would lose that case. So South Korea entered into bilateral negotiations to preempt a WTO decision and reopened Ca nadian beef imports in January 2012.”

John Masswohl is the Director for Gov ernment and International Relations with the Canadian Cattlemen Association. He re counted, “It was in 2003 that we were shut out after Canada discovered a few domestic cases of BSE. South Korea stopped imports, as did all other buyers. The difference is that South Korea did not resume imports as other countries did after the World Ani mal Health Organization acknowledged the safety of Canadian beef in 2007. In 2002, we sold some US$40 million worth of beef in South Korea” i.e., the years of losses were huge.

In 2008, emphasizes Masswohl, when the ROK reaccepted US beef, it failed to follow through on similar plans for Canada’s meat because the vigorous protests had spooked officials. As for the opening in early January, Masswohl evaluates the resulting trade as “smaller than it should be.” Now, as Canadi an beef faces a 40 percent tariff in South Ko rea, the KORUS provides a preferential rate of 37.3 percent on US beef heading toward 34.6 percent next year and finally zero” in 2026. Canada, insists Masswohl, needs a “defensive FTA with South Korea just to maintain its presence or it risks being shut out. If we get the same tariffs as the US en joys, we can do at least US$40 – 50 million of business a year.”

Overall, says Tieberghien, Canada still wants an agreement. “South Korea is one of the most dynamic economies in Asia, still growing around 4 percent a year. Canadian exporters need to have secure longterm ac cess to this market, the third largest Asian market for Canada, for opportunity reasons [and] for defensive reasons, as South Korea is home to some effective competitors to Canadian firms, e.g. nuclear technology, au tos, electronics, etc.”

Finally, Tiberghien underscores the “large geopolitical dimension. FTAs today in East Asia are the main instrument for geopo litical competition. For example, the boom ing region of East Asia is now the scene of intense competition between a Chineseled effort to develop Chinesecentred FTAs and the USled TPP (Trans Pacific Partnership), which is meant, to a large extent, to counter the Chinese offensive.”

It is a big game, insists Tiberghien, and “countries that are nimble, smart, and able to develop an active FTA program with key trading nations will develop a great com etitive advantage. In Asia, the two best na tions in this game are South Korea and Sin gapore.” Ottawa was slow to join the game in the 2000s. “But, since winning a majority government last year, Prime Minister Ste phen Harper [wants] a longterm strategy toward Asia” that incorporates a very active trade strategy. A potential South KoreaCan ada FTA [is] a good geopolitical move.” An oftquoted naysayer is Jim Stanford, an economist spewing discouraging num bers at the Canadian Auto Workers (CAW), the biggest private sector union in Canada. He worries that, “Canadian agricultural producers, especially pork and beef, are the only sectors that would enjoy significant ex port growth to South Korea after an FTA.” Stanford rejects the protectionist label. True, his goal is partly “to retain a 6.1 per cent tariff” on car imports, especially since that tariff has not stopped an enormous oneway inflow of automotive products and other manufactured goods from the ROK. More broadly, he explains that, “a sec tor by sector comparison of current trade flows with South Korea” shows that an FTA “would widen the alreadysubstantial bilat eral trade deficit by as much as US$10 bil lion, and cause the loss of up to 33,000 jobs, including up to 4,000 in the auto and parts industries.”

As for the overall bilateral trade deficit, it has averaged about $2.5 billion in recent years, but fell to $1.5 billion in 2011 due to increased commodity exports. Stanford criticizes South Korea’s “much lower import penetration” compared to other industrialized countries “in key hightech products, including automotive products, where there is virtually none. So calling us protectionist for opposing a free trade deal with a country that buys virtually nothing from us other than resource and agricultural products is clearly misplaced.”

He continues that, “Until 1997, bilateral trade was broadly balanced. Since 1997, Canada’s dollar value of exports to South Korea grew to 2011 by 68 percent, mostly resources, mainly reflecting higher com modity prices, not higher volumes. Canada’s imports from there expanded about twice as much at 133 percent all manu factured ware.” In that sector, the situation is much worse, laments Stanford. “Canada’s exports to Korea grew 1.5 percent from 1997 through 2011, our imports grew by 132 percent or about 90 times as fast. The result is an enormous oneway deficit in manufactured goods that reached US$4.5 billion last year, the biggest ever. Canada buys over $3 in manufactures from Korea, for every dollar we sell there.”

Specifically in automotive products, “the imbalance is ridiculous. Canada’s exports to the ROK fell by 95 percent since 1997, rep resenting the effective closing of the South Korean market, while our imports from South Korea exploded by 746 percent. The automotive trade deficit is now US$2 billion per year.” “These imbalances destroy thousands of Canadian jobs, and will only get worse if Canada removes its tariffs and further opens its market. There is no realistic ex pectation that South Korea will buy more manufactured products from Canada after an FTA of any sort.” The author gets work ers’ attention because their union is strong. But others, rues Stanford, “such as machin ery and electronics would be hit even hard er, but lack a voice.”

Stanford warns that the ROK’s workers would also lose under a FTA “because it gives both South Korean and North Ameri can corporations more freedom to move capital around, threaten workers with job loss, and negotiate down wages…South Ko rean auto companies are now using ultra low wages in unionfree states like Alabama to threaten South Korean workers with job loss. We feel common cause with them.” His CAW started a large scale “community cam paign in autodependent communities in 2006 and 2007 about the proposed FTA, and we got a lot of support from city councils, local small businesses, etc.”

But Ottawa is more positive. Reports Ti berghien, “The strategy is now pushed by the prime minister, the trade and the ag riculture minister. It seems to have cross party support at least from the centrist Liberals. Even many left wing New Demo cratic Party politicians are not opposed in principle, but will examine the impact on jobs.” The FTA can win crossparty support if it stresses “winwin gains and South Ko rean investments in Canadian higher end industry.”

As for boosters in Seoul, Tiberghien ob serves that the trade agreement is the goal of Lee Myungbak and his party. But the president is now in a lame duck position. The party is now more under control of the new leader Park Geunhye. She “seems to be shifting to the centerright and to be more cautious on free trade, although still pro free trade. The party just won a thin major ity in the April 2012 election, 152 out of 300 seats, making it harder to force unpopular measures. The opposition Democratic Unity Party (DUP) is mostly opposed to more FTAs, but the Canadian FTA is probably the least controversial one. Still, it is a difficult politi cal climate to get a FTA agreed and passed. The window may have been greater a year ago.”

Looking ahead, the key variable for the success of the CanadaKorea FTA will be the December elections in Korea. “If the DUP wins, prospects for the FTA will be dimmer. If Park wins, the prospects will be quite strong. Right now, Park is the favorite, but the situation is volatile.”

As for South Korea’s motives, Tiberghien explains that, “After a careful and defensive approach since the 2008 beef crisis...Korea seems to be warming up again to an FTA with Canada. The top level meeting be tween Prime Minister Harper and President Lee Myungbak on the sidelines of the G20 meeting in Los Cabos on June 1819...seems to have cleared the air. The two leaders com mitted to give priority to the FTA negotia tions. Korea has gained interest in Canadian shale gas resources and technology. With the removal of negatives on beef and ap pearance of new positives on energy, there could be positive momentum.”

 

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