Canada's Ambitious Free Trade Agenda: The Recently Concluded Canada-Korea Free Trade Agreement

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On March 11, 2014, the Canadian government announced that it had concluded a new free trade agreement with South Korea following negotiations that have lasted for over nine years. This agreement is stated to be part of the government's “most ambitious trade plan in Canadian history.”

Within the last seven years the Canadian government has finalized free trade agreements with nine countries and is currently negotiating with several more. Canada’s negotiations within the Trans-Pacific Partnership will substantially increase the number of countries based in Asia and the Pacific Rim with which it plans to have free trade arrangements. Canada has also reached an agreement-in-principle with the 28 member countries of the European Union (see Analysis of the Canada-EU Comprehensive Economic and Trade Agreement).

The Canada-Korea Free Trade Agreement (CKFTA) is a comprehensive free trade agreement that covers trade in goods, financial and other services; government procurement; non-tariff barriers; intellectual property; investment; environment and labour cooperation; and other areas of economic activity. It is Canada`s first free trade agreement with a country in Asia, and one that has an economy that is the fourth-largest in that region. According to the Canadian government’s estimates, beyond creating thousands of jobs, Canadian exports to South Korea will increase by 32% and the Canadian economy will grow by $1.7 billion as a result of this free trade agreement.

A. MARKET ACCESS

Goods

The central feature of the CKFTA is elimination of customs duties in a wide range of sectors, providing Canada with duty-free access to new markets in South Korea. Because South Korea’s customs duties are, on average, three times higher than Canada's, the Canadian government has championed this part of the deal as particularly advantageous for Canadian businesses seeking to export to South Korea.

Once fully implemented, the CKFTA will remove virtually all duties between the two countries: South Korea has pledged to ultimately make 98.2% of its tariff lines duty free, and Canada will remove duties from 97.8% of its tariff lines. Immediately upon coming into force, the CKFTA will cut 81.9% of South Korea’s duties and 76.4% of Canada’s duties.

Most exports will receive duty-free treatment immediately, while other tariffs will be eliminated within 5 to 12 years. The following are considered to be some of Canada's key wins with respect to tariff elimination:

  • South Korea will fully eliminate tariffs on about 97% of Canadian agricultural exports, including beef and pork. Agriculture is the most heavily protected sector in South Korea, and this was a key priority for Canada in the negotiations and is being promoted by the Canadian government as a crucial benefit for the Canadian farm sector.
  • Tariffs on fish and seafood will be completely eliminated. Products that will benefit from immediate tariff elimination include lobster and Pacific and Atlantic salmon. Seafood is another important export for Canada, and also a sector that is heavily protected by South Korea, with average tariffs around 17% and tariff peaks as high as 47%.
  • Canada's forestry industry will benefit from greater market access for lumber and for value-added products such as plywood and strand board. Wood exports are subject to substantial tariffs in South Korea (up to 10%). Under the CKFTA, all South Korean tariffs on forestry and value-added wood products will be eliminated within 10 years. Over 57% of tariff lines for wood and forest products will be duty free immediately upon entry into force of the agreement.

Duties will also be eliminated in aerospace, automotive, chemicals and plastics, information and communication technology, life sciences, metal and minerals, natural gas, textiles and other industrial sectors.

Yet not all tariff reductions are being met with enthusiasm on the Canadian side. Public protest has been voiced by one of the major Canadian automobile producers and labour unions regarding the tariff elimination on motor vehicles. The 6.1% duty on Korean exports of passenger vehicles will be eliminated over two years once CKFTA is implemented, further increasing competition for domestic automobile manufacturers. The concerns raised by the automotive producer and the labour unions are based, in part, on Canada's inability under the CKFTA to roll back tariff concessions (generally referred to as a “snap-back” provision) if South Korea fails to open its automotive market by using non-tariff barriers. The United States–Korea free trade agreement provides for such a provision. Furthermore, the CKFTA has been criticized for providing for a short phase-in period for tariff removal on passenger vehicles. The Canadian government has responded to these and other similar objections by noting that the CKFTA provides other advantages not present in the United States' agreement with South Korea, including the ability to qualify vehicles as originating from Canada even if the inputs are from the United States, other provisions providing for greater flexibility in meeting Canadian content and origin requirements, an expedited dispute resolution process for the automotive sector (requiring a decision within 177 days) that will not be limited to the first 10 years of the CKFTA, and safeguard protection rules that do not require compensation to South Korea for temporary customs duties imposed against South Korean vehicles during the first two years of the CKFTA.

Safeguards

Most free trade agreements provide for temporary duties or other safeguards (e.g., quotas) to be imposed under exceptional circumstances, such as if the removal of tariffs causes, or threatens to cause, serious injury to domestic producers due to a surge of exports from a free trade partner. According to the Canadian government, the safeguard provisions in the CKFTA will be equivalent to those available for automotive trade in the United States' free trade agreement with Korea, but will apply to all goods imported into Canada, and therefore all Canadian producers will be able to access this exceptional remedy.

The key aspects of the safeguard remedy in the CKFTA consist of the following:

  • Temporary increase in duties to the levels provided for under WTO commitments (i.e., most-favoured-nation, or MFN), when increased imports due to the tariff cuts under the free trade agreement are causing, or threatening to cause, serious injury to the domestic industry.
  • The safeguards can only be implemented during the transition period for the free trade agreement, which will be tied to the removal of duties for the goods. The maximum period of time for resort to this remedy will be 15 years.
  • The maximum duration for the safeguard remedy will be four years.
  • Requirement to provide offsetting tariff reductions for the exporting country after the safeguard remedy has been in place for two years.

Services

Under the CKFTA, Canada's service providers should benefit from new market access commitments exceeding those already agreed upon by South Korea under the under the WTO's General Agreement on Trade in Services (GATS). The additional market access commitments were negotiated so as to facilitate Canadian exports of professional services, environmental services, business services and services incidental to manufacturing, mining and wholesale trade. Highlights of the CKFTA chapter on services include the following:

  • A “negative list approach” for listing reservations. Under this approach, a market is fully open unless otherwise listed in a schedule as subject to a reservation. This approach provides service suppliers in each market with increased transparency and predictability of domestic regulatory regimes.
  • A “ratchet mechanism” by which future unilateral trade liberalization measures taken by South Korea become entrenched as binding obligations under the CKFTA.
  • MFN provision ensuring that any additional benefits granted by South Korea to its future free trade agreement partners will also be extended to Canada.
  • The inclusion of a non-binding mutual recognition agreement framework that provides common standards for the licensing/certification of professional service suppliers.

Services provided in the exercise of government authority, including health, public education and other social services sectors and activities, will be excluded from the ambit of the CKFTA. In addition, Canada has reserved the right to continue preferential treatment for Aboriginal peoples and minority groups.

Financial Services

The CKFTA will help Canadian financial service providers that have investments in South Korea with enhanced investment protection and access in the South Korean market on par with the best treatment provided to any other foreign company. Highlights include the following:

  • South Korea will grant Canadian financial service providers and investors the benefit of any additional trade commitments that it makes in the future.
  • New commitments to facilitate cross-border trade, including in the areas of portfolio management services, data-processing operations and transfers of information that facilitate efficient capital allocation by Canadian financial institutions.
  • Special dispute settlement rules for financial services, including a carve-out that allows governments to take prudential measures aimed at protecting the financial system's stability and integrity.

Public Procurement

In 2012, South Korea's public procurement market was estimated to be worth approximately $105 billion, nearly half of which was in the infrastructure and construction procurement market. The CKFTA will provide opportunities for Canadian companies to more effectively bid for lucrative public procurement opportunities in South Korea.

Under the CKFTA:

  • Canadian suppliers are now eligible to participate in procurement by South Korean central government agencies for contracts valued above 100 million won (C$100,000) (which will place Canada on an equal footing with suppliers from the United States and in a more advantageous position than suppliers in other countries such as Japan and the European Union).
  • Canadian suppliers will be entitled to all necessary pre-bid information and a challenge mechanism in the event of non-compliance by the procuring Korean central government agency with the rules.
  • Ancillary gains under the CKFTA, such as tariff reduction and investor protection, may make Canadian bids and pricing more competitive.
  • South Korean companies will have access to Canadian federal government procurement opportunities above the C$100,000 threshold.

B. INVESTMENT

The critical importance of cross-border investment in increasing bilateral trade has been recognized by Canada for over two decades, and when NAFTA was implemented in 1994 by Canada, it provided for robust investment promotion and protection rules. Since then most of Canada's free trade agreements have included investment provisions, and they will also be contained within the CKFTA.

Some of the key provisions will provide for the following:

  • Transparency and predictability so that Canadian companies can invest in South Korea with assurances of continued secure and stable conditions.
  • National treatment and MFN treatment for Canadian investors and their investments.
  • Protection from arbitrary and discriminatory treatment, and a requirement to provide full and effective compensation for any expropriation.
  • Ability for a Canadian investor to unilaterally initiate against South Korea an independent international arbitration proceeding for damages and losses incurred due to adverse government measures, generally known as investor-state treaty arbitration mechanism.

C. DISPUTE RESOLUTION

According to the Canadian government, the CKFTA's dispute settlement provisions will build on Canada's experiences from other such mechanisms. It will be faster than the process in place in Canada's other free trade agreements and the WTO dispute settlement process. In the case of perishable goods and motor vehicles, the resolution process will be further accelerated.

Openness in the process is to be promoted by allowing public access to the hearings, and the ad hoc tribunal made up of three members will be allowed to consider submissions from non-governmental organizations.

This dispute settlement process will be employed for subject matters not otherwise covered by specialized dispute resolution mechanisms provided for in the CKFTA. As noted previously, disputes concerning financial services and investment will have their own special resolution mechanisms. In addition, dispute settlement for trade remedies and customs matters will also be available under Canada's domestic laws such as those for anti-dumping, countervailing, safeguards and customs disputes.

D. ENVIRONMENT AND LABOUR

The CKFTA reinforces the mutual support of the two countries for trade and environmental policies by including commitments to foster good environmental governance and high labour standards.

Highlights of CKFTA's environmental commitments include the following:

  • Environmental obligations consistent with Canada's other agreements, such as commitments to
    • maintain high levels of environmental protection, the effective enforcement of environmental laws, and not derogating from or waiving such laws to promote trade or investment;
    • ensure transparency and public participation in the making of such laws;
    • reaffirm commitments to multilateral environmental agreements ratified by Canada and South Korea.
  • A framework for cooperation in areas of mutual interest.
  • A dispute resolution process to address any questions regarding compliance, including review by an independent panel of experts whose recommendations will be made publicly available.

Highlights of CKFTA's labour commitments include the following:

  • Obligations ensuring that national labour laws and policies in Canada and South Korea respect international labour standards, including in regard to the International Labour Organization's 1998 Declaration on Fundamental Principles and Rights at Work.
  • A non-derogation clause preventing either party from derogating from its labour laws in order to encourage trade or investment.
  • The establishment of certain institutional structures to implement and monitor compliance.
  • An enforceable dispute settlement mechanism, which may result in financial penalties in cases of non-compliance, to help ensure that all labour obligations are respected.

Topics:  Canada, Free Trade Agreement, Trade Policy

Published In: Alternative Dispute Resolution (ADR) Updates, Antitrust & Trade Regulation Updates, Business Organization Updates, International Trade Updates, Securities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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