Hot on the heels of the Canada-Korea Free Trade Agreement’s entry into force on Jan. 1, Canada’s trade minister, Ed Fast, is leading a trade mission to South Korea this week. This is a good time to remind ourselves of the importance of this agreement, Canada’s first with an Asian economy. It is also a good time to commit to the further work required for Canada to reap the full advantage of this more open door toward Asia.
Although the income of the average South Korean is about a third lower than that of Canadians, it has been rising much faster over the past three decades. The Canadian and South Korean economies are now roughly the same size. Canadian and South Korean standards of living will likely converge over the next two decades.
Other developed countries have moved to take advantage of this dynamic market. The European Union, the United States, and then Australia, among others, have signed free-trade agreements with South Korea over the past three years, putting Canadian producers at a disadvantage.
Restoring Competitive Balance
The Canada-Korea agreement restores the competitive balance for existing and potential Canadian exporters to South Korea. One of the benefits of this agreement for Canada is how it positions us to maintain market share and jobs that would otherwise have gone to the competition. This is notably the case for Canada’s beef and other agricultural and food producers.
A recently published analysis of the agreement by the C.D. Howe Institute shows that the Canadian economy will expand by $3.1 billion (half of 1 percent) and sustain thousands of jobs as a result of the deal.
South Korea is also becoming the linchpin of North Pacific economic dynamism. It signed a trilateral investment agreement with China and Japan in 2012, and completed the substance of a trade agreement with China late last year. Those pave the way for a broader China-Japan-Korea agreement which, if successful, will open the door to completing the Regional Comprehensive Economic Partnership (RCEP) negotiations between Korea, ASEAN, China, India, Japan, Australia, and New Zealand.
South Korea is not only a buyer of our goods, but of course a supplier as well. Canadian consumers got an early taste of the benefits they can expect from the agreement when a South Korean car maker advertised a price cut on its vehicles sold in Canada last month, billed as the “Free Trade Celebration Event.” South Korean goods such as cars, machinery, and chemicals will have easier-than-otherwise access to the Canadian market, and some Canadian sectors will feel the competitive pinch.
It is important, therefore, that Canadian business be just as opportunistic as South Korea’s and stage “Free Trade Celebration Events” of their own—in South Korea. Governments can sign trade deals, but countries do not export—firms do. And South Korea can be a tough market for firms.
Fully Explore Opportunities
Companies need to build relationships to do business in Asian markets. To succeed, Canadian businesses need to invest in building those relationships in South Korea—and also so that such efforts are not given a cold shoulder by South Korea’s closely knit chaebols, or family-controlled conglomerates, that account for some 80 percent of the country’s production.
South Korean border practices also need to be monitored. Other free-trade partners of South Korea have complained of authorities imposing aggressive paperwork and inspection requirements on imports.
Here, there is a continuing role for Canada’s foreign trade professionals to facilitate, monitor, and intervene where necessary at the political level to ensure that the market access gains made at the negotiating table are not nullified by exclusionary business practices.
While effort is required to make the agreement succeed for Canada, the timing is propitious. The exchange rate between the Canadian dollar and the South Korean won is closer to reflecting underlying competitive fundamentals than it has been in a decade, providing Canadian businesses with the breathing room to better compete in the South Korean market.
What we do know, is that official trade diplomacy is effective in opening trade in countries where foreign businesses experience such problems. The trip by Mr. Fast and his officials, accompanied by Canadian business leaders, is an important signal that Canada takes the relationship seriously—and expects that Canadian businesses will be able to fully explore opportunities in the South Korean market on par with its competitors there.
Our competitors in Europe, the United States, and Australia were leaving us behind with South Korea. Now is Canada’s chance to move to the forefront.
Article courtesy C.D. Howe Institute
Dan Ciuriak is a Fellow in Residence with the C.D. Howe Institute and the former Deputy Chief Economist at the Department of Foreign Affairs and International Trade. Daniel Schwanen is Vice President Research at the C.D. Howe Institute.
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