CIIT Committee Report

II.      Overview of Trade Negotiations and the Canada-Korea Economic Relationship

A. Canada-Korea Free Trade Negotiations

The possibility of a comprehensive free trade agreement between Canada and Korea was first raised by Korea in 2004. The two countries discussed the topic in November of that year in Santiago, Chile, during a meeting held on the margins of the Asia Pacific Economic Cooperation Leaders’ Meeting. The leaders of the two countries concluded those discussions by announcing that they would explore the feasibility of a free trade agreement.

Official negotiations were formally launched in July 2005. Substantive discussions began in September of that year, and a total of twelve rounds of talks have since been completed, the most recent in November 2007 in Seoul. A thirteenth round of negotiations is slated for Ottawa in March 2008.

Canada’s stated objective for these negotiations is, in accordance with the rules of the World Trade Organization (WTO), to remove tariffs for almost all trade in goods between the two countries and also address non-tariff barriers, as well as sanitary and phytosanitary measures that impede current market access opportunities. Canadian negotiators are also in favour of an agreement on services that would improve the market access and treatment that South Korea gives to Canadian service providers; trade facilitation measures that would lessen the regulatory burden on Canadian companies; and a modern investment chapter. Health, public education, social services and culture would be excluded from the application of the agreement, and environmental and labour cooperation side agreements would be finalized.

B. Background on the Canada-Korea Economic Relationship

South Korea is Canada’s seventh most important trading partner in the world. In 2006, the most recent year for which data are available, total merchandise trade between the two countries reached a record $9.0 billion. Korea is also growing in importance as a trading partner. Two-way trade has grown by an average of 6.4% per year since 2001. By comparison, Canada’s global merchandise imports and exports have risen by an average of 2.3% per year over that same period.

Canada has a large trade deficit with South Korea. In 2006, merchandise exports to that country were valued at just under $3.3 billion, while imports were nearly $5.8 billion. The resulting trade deficit of $2.5 billion is significant relative to the total value of goods exchanged between Canada and Korea.

Canada’s trade deficit with South Korea was triggered by a specific economic event — the 1998 Asian Crisis. Prior to 1998, trade between the two countries was approximately balanced. However, a combination of speculative investments and non-performing loans in the region caused a crisis of confidence in the financial sector. The result was a flight of capital out of the region and a large-scale devaluation of the exchange rate in many countries. South Korea was one of the hardest hit. The domestic economy plunged into recession and the currency — the won — lost a third of its value relative to the Canadian dollar in 1998.

The fallout from this event had a significant effect on trade between Canada and Korea. A weaker currency made Korean goods much cheaper in the Canadian market, while having the opposite effect on Canadian goods priced in Korean won. At the same time, the recession in Korea dried up demand for foreign imports. As a result, Korean exports to Canada grew by 16% in 1998 while Canadian exports fell by 40% that year.

While import growth continued unabated, it took five years for Canadian exports to recover. During that time, Canada’s trade deficit with Korea ballooned. However, the gap has been closing in recent years. From 2003 to 2006, exports to Korea rose by an average of 17.8% per year, aided by the recent boom in commodity prices. For its part, import growth averaged 4.1% over the same period. Canada’s $2.5 billion merchandise trade deficit in 2006 was, in fact, the smallest annual trade deficit with Korea since 1999.

1. Major Export and Import Products

Natural resources represent a large proportion of Canada’s exports to South Korea. Coal, wood and wood pulp, minerals (led by nickel, aluminum and copper) and agri-food products (led by wheat and pork) together made up over 62% of total merchandise exports in 2006. Moreover, this share has been rising in recent years; in 1997, those same products accounted for 44% of Canadian exports.

Canadian imports from Korea are dominated by manufactured goods. Motor vehicles and parts, electronics, and machinery and equipment together account for close to three quarters of total merchandise imports. Of these, motor vehicles and parts represent the largest category of imports, with total value of $1.65 billion in 2006. They have also been one of the fastest-growing major imports from Korea in recent years. From 1998 to 2004, imports of vehicles and parts grew by 530%, although they have slightly fallen back since.

2. Foreign Direct Investment and Trade in Services

Although Korea is Canada’s seventh-largest trading partner in terms of goods, the economic relationship between the two countries is comparatively modest in other areas. Korea is not, at present, a major destination for Canadian direct investment abroad (CDIA), nor is it an important source of foreign direct investment (FDI) into Canada. In 2006, the stock of CDIA in Korea was valued at $431 million, while the stock of Korean FDI in Canada was worth $655 million.

Figures on services trade are similarly modest, although unlike trade in goods, Canada has a surplus in services trade. Canadian service exports (also known as “receipts”) to Korea were worth $651 million in 2005, the most recent year for which data are available. Service imports (“payments”) from Korea that year totalled $324 million.