Monday, 02 March 2015 08:00 | Written By Patrick Gervais
Canadian consumers are already benefiting from the Canada-South Korea free-trade agreement that came into force on Jan. 1.
The agreement results in significant tariff elimination on many South Korean goods. The eliminations include the immediate end of an 81.5-per-cent tariff on all non-agricultural goods.The deal also includes the elimination of 100 per cent of tariff lines on fish and seafood within three years as well as duties on all wood and forestry tariff lines. In addition, it signals the immediate elimination of half of the agricultural tariff lines and a further 36-per-cent reduction of duties for agricultural products over five years. Exclusions include supply-managed products such as dairy, poultry, and eggs.
One of the most contentious matters during the negotiations for the agreement was the elimination of duties on South Korean automobiles. The Ontario automotive lobby opposed the elimination of these tariffs claiming that it would increase Canada’s trade imbalance with South Korea. This argument followed U.S. data in light of the implementation of that county’s free trade agreement with South Korea that showed overall American exports to South Korea actually decreased and imports increased in large part due to the trade imbalance in the automotive sector. It’s important to note, however, that the timing of the agreement coming into force after the financial crisis didn’t help.
The government dismissed the Canadian automotive lobby’s arguments with the duties applied to South Korean automobiles eliminated on Jan 1. Hyundai and Kia were the first companies to actively promote retail price cuts to their vehicles directly due to the elimination of tariffs resulting from the free trade agreement, with savings of $300 to $1,300 on the vehicles’ manufacturer-suggested retail price. Prior to the trade agreement, vehicles manufactured in South Korea were subject to a 6.1-per-cent federal import duty. The savings are the result of the first of three annual tariff reductions that came into force earlier this year. The C.D. Howe Institute projects that over the next 20 years, Canadian automobile production will decline by $114 million because of cheaper South Korean cars. It’s a win for Canadian consumers but is worrisome for Canadian carmakers.
Other sectors will also need to adapt to downward pressure as a result of competitive pricing from Korean suppliers. As motor vehicles, trailers, bicycles, and motorcycles account for close to 40 per cent of Korean imports to Canada, Canadian consumers can expect to benefit from widespread tariff reductions for this type of merchandise. Electrical machinery and equipment and major appliances make up another 40 per cent of Korean imports, and tariff elimination in these industries will continue to add pressure on Canadian suppliers of those goods.
All told, this is good news for Canadian consumers. The Canadian government forecasts that Canadian exports will counterbalance the influx of cheaper Korean goods. Canada follows the European Union, United States, and Australia in signing free trade agreements and will have to catch up now that Canadian goods are no longer subject to tariffs competitors haven’t been subject to for the past few years. The main Canadian benefactor may be the West Coast as about half of Canadian exports to South Korea originate from British Columbia.
The Canadian government embarked on a trade mission to South Korea this week with more than 100 Canadian participants aiming to benefit from the new agreement. Although natural resources account for almost 50 per cent of Canadian exports to that country, the hope is other Canadian industries no longer subject to tariffs will now benefit from the new access to the Korean market. Canadian consumers may, however, be the main benefactors as the price of Korean goods will continue to drop during the next few years as the next phases of tariff elimination come into force.
Patrick Gervais is a business lawyer at Blaney McMurtry LLP called to the Ontario and New York bars. His practice focuses on a range of commercial matters including mergers and acquisitions, public and private financings, and a range of commercial agreements. Patrick also advises companies on compliance requirements and regulatory matters. He’s available at email@example.com.
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