Part II: A Snapshot of Canada-Korea Relations

It has been three years since the Canada-Korea Free Trade agreement came into affect. Part two of this series will attempt to analyze the impact the CKFTA had on the Canadian economy, both on goods imported and goods exported to South Korea. It was clearly outlined in part one of this series that like other trade agreements, CKFTA eliminates most tariffs, with non-sensitive sectors having had tariffs eliminated immediately and the more sensitive sectors put into a process of having tariffs reduced or eliminated more gradually. It’s important to also note that while Canada as a whole has gained and stands to gain in the future from the CKFTA; different provinces have been impacted differently.

This means provinces have differing perspective on CKFTA. These differing perspectives are shaped by both the size of the province in question and it’s relative distance to and from South Korea. The smaller the economy of a province the greater the increase in GDP after CKFTA was implemented. For example a province like British Columbia benefits greatly from this trade deal; it is the closest province to South Korea and has an economy one-third the size of the province of Ontario. British Columbia’s logistical advantage does not end there; the product composition of trade also happens to favor BC because its resource-based economy sends much more to Korea than does Ontario’s manufacturing-based economy. While Ontario accounts for a disproportionate share of Canada’s imports from Korea, reflecting both its large share of consumption and Korean intermediate inputs into Ontario’s manufacturing sector.

This brings us to the role of individual provinces specialization and the competitive strengths of the trading partner at play, as both variables ultimately determine the impacts of free trade agreements on provinces. For example: Korea’s sensitivities in the beef sector and Canada’s sensitivities in the auto sector were just two of the key issues that came up during the negotiation of the CKFTA. In a Canadian regional context, the benefits in these two sectors are expected to flow primarily to the western Canadian beef sector, while the costs are to be incurred by the Ontario-based auto sector.

CKFTA Impact on Four Key Sectors

CKFTA’s impact can be observed and illustrated in the following four sectors: the beef sector, the automotive sector, the machine and equipment sector, and the beverages and tobacco sector.  It is no secret, in Canada, that the main supplier of beef is the province of Alberta. So the opening up of the South Korean market means that Albertan producers ramp up their sales to take advantage of the lucrative Korean Market and thus benefiting greatly from the Korean beef tariff reduction. However, it would be a mistake to assume a province like Ontario, which has a small presence in Canada’s exports to Korea, wouldn’t also benefit from this deal as well. In fact the beef sector showcases the re-distributive effect of CKFTA across provinces when trade is examined on an integrated international and an inter-provincial basis. When Albertan producers increase their supply to the Korea Market, they create a shortage or a decrease in supply to other Canadian provinces; this means that Ontario producers step in with increased shipments to their domestic market. Everybody wins!

On the other hand, most of the expansion caused by the CKFTA in the automotive sector is Korean Sales to Canada. The direct effect of this is a reduction of output. Here the catch is that this reduction is in the third country sales to Canada and not Canadian domestic shipments. That means that the impact of intensified competition in the domestic market reflects the highly export-oriented nature of Canada’s automotive sector. In fact Van Biesebroeck, Gao, and Verboven argue that Canada’s producers were more affected by the US-Korea FTA, which intensified competition for Canadian-produced vehicles in the all-important US market, than they were by the CKFTA. [1]

The impact of increased two-way trade can be observed in the machinery and equipment sector. And while the jury is still out on whether or not Canada has indeed benefited from CKFTA in this sector as regions have seen a reduction, albeit a small one, of total shipments to all destinations as a direct result of Korean penetration; economists are holding out hope that there likely is a productivity-enhancing effect that current models do not capture.

Finally, while the CKFTA will not have a direct effect on the Beverage and tobacco sector, there will be income effects created as byproduct of redistribution of gains from traded sectors to non-traded sectors. These income effects will expand overall sales in this sector. The bottom line is that while Ontario makes a small gain, although one that is disproportionately smaller than its share of Canadian economic activity, the rest of Canada makes disproportionately larger gains.  More importantly, the gains come through perhaps unexpected channels, often as the result of indirect effects that were not anticipated when the direct effects of tariff concessions were considered.

By,
Kaha Haji-Mohamed

Works Cited

1.     Bachmann, C. ANALYZING THE TRANSPORTATION IMPACTS OF FREE TRADE AGREEMENTS.

2.     Chang, H. J. (2014). Canada Announces Free Trade Agreement with the Republic of Korea. International Business Bulletin.

3.     Ciuriak, D. (2009). Overcoming Obstacles to the Canada-Korea Free Trade Agreement–The Beef Issue.

4.     Ciuriak, D., Xiao, J., & Dadkhah, A. (2015). The Canada-Korea Free Trade Agreement: What it Means for Canada.

5.     The 2012 GDP and bilateral trade figures are sourced from IMF and national statistical agencies.

6.     Van Biesebroeck, J., Gao, H., & Verboven, F. (2012). Impact of FTAs on Canadian auto industry. DFAIT Canada, 31.

7.     Young, N., & Matthews, R. (2011). The aquaculture controversy in Canada: activism, policy, and contested science. UBC Press.

Picture titled, "Korea_Changdeokgung_20140407_16," taken by Republic on Korea on April 7, 2014, obtained through Creative Commons (https://flic.kr/p/mRCEr6)

[1] Van Biesebroeck, Gao, and Verboven (2012) found an FTA with Korea would reduce Canadian domestic auto production by 0.15% to 0.25%, depending on the demand model employed.