A Snapshot of Canada-Korea Relations (Part 3)

Over the past recent decades South Korea has transformed itself from a developing country with an authoritarian regime to a centralized democracy. This transformation has been rapid and resulted in wide-ranging changes that have cemented South Korea’s partnerships with a number of allies in order to ensure its’ security and grow its’ economy. Ultimately, Koreans embraced globalization and aggressively pursued Free Trade agreements (FTAs). One such free trade agreement is the Canada Korea Free Trade Agreement (CKFTA).  In 2014, when this agreement was signed, South Korea’s GDP ranked 10th globally while Canada was ranked at 8th. To put this in perspective the potential impact of a CKFTA on the South Korean economy was assessed by the Korean Institute for International Economic Policy (KIEP). They predicted that bilateral trade would increase by 80% under complete lateral tariff and non-tariff barrier (NTB) elimination (Republic of Korea, Ministry of Foreign Affairs, 24 April 2007). Furthermore, according to the IMF when CKFTA was signed Korea’s economic outlook for steady growth over the medium term was at about 3.9%; the comparable figure for Canada was 2.2%. (IMF, October 2014)

While Ciuriak and Xiao (2014) argue that “on paper,” Canada places more importance on the CKFTA, “as it represents a first deal with a country in the dynamic East Asian region,” they readily admit that the CKFTA expands Korea’s favored access to NAFTA markets, building on KORUS. From an initial conditions perspective, Korea stands to gain, as it has the stronger beachhead in terms of established market share in Canada. It is important to note that the CKFTA confronts a pattern of protection that is very uneven across sectors. For Korea, the deal expands the auto sector and transportation equipment exports in particular, followed by chemicals and ferrous metals. The biggest winners of production gains after autos are non-traded services and business services. The beef sector and food products experience relatively modest declines compared to the inroads in the Korean market made by Canada.

Ciuriak and Xiao further break down the impact of the CKFTA on South Korea in five areas, focusing on the incremental impact of each policy measure to GDP, household income, exports, imports, and investment. At each stage they highlight the policy shock at play and project the data over 20 years from the date CKFTA officially came into effect. They labeled these policy shocks as “Tariffs”, “Rules of Origin”, “goods NTBs”, “Services NTBs” and “FDI restrictions.” The following five figures provide a graphical representation of these impacts.

A. CKFTA’s contribution to percentage change in Korea’s GDP.

Kaha 1.jpg

The above figure highlights Rules of Origin reduces the initial increase in the percentage change in GDP from the tariffs policy shock. We then see that the net gain rises once the policy shock NTB reductions on goods are taken into account. The net gain rises still further when services is taken into account. Finally, there is effectively no net gain from FDI liberalization.

B. CKFTA’s contribution to change in Korean Household Income.

Kaha 2.jpg

The above figure highlights Rules of Origin reduces the initial increase in the change in Korean household income from the tariffs policy shock. We then see that the net gain rises once the policy shock NTB reductions on goods are taken into account. The net gain rises still further when services is taken into account. Finally, there is effectively no net gain from FDI liberalization.

C. CKFTA’s contribution to percentage change in Korean Exports. 

Kaha 3.jpg

The above figure highlights Rules of Origin reduces the initial increase in the percentage change in Korean exports from the tariffs policy shock. We then see that the net gain rises once the policy shock NTB reductions on goods are taken into account. The net gain rises still further when services are taken into account. Finally, there is effectively no net gain from FDI liberalization until 2020; after which an incremental increase can readily be observed from the projected date.

D. CKFTA’s contribution to percentage change in Korean imports.

kaha 4.jpg

The above figure highlights Rules of Origin reduces the initial increase in the percentage change in Korean Imports from the tariffs policy shock. We then see that the net gain rises once the policy shock NTB reductions on goods are taken into account. The net gain rises still further when services is taken into account. Finally, there is effectively no net gain from FDI liberalization.

E. CKFTA’s contribution to percentage change in Korean imports.

kaha 5.jpg

The above figure highlights that Rules of Origin reduces the initial increase in the percentage change in Korean Investments from the tariffs policy shock. We then see that the net gain rises once the policy shock NTB reductions on goods are taken into account. The net gain rises still further when services are taken into account. Finally, there is a decrease net gain from FDI liberalization.

By,

Kaha Haji-Mohamed

 Works Cited

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.     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.     Dan, C. and Jingliang, X. (2014). The Impact of the Canada-Korea Free Trade Agreement as Negotiated. Journal of East Asian Economic Integration, 18(4), pp.425-461.

6.     Grzelczyk V. (2017) The Coming Age of South Korea: Power, Influence and Implications. In: Kim Y. (eds) Korea’s Quest for Economic Democratization. Palgrave Macmillan, Cham

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

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

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