Canada - South Korea Bilateral Trade Agreement

Free Trade Must Be Fair Trade.

CVMA member companies support free trade efforts on the basis that both free and fair trade leads to greater prosperity and economic competitiveness.

Figure 1: Canada – South Korea Vehicle Trade Comparison, 1997 to 2004. (Click on picture to enlarge)

In 2005, the government of Canada and South Korea began negotiations on a possible free trade agreement (FTA). Historically, automotive trade with South Korea, for all countries, including Canada, has been a one-way street because of a series of tariff and non-tariff barriers (NTB) that block the importation of finished vehicles into their new vehicle market. In fact, South Korea has the most closed automotive market of any auto-producing OECD country, with only 4% of new vehicle sales being imported, next to only Japan with just 5%. In 2006, South Korean auto manufacturers imported over 125,000 vehicles into Canada, yet Canadian manufacturers exported less than 500 vehicles to South Korea. This imbalance resulted in a trade deficit with South Korea of roughly $2.5 billion, of which 60%, or $1.5 billion, was the result of one way automotive trade. The impact of an unfair trade relationship is less production of finished vehicles and assembly parts domestically and fewer jobs.

The CVMA would welcome a free trade agreement with South Korea that would provide Canada’s auto industry more open, measurable, and fair access to their new vehicle market in order to compete. Given South Korea’s historical practices of thwarting access to their domestic new vehicle market, this can only be done through:

	The complete elimination of South Korean tariff and non-tariff barriers;
	Placing the burden of permanently removing NTBs being on South Korea;
	An immediate tariff snap-back of Canadian auto tariffs if new South Korean NTBs emerge;
	Delayed reduction in Canada’s finished vehicle tariff levels until there is a demonstrated and measurable opening of South Korea’s closed auto market;
	An accelerated dispute settlement process that takes into account business and market realities of the auto industry.

Canada - South Korea trade realities

	Canada has an unbalanced trade relationship with Korea: • $2.5 billion trade deficit in 2005 • 67% of this trade deficit is automotive
	Canada must ensure fair trade treatment for its automotive sector into South Korea.
	Canada must achieve mechanisms to help gain fair access into South Korea.

Accessing the South Korean Market

Figure 2: Imported Vehicle Sales – Select OECD Countries. (Click on picture to enlarge)

The South Korean new vehicle market is nearly identical to Canada's with respect to market segmentation and vehicle affordability. Gaining real access to this market could offer Canadian facilities new opportunities to maximize production in Canada, enhance benefits for Canadian suppliers and workers, and further improve Canada's attractiveness for new assembly investments.

A number of Canadian assemblers are well positioned. They are currently producing, or could be producing at their Canadian facilities suitable products that would be competitive with South Korean domestic built vehicles. Currently, there are three Canadian assembly plants that are producing vehicles that are being sold in the South Korean market. Several Canadian facilities produce small SUVs/cross-over utility vehicles today. This segment represents roughly 25% of South Korean vehicle sales annually. Unfortunately, because their market is essentially closed to imports, the ability to produce and competitively sell significant quantities of Canadian built vehicles does not exist.

Figure 3: Canada Open Market VS South Korea Closed Market. (Click on picture to enlarge)

In order to perpetuate their closed new vehicle market, South Korea retains a series of tariff and NTBs that make it difficult to sell imported products into their market. In an attempt to address these issues, the United States government and auto industry entered into two formal arrangements in 1995 and again in 1998. In both cases and while South Korea agreed to eliminate the readily identifiable market entry barriers, those that were removed were quickly replaced new ones so as to maintain their closed market. Given this history, Canada must work to eliminate existing NTBs, as well as put in place mechanisms to ensure South Korea does not re-introduce new NTBs in the future to ensure that the South Korean market will be open to Canadian built vehicles (and other vehicles built around the world). Without this, any FTA will lock in the permanent one-way, unbalanced trade relationship and create an uncompetitive landscape both in Canada and South Korea for Canada’s auto industry.

Non-Tariff Barriers > Closed South Korean Market:

	South Korea has the lowest automotive import penetration levels in the OECD at 2.4% (2004).
	South Korean market is protected by ever changing NTBs: • Vehicle safety and emissions certification restrict imported vehicles • Taxes and insurance policies target imported vehicles

Impact of Continued One-Way Trade with South Korea under an FTA

Under the proposed FTA, the CVMA expects that the market share for South Korean made vehicles in Canada would increase if the existing 6.1% duty rate is dropped. Elimination of the 6.1% tariff would represent a benefit of about $1,500 on an average priced Canadian vehicle. In an industry where 2% margins on sales is currently considered exceptional, a 6.1% cost reduction to the competition would have a significant impact on the Canadian assemblers and dealers.

Due to the integrated nature of the industry, this increase in imports would also dislocate vehicles that are produced across North America which contain significant Canadian parts content. Further, the segments of the marketplace that South Korean manufacturers are most competitive, mainly small and mid-sized cars, small SUVs/crossover utility vehicles, and minivans, all have several direct Canadian manufacturer competitors. This would directly and negatively impact vehicle production at Canadian parts and vehicle assembly facilities.

Proposed South Korea - United States FTA (KORUS)

While Canada continues to negotiate an FTA with South Korea, the United States has recently concluded negotiations on an FTA with South Korea however neither party has ratified the proposed agreement. Prior to signing the proposed agreement, U.S. Congressional leaders outlined a series of recommendations that they insisted be included in any agreement in order to gain support. These recommendations are similar to those of the CVMA in that they are focused on correcting the historical government practices of limited market access in South Korea by placing the onus on the South Korean government to remove trade distorting tariff and non-tariff barriers in advance of any tariff reductions on finished vehicles entering the U.S. Rather than following those recommendations and eliminate the South Korean NTBs, U.S. officials negotiated small volume importers exemptions to the identified non-tariff barriers which limits the amount of exports allowed under the existing regulations. These proposed measures under KORUS do not meet previous demands presented by U.S. Congressional leaders because they fail to adequately open South Korea’s closed market. In effect, the proposed measures create a managed trade relationship that allows for only limited, or capped, free and fair trade.

Canadian government officials have publicly claimed that Canada will sign a similar deal to the KORUS because “it is a good deal.” We do not believe that capping free trade is good trade policy. Copying policies from an agreement that has been recognized by elected officials in the U.S. as limiting free and fair trade will only lock Canadian manufacturers into an unbalanced trade relationship with South Korea – forever maintaining significant trade deficits in finished vehicles. The result for Canada will be an accelerated one-way automotive trade relationship that would damage Canada’s enormous automotive manufacturing and supply industry and the many Canadians who depend on our sector for their livelihood.

Canada must find ways to level the playing field for Canadian manufacturers and provide an opportunity to export to foreign markets in all free trade agreements if the agreements are to benefit Canada. The U.S. congressional and CVMA proposals should be a baseline approach for Canada’s negotiators.

CVMA’s Proposed Solution for Fair Trade

History tells us that singularly negotiating NTBs with South Korea will not open their market to Canadian made products. Given this well documented experience, and as a means of rectifying the ongoing history of one-way trade in finished vehicles with South Korea so that Canadian vehicles can gain fair access for Canadian made products, the CVMA has proposed to the Canadian government a solution. That solution would require South Korea to measurably remove its NTBs prior to the lowering of Canadian tariff rates on finished vehicles. Once the rate of import of finished vehicles in South Korea are increased and sustained, and fair trade is demonstrated, Canada could then subsequently lower its effective tariff rate appropriately over time. CVMA has acquired a legal opinion from internationally recognized trade lawyers that our recommended approach is acceptable under World Trade Organization (WTO) and General Agreement on Tariffs and Trade (GATT). In fact, there are a variety of relevant precedents for this approach. CVMA maintains that it is arguably a requirement for Canada to ensure that any agreement effectively removes barriers to allow for free two-way trade. As the automotive industry is a highly visible aspect of Canada-South South Korea trade, we believe this proposal will help the two parties meet its obligations in this regard.

As the largest industrial sector and a key driver of Canada’s overall wealth and prosperity, any FTA must have a real benefit to the auto industry in order for Canada to have positive gains under an agreement.

Proposed solutions for fair trade:

	Canada should not reduce its tariff on finished vehicles from Korea until there is measurable and sustained import penetration into South Korea that is in line with other OECD countries.
	Canadian tariff reductions should be "snapped back" to Canada's bound rate of 6.1% if import market share in Korea falls below the set level.
	The burden of permanently and effectively removing NTBs must be placed on South Korea.