The Canada-Korea Free Trade Agreement: Benefits and Opportunities in South Korea's Defence and Security Market

The CKFTA is Canada’s first FTA in the Asia-Pacific region. It strengthens Canada’s presence in the important South Korean market and helps expand our economic footprint in this dynamic and vibrant part of the world. It also offers exporters, investors and service providers strategic access to regional and global value chains, and levels the playing field vis-à-vis their key competitors from the U.S., the EU, Australia and other countries that have concluded an FTA with South Korea. As such, the CKFTA provides a platform for Canadian companies to become increasingly competitive in the region. In terms of economic impact, the CKFTA is projected to boost Canada’s GDP by $1.7 billion and result in an increase in Canada’s exports to South Korea by over 30%.

Overview of Opportunities in South Korea

• South Korea’s military expenditures have steadily increased over the past several years. In 2013, spending increased by 4.2% reaching US$32.7 billion, which includes US$9.6 billion in Forces Improvement Program funding, a 2.3% increase over 2012.
• According to South Korea’s Defence Reform Plan, up to half of South Korea’s existing military systems are due for replacement. The Ministry of National Defence budget projections forecast expenditure increases of 11.1% per year through 2015, followed by 7.5% annual increases through 2020. This represents an aggregate rise of some US$591.4 billion between 2006 and 2020. The Ministry of National Defence allocated a budget of US$34 billion for 2014.
• South Korea’s Ministry of National Defense is currently pursuing 202 projects to improve the armed forces. This includes projects related to the KF-X Korean fighter program, the KDX III - Aegis Destroyer batch II, the LAH light armed helicopter program, the F-X F-35A stealth fighters, the KUH Korean utility helicopters, and the FA-50 light combat aircrafts programs.
• Several South Korean defence primes and integrators are working closely with foreign vendors of defence and security products. While U.S. companies have historically held a dominant position in the South Korean defence market, the South Korean military has shown interest in diversifying its supply sources.
• The South Korean market provides opportunities for Canadian companies in the following sub-sectors:
  • aircraft programs – KF-X and LAH;
  • radar systems; and
  • military robots and unmanned combat systems.

Improved Market Access for Canadian Exporters in South Korea’s Defence and Security Market  

The CKFTA provides new opportunities for Canadian exporters of defence and security products by eliminating tariffs and creating a level playing field vis-à-vis South Korea’s current FTA partners, such as the United States and the European Union. As of January 1, 2015, all Canadian exports of aerospace products enter South Korea on a duty-free basis (previous duties of up to 8 percent). This includes flight simulators, gliders, turbo propellers, radar systems and turbo jet and propeller parts. With the CKFTA’s entry into force, tariffs on Canadian exports of information and communications technology products have been eliminated.

Increased Access for Services and Improved Temporary Entry

Canadian defence and security service providers benefit from increased and more transparent and predictable access to the South Korean service market. For example, Canadian companies benefit from preferential market access in key areas of export interest to Canada, which include research and development, and services incidental to air transport services. This means that Canadian companies face reduced barriers when offering services in those sectors of the South Korean market.

The CKFTA also removes barriers to temporary entry for various professionals related to the defence and security industry, including engineers and physical scientists, to fulfill contracts in the South Korean market. The Agreement facilitates the movement of business persons by removing barriers to entry such as economic needs tests, and ensuring new barriers are not introduced in the future, such as quotas and proportionality tests.

These temporary entry provisions are the most ambitious that South Korea has ever negotiated, which gives an advantage to Canadian companies over their U.S. and EU competitors.

Reduced Non-Tariff Barriers

The Agreement contains strong disciplines on non-tariff measures, which help Canadian businesses reap the benefits of the Agreement and prevent market access gains from being undermined by a lack of transparency or unjustified trade restrictions. In addition, these strong disciplines are backed up by comprehensive bilateral dispute settlement provisions. Specifically, the Agreement:

• promotes and requires (in the absence of good reason not to) the use of internationally accepted standards that minimize duplicative certification and testing of products;
• improves transparency with respect to standards and regulatory development by ensuring that companies have access to information, such as laws, regulations and administrative rulings, that can affect trade;
• encourages cooperation in bilateral, regional and multilateral forums on ways to promote increased transparency; and
• establishes a committee whereby any standards-related concerns can be addressed and dealt with on a timely basis.

Other key CKFTA Benefits for the Defense and Security Sector  

Government Procurement

Several South Korean central government entities that procure defence and security products and services are covered under the CKFTA, including the Korean Ministry of National Defence, the Defence Acquisition Program Administration, and the Korea Coast Guard. Canadian defence and security companies benefit from secure and predictable access to covered procurement opportunities above a contract value of approximately $100,000 tendered by covered South Korean central government entities. Importantly, however, given national security considerations, the procurement of specialized military equipment is not covered by FTAs, including the CKFTA. This includes equipment such as aircraft and communication systems when purchased by the South Korean Department of National Defence and the Defence Acquisition Program Administration. Accordingly, whether the procurement of defence and security goods or services is covered by the Agreement depends on both which procuring entity issues a tender, and the purpose of the procurement (e.g. military vs. non-military). South Korea’s overall government procurement market is estimated to be worth $105 billion annually.

Investment

Canadian companies investing in the South Korean defence and security market benefit from the Agreement’s investment chapter provisions.  These provisions provide Canadian investors with a more transparent and predictable investment environment, and help mitigate any risks associated with investing in South Korea. Among other things, the investment chapter provides protection against discriminatory and arbitrary treatment, protection from expropriation without prompt and adequate compensation, and access to independent international investor-state dispute settlement.

Intellectual Property

The CKFTA’s Intellectual Property chapter provides clear and transparent intellectual property rules that help protect Canadians that own copyright, patent or trademark rights in South Korea. The Agreement’s robust provisions on the enforcement of intellectual property rights help ensure that Canadian intellectual property rights-holders can do business with confidence in the South Korean market.

Canadian exporters of goods and services relevant to the defence and security sector thus stand to benefit considerably from the CKFTA.  

For more information on the CKFTA and prospective benefits from this Agreement, please visit Canada-Korea Free Trade Agreement, or contact the Trade Commissioner Service in South Korea (seoul-td@international.gc.ca).