The Canada-Korea Free Trade Agreement: Benefits and Opportunities for the Canadian Automotive Sector

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

• The South Korean automotive industry is the fifth largest in the world, led by Hyundai and Kia, the combination of which are the fourth largest auto manufacturers in the world.
• Global vehicle exports to South Korea have been growing by about 30% annually in the last 4 years, while the U.S. and the EU automotive exports to South Korea have been increasing steadily since their respective FTA came into force.
• Since the implementation of the Korea-U.S. FTA (KORUS), U.S. automotive exports to South Korea have more than doubled (from $340 million in 2011 to over $800 million in 2013). EU exports to South Korea have roughly doubled (from $2 billion in 2010 to almost $4 billion in 2013) since the entry into force of the Korea-EU FTA (KOREU).
• The CKFTA’s extensive and ambitious automotive provisions re-establishes a level playing field in the South Korean market for Canadian companies in the automotive sector by providing enhanced access on terms commensurate with, and in some areas better than those found in KORUS and KOREU. 

Improved Market Access for Canadian Auto Exporters to South Korea

The CKFTA provides a significant advantage for Canadian automotive stakeholders looking to further expand market opportunities in South Korea. As of January 1, 2015, South Korean tariffs have been eliminated on:

• all light vehicles (8 percent tariff); and
• all automotive parts (tariffs ranging from 3 to 8 percent).

The removal of South Korea’s tariffs on automotive products provides Canadian exporters with improved market access, thus offering diversification and export opportunities to the Canadian industry.

Rules of Origin that Reflect the Integrated Nature of the North American Automotive Industry

The CKFTA includes rules of origin for vehicles that provide Canadian vehicle manufacturers with the ability to source inputs from the United States and still benefit from the Agreement when exporting vehicles to South Korea. The thresholds and methodologies for origin content ensure that the rules of origin under the CKFTA can be met by all Canadian manufacturers without quantitative limits.

Increased Access for Services and Improved Temporary Entry

Canadian service providers in the automotive sector 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, including research and development, and services incidental to the automotive industry. 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 automotive 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.

Under the CKFTA, the safety standards equivalency provisions give Canadian automakers preferential access to the South Korean market for cars built to key U.S. safety standards (as most Canadian manufacturers currently are) or European Union safety standards (as is necessary to export vehicles to the EU and to many other markets) and are not subject to any numerical limits.  This outcome provides Canadian vehicle manufacturers with additional flexibility to build for the global marketplace. Provisions on new vehicle technologies and compliance testing procedures also help to facilitate access to the South Korean market.

The CKFTA also includes most favoured nation (MFN) obligations that cover vehicle emissions and fuel economy regulations, as well as automotive parts. The MFN obligations ensure that any additional benefits on these issues granted by South Korea to any other trading partner are automatically extended to Canada.

The CKFTA also provides Canada with accelerated dispute settlement procedures in the event that South Korea fails to comply with its Agreement obligations. This means that any disputes related to motor vehicles, should they arise, would be dealt with more quickly than dispute concerning other products and ensure that Canadian vehicles continue to benefit from preferential access in the South Korean market.

Other Key CKFTA Benefits for the Canadian Automotive Sector

Investment

Canadian companies investing in the South Korean automotive sector 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.

Origin Procedures and Trade Facilitation

The CKFTA also simplifies the process of clearing goods through South Korean customs in view of:

• clear and transparent origin procedures to administer effectively the rules of origin without creating unnecessary obstacles to trade;
• access to advance rulings on the origin or tariff classification of products;
• the promotion of border procedures automated through the use of information technology in order to expedite procedures for the release of goods;  and
• an impartial and transparent system for addressing any complaints about customs rulings and decisions.

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.

Government Procurement

The Agreement provides Canadian suppliers of products and services preferential access to procurement opportunities of South Korean central government entities. Through the Agreement, Canadian suppliers of products and services benefit from secure and predictable access to covered procurement by South Korean central government agencies for contracts valued above 100 million South Korean Won (roughly $100,000). South Korea’s overall government procurement market is estimated to be worth $105 billion annually.

Canadian producers and exporters of automotive products 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).