Korea Free Trade Agreement: What's in it For Canada?

March 17, 2014

There is little question that economic power has shifted from Europe and North America to Asia. But it does not follow that the neoliberal philosophy embedded in NAFTA-style trade and investment agreements such as the Canada-Korea Free Trade Agreement (CKFTA) will serve Canadians well in the coming Asian century.

The CKFTA is Canada's first with an Asian country. It is being widely touted as a necessary foothold in the Asia-Pacific region, and as a stepping stone to future pacts with Japan, the 11 nations in the Trans-Pacific Partnership and ultimately China. Yet the rapid breakthrough in the long-stalled talks appears to be driven more by political rather than trade policy factors.

Canada's trade deficit with South Korea actually increased last year to almost $4 billion. If the swelling U.S. trade deficit following their bilateral deal with South Korea is any guide, the CKFTA will only widen that gap.

Just as troubling as the trade imbalance is the make-up of our trade with South Korea. Canada sells mostly unprocessed, low value-added, carbon-intensive resources to South Korea (coal, copper, pulp, and aluminum), and in return buys high-tech, manufactured goods (cars, electronics, and appliances). Consequently, the deal is likely to further entrench Canada's global role as a natural resource supplier, to the detriment of high value-added sectors such as automobiles.

How South Korea prospered

South Korea is a remarkable economic success story. Following the Korean War, it was one of the poorest countries in the world. Today it stands as one of the few underdeveloped economies to have broken into the ranks of high-income countries.

South Korea's economic development success stemmed from its active use of "industrial policy." Successive South Korean governments deliberately targeted, supported and protected key manufacturing industries. Having achieved their goal of spurring export-led growth in high-value manufactured products, more recent South Korean governments have embraced neoliberal trade and investment agreements. The continuing close ties between South Korean political and economic elites and the persistence of non-tariff barriers, however, still keep strategic domestic sectors largely closed to foreign competition.

Canada is a high-income country, but its over-reliance on natural resource exports is cause for concern. While South Korea has been moving up the global value chain, Canada has been slipping down. NAFTA-style trade and investment treaties deny governments the industrial policy tools which earlier South Korean governments employed so successfully to encourage manufacturing-led growth and which, in future, might help Canada correct its economic course.

The longer-term impacts of trade and investment treaties are as much about what does not happen, or is not even considered as a viable policy option, as about the shorter-term impacts such as tariff elimination. The biggest legacy of the Conservatives' intensified free trade agenda could be to deny future governments the policy tools that might wean Canada off its economically and environmentally costly dependence on natural resource exports.

Ingraining Canada's current trading patterns with Korea is not only detrimental for the Canadian economy; it is unhealthy for the planet. The environmental costs of Canada's resource dependency are clear. Coal, for example, is Canada's single largest export to South Korea. In 2013, Canada exported 7.5 million metric tonnes of coal to South Korea, most of it through B.C. ports. This totals over 82,000 fully loaded rail cars. When burned in South Korea, this Canadian coal will release over 19 million metric tonnes of CO2 into the global atmosphere, the equivalent of putting 4 million passenger cars on the road for a year.

Don't look for any mention of this in the federal government's Environmental Impact Assessment of the South Korea deal. And don't worry about blowing the roof off Canada's GHG emission targets. Canadian exports don't count towards our GHG emissions. 

Environmental concerns trumped by foreign interests 

Despite the potential consequences, there has been almost no media attention to the fact that the CKFTA contains a NAFTA-style investor-state dispute settlement mechanism that will further empower foreign investors to challenge environmental protection and public interest regulations in both countries. 

Korean industrialists are eyeing major investments in LNG terminals in BC. As Marc Lee, Senior Economist with the Canadian Centre for Policy Alternatives-BC, noted in a 2012 study: "Increased development of fracking and LNG exports will make it virtually impossible for the province to reach its legislated GHG targets." 

But if future B.C. or Canadian governments have second thoughts about fracking and massive LNG developments, they could see investor-state dispute settlement claims from South Korean investors. Korean citizens will face the same dilemma if Canadian investors are aggrieved by laws or regulations in their country. 

Canadians are becoming used to the Harper government bragging about its growing number of trade and investment deals. Unfortunately, the negative economic and environmental impacts of these agreements leave the Canadian public little to cheer about.

Scott Sinclair is the director of CCPA's Trade and Investment Research Project (TIRP).

This op-ed was first published in The Tyee.