International Trade Committee on Sept. 30th, 2014

[The Chair, Conservative, Randy Hoback]

Pursuant to Standing Order 108(2), we are studying the positive effects for Canada of the Canada-Korea free trade agreement.

We'll start off with our witnesses.

Mr. Burney, I understand that you will be testifying, so I will turn the floor over to you, sir.

[Ian Burney, Assistant Deputy Minister, Trade Policy and Negotiations Branch, Department of Foreign Affairs, Trade and Development]

Mr. Chairman, let me start by congratulating you on your election.

I'm grateful for this opportunity to appear before the committee to discuss the landmark Canada-Korea free trade agreement which, as you know, was signed in the presence of Prime Minister Harper, and President Park of South Korea last week here in Ottawa, and for which implementing legislation Bill C-41 has now been tabled in the House.

The CKFTA is Canada's first FTA in Asia. It is a key plank in the government's ambitious trade agenda as laid out in the global markets action plan that Minister Fast announced last fall and had an opportunity to brief this committee on in the spring.

The agreement represents a watershed in Canada-Korea bilateral relations. Commercial flows are already significant, with two-way trade of just under $11 billion last year and two-way investment approaching $6 billion, but for two large and sophisticated G-20 economies like ours, the potential is much greater. The CKFTA should go a long way towards unlocking that potential. Critically, it will restore a level playing field for Canadian companies in the Korean market, where our companies are rapidly losing ground to competitors, notably from the United States and Europe, who are already benefiting from their own FTAs with Korea. With the CKFTA, Canadian companies will be able to compete on equal or preferential terms in this increasingly important market with a population of 50 million and a $1.3-trillion GDP that ranks fourth largest in Asia. Indeed, the projections of our chief economist are that as a result of the agreement, Canada's GDP will increase by $1.7 billion annually, and our exports by about the same amount.

Those are significant numbers, but there are important strategic dimensions to this FTA as well. The agreement will strengthen our hand in our ongoing trade negotiations in the region, including the Trans-Pacific Partnership and our bilateral negotiations with Japan, as well as provide a stronger platform for Canadian companies to pursue opportunities across Asia and beyond.

Turning to the agreement itself, the CKFTA is a comprehensive, state-of-the-art FTA that is ambitious in reach and comprehensive in scope, covering virtually every facet of modern commerce. The centrepiece is the elimination of tariffs on virtually all trade between Canada and Korea. Nearly 90% of our current exports to Korea will become duty-free on the day the agreement enters into force, and all but a small fraction of the rest over time. That front-end loading of tariff cuts on our exports is vital given the urgency of restoring our competitive position in the Korean market. The outcomes are particularly advantageous for Canada when you consider that Korean tariffs are on average three times higher than ours, 13.3% versus 4.3%.

The agreement will result in the elimination of all Korean tariffs on industrial goods, on forestry and wood products, and on fish and seafood products, as well as the elimination of the vast majority of Korea's agricultural tariffs, including in such priority areas for Canada as beef, pork, grains, pulses, oilseeds, and processed foods. The terms are commensurate with those obtained by our competitors, and in some priority areas for Canada the outcomes are stronger.

For example, in the sensitive fish and seafood sector, where Korean tariffs run as high as nearly 50%, we've obtained faster tariff elimination periods on products that account for nearly half of our exports, including lobster, hagfish, and frozen herring, halibut, and Pacific salmon.

In agriculture, Korea's most heavily protected sector, with tariffs approaching 900%, we've achieved better outcomes than our competitors on a range of key products, including canola oil, barley malt, some pulses, baked goods, and maple syrup and maple sugar. There will also be major benefits across industrial and manufacturing sectors in Canada, including aerospace, rail, information technology goods, chemicals, and pharmaceuticals to name a few, where Korean tariffs can run up to 13%.

To complement tariff elimination, the agreement contains an ambitious array of disciplines on the non-tariff barriers that are such a priority for our companies, such as provisions relating to standards and technical barriers, transparency and non-discrimination, and fast and effective dispute settlement procedures.

Beyond the trade of goods, the agreement provides for ambitious results when it comes to services and investment, which will give Canada better market access to export industries that are of particular interest, such as professional and financial services.

The provisions governing procurement will give companies wider preferential access to central government procurement in both countries, putting Canada on equal footing with the United States and in a better position than Japan and the European Union, for example.

Furthermore, the agreement sets out commitments around the protection of intellectual property rights and higher protection standards for the environment and workers.

Let me turn now to the auto sector. Given its importance to our bilateral trade and to the Canadian economy, this was an area of intense focus throughout the negotiation, and the result is very strong outcomes that are commensurate with and in some cases better than what our principal competitors obtained.

For example, under our agreement, Korea will eliminate its 8% auto tariffs immediately, which compares to five years in KORUS, the agreement with the United States, and three to five years with the EU. Coming the other way, Canada's smaller 6.1% tariff will be phased out in three equal annual cuts. This means that, notwithstanding our much later start, Canadian automakers will likely have full duty-free access into Korea before the United States and the EU and will benefit from tariff protection in our market for some period of time after tariffs on Korean cars have been fully eliminated in the U.S. and the EU.

We also negotiated highly advantageous rules of origin on cars, which reflect the integrated nature of production in North America. We matched the robust safeguard provisions obtained by the United States to protect against any prospect of import surges under the agreement, and we extended those provisions to all products.

In the critical area of non-tariff barriers, including internal taxes, emission and fuel economy standards, and safety standards, our outcomes are as strong as those obtained by our competitors.

Finally, the CKFTA also provides for strong institutional mechanisms to address auto issues and specialized dispute settlement provisions with significantly accelerated timelines for disputes involving motor vehicles.

The views of our auto industry in Canada are mixed. Some firms, including Honda and Toyota and their association, have publicly and strongly welcomed the CKFTA. The concerns that have been expressed come down to two main points: first, that the elimination of the Canadian tariff will harm production and jobs in Canada; and second, that the agreement will not achieve any real access in Korea because its auto market is closed to foreign competition.

With respect to the first point, every credible study that has been conducted on the subject has concluded that the impact of the CKFTA on auto jobs and production in Canada would be negligible at 0.2% of domestic production. That's because most Canadian production, in fact, almost 90% last year, is exported and so will be unaffected by the increased competition in the Canadian market. Moreover, Korean-branded cars sold in Canada are, as you know, increasingly coming in from plants in the U.S. duty-free under NAFTA. That volume is already close to 50%, so the protection afforded by the tariff is declining in any event.

With respect to the Korean market, while it remains challenging, there is no doubt it is opening up. Imported auto sales in Korea have been growing at about 30% annually over the last four years. The import penetration rate has increased from about 3% when our negotiations started to over 12% today, meaning that nowadays one in eight cars sold in Korea is an imported vehicle.

What is incontestable is that our access into the Korea market will be much better off with the enhanced access and disciplines of the CKFTA than without. In that context, I'd note that both the Americans and the Europeans have doubled their auto sales into Korea since their respective FTAs came into effect.

In terms of next steps, the official signing of the agreement happened last week during President Park Geun-hye's state visit to Canada. The visit marked the first time a South Korean president had visited Canada in 15 years. Both of our leaders reaffirmed their mutual commitment to bring the agreement into force as quickly as possible.

Now that the agreement has been signed, the ratification process in each country can begin. In Canada, that will require the passage of an implementation bill, and the government has introduced Bill C-41 for Parliament's consideration. On South Korea's end, a ratification bill should be introduced in the national assembly very soon and referred to the appropriate parliamentary committees for study.

While I can't give a specific forecast of when the agreement will come into force, because that requires the legislative approval of both countries, I will note that Bill C-41 envisages entry into force as early as January 1, 2015.

To conclude, the CKFTA is a historic agreement that will raise our bilateral relations with Korea to a higher level, provide inroads for Canadian companies throughout the Asia-Pacific region, and increase economic prosperity here at home.

I appreciate this opportunity to appear before the committee. My team and I would be pleased to take your questions.

[The Chair, Conservative, Randy Hoback]

Thank you, Mr. Burney. We appreciate your presentation.

We'll go to our first round of questions, starting with Mr. Davies.

[Don Davies, NDP, Vancouver Kingsway, BC]

First of all, congratulations, Mr. Burney, to you and your team on concluding this agreement. You mentioned that about 50% of Korean-made cars already come in tariff free through the NAFTA. Would you have any information, and could you undertake to provide that data to this committee?

[Ian Burney]

Yes.

[Don Davies, NDP, Vancouver Kingsway, BC]

Thank you.

You also made reference to the transitional safeguards that are meant to protect us, for at least two years if I'm reading correctly, against surges in imports. What percentage of increase in Korean-made automobiles, for example, would DFATD consider a surge that might trigger the invocation of the transitional safeguards? Do you have a figure in mind?

[Ian Burney]

On the first point, it's actually for much longer than two years. The period in which a safeguard can be invoked is the tariff phase-up period plus 10 years, up to a maximum of 15. It's actually quite a lengthy period.

In terms of who would determine that, in Canada it would be the CITT, the Canadian International Trade Tribunal. The way it would operate is if an industry or a company felt that it was facing either material injury or the threat of serious injury as a result of tariff elimination in this agreement, it would petition the CITT with that complaint, and the CITT would go about its business and determine whether or not such serious injury is the standard, or threat of serious injury existed. What's also unique about this agreement is the possibility of having provisional measures invoked before the full inquiry has been completed. Normally the inquiry takes over 200 days. Under this agreement if the claimant wished to pursue this as a critical issue, we could do so in 65 days and get a preliminary decision.

[Don Davies, NDP, Vancouver Kingsway, BC]

I just want to make sure I understand it, and I'll use auto as an example. Are you saying that the protection in this agreement against a potential surge in Korean-made auto products would last for the three-year tariff elimination plus 10 years? Is that how long the auto sector could invoke the potential protection against surges?

[Ian Burney]

The period in which a safeguard action on autos could be taken would be the ten-plus-three years, but the measure itself initially could be for only two years with the possibility of extending it for another two. There's no limitation on the number of measures that could be taken during that 13-year period.

[Don Davies, NDP, Vancouver Kingsway, BC]

If I understood your answer, there is no set number that would be determined by this body depending on the submissions made to it.

[Don Davies, NDP, Vancouver Kingsway, BC]

There's no hard right line.

[Don Davies, NDP, Vancouver Kingsway, BC]

Okay. Thank you.

Right now, as we all know, there is a significant trade deficit between Canada and Korea. I think we did about $11 billion of trade in 2013, and it's roughly 2:1. I think we imported $7.3 billion and we exported somewhere around $4 billion. You anticipate there's going to be an increase in Canada's GDP. Do you have any projections on what will happen to the trade deficit between Canada and Korea as a result of the implementation of this agreement?

[Ian Burney]

We don't have projections that focus on the balance. We have projections that focus on the increase in exports. Our projection is that our exports would increase by $1.7 billion, and I think the model projects that Korean imports would increase by $1.4 billion. All else being equal, that would lead to a slight narrowing of the trade deficit.

[Don Davies, NDP, Vancouver Kingsway, BC]

You don't see, as a result of signing this agreement, a disproportionate increase in imports from Korea as opposed to exports.

[Ian Burney]

The model actually suggests that the exports would grow at a faster rate than the imports would.

[Don Davies, NDP, Vancouver Kingsway, BC]

Okay. Thank you.

Mr. Burney, I'm curious about Korean labour costs. In the course of all these lengthy negotiations, how did Korean labour costs compare with Canadian labour costs? I'm thinking in the context of, say, the auto sector or the aerospace industry or other machinery manufacturing industries. Did you take a look at that?

[Ian Burney]

Indeed. The Korean minimum wage is currently 41,680 won, which at our current exchange rate works out to $5.54 an hour or roughly half of, I think, prevailing minimum wages in the Canadian context. But in the auto sector, the averages are closer to what they are in Canada. In fact, by some measures, auto wage packages in Korea are higher than they are in Canada.

I'll ask my colleague Pierre if he has anything he wishes to elaborate on.

[Pierre Bouchard, Director, Bilateral and Regional Labour Affairs, Department of Employment and Social Development]

No. I'll just confirm it. That's exactly the case for the wages in the auto sector.

[Don Davies, NDP, Vancouver Kingsway, BC]

Could you provide the committee with an updated estimate on the number of jobs that are expected to be created resulting from this trade agreement?

[Ian Burney]

The modelling projection from the chief economist does not include a projection on jobs. I think the model assumes full employment, and that's how it generates its figures.

The practice that it has occasionally used is that you take the GDP figure and then take that as a percentage of total employment in the economy. I think that works out to roughly 10,000. You may have seen the figure of 10,000. That's where it would come from. That's the equivalent of what a GDP increase of $1.7 billion would generate.

[Don Davies, NDP, Vancouver Kingsway, BC]

I see.

In your view, does the Canada-Korea agreement fully protect the right of Canadian governments to legislate and regulate in the public interest? I'm thinking of the ISDS provisions. I'm wondering if you might point to where some liabilities might exist for a government in the public interest legislation and regulation. Are there any weaknesses, in other words, in terms of our ability to legislate?

[Ian Burney]

I don't believe so. I think this agreement, like all of our agreements, completely protects the abilities of government to regulate in the public interest. I don't anticipate there would be any liability or exposure on that front.

[Don Davies, NDP, Vancouver Kingsway, BC]

It's tough to compare the auto provisions of this with KORUS, but I know that the Americans got a snap-back provision in the case of a surge in auto imports from Korean manufacturers. Also, their tariff phase-out is five years.

What is the tariff phase-out for Korea in terms of auto imports from the U.S.? When does the Korean tariff come down?

[Ian Burney]

Half on implementation and the other half after five years, to match the phase-out on the other side.

[Don Davies, NDP, Vancouver Kingsway, BC]

Whereas ours is immediate?