Academic journal article East Asian Economic Review

The Impact of the Canada-Korea Free Trade Agreement as Negotiated*

Academic journal article East Asian Economic Review

The Impact of the Canada-Korea Free Trade Agreement as Negotiated*

Article excerpt

I. Introduction

On 11 March 2014, agreement was reached to conclude long-running negotiations towards a Canada-Korea Free Trade Agreement (CKFTA). For Korea it was the latest in a series of free trade agreements (FTAs) concluded with major economies, including the European Union (KOREU), the United States (KORUS), and Australia (KAFTA). For Canada, it marked the second deal in a row with a major economy, following hot on the heels of the deal with the European Union (CETA). Importantly, it is Canada's first full-fledged trade agreement with an Asian economy.

Since the conclusion of KOREU, which seems to have acted as an ice-breaker, the FTA dominoes have been falling between major economies. The hold-up on KORUS was resolved weeks after KOREU; KAFTA, and a Japan-Australia FTA also followed in short order. Clearly, a key motivating factor has been re-levelling playing fields unlevelled by the prior preferential agreements. The breakthrough on the long-running CKFTA negotiations can be understood in this context.

However, two other developments helped set the stage for the deal. First, the Canadian auto sector, which had been in a severe slump following the 2008-2009 recession, rebounded, probably as far as is likely in view of the structural changes in the North American auto sector that have resulted in a shift of production to Mexico and to the United States.1 Second, the long-running Canada-Korea beef dispute was settled with a mutual agreement announced on 19 June 2012, which re-opened the Korean market for Canadian beef under conditions similar to those applying to US beef. With these issues receding in the rearview mirror and major negotiating challenges looming ahead for both parties, the dynamics favoured bringing closure to the negotiations. And closure was brought.

In terms of further process, the agreement must be ratified before coming into force. For this impact analysis study, we assume it comes into effect 1 January 2015. As regards substance, the agreement follows a standard template of subject matter covered and breaks no new ground in the mies areas. While it is difficult to reach precise conclusions regarding how negotiated text translates into trade, the CKFTA appears to deliver approximately the same degree of liberalization as KORUS or KAFTA in the mies component of the treaty.

No formal analysis of the deal as negotiated has, to our knowledge, been undertaken.2 This paper fills this gap. It provides a quantitative assessment of the impact of the CKFTA, as negotiated. The paper is organized as follows. The next section provides basic background on the Canadian and Korean economies. Section 3 describes the modelling framework and the derivation of the policy "shock" used to evaluate it. Section 4 describes the results. Section 5 draws some conclusions. Section 6 makes some final comments.

II. Background

1. Macroeconomic

The CKFTA links two of the largest economies in the world and, on those grounds, is a major deal. Korea ranked 10th globally in terms of gross domestic product (GDP) in 2014 with an economy measured at market exchange rates about 81% the size of 8th-ranked Canada's. However, measured in terms of GDP at purchasing power parity (PPP) exchange rates, Korea's economy was about 13% larger than Canada's in 2014. Korea's population in 2014 of 50.4 million was 42% larger than Canada's population of 35.5 million, resulting in substantially lower levels of per-capita income, when compared at PPP exchange rates, and even more so when compared at market exchange rates. Table 1 sets out summary information on the Korean and Canadian economies.

2. Global Trade and Investment Orientation

Korea is a highly open economy and becoming more open rapidly, with two-way trade in goods and services equivalent to 110% of GDP, up from the 82% range prior to the global crisis of 2008-09; Canada is much less open with a two-way trade share of GDP of about 62%, down from about 67% prior to the global crisis (OECD, 2014). …

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