Canada’s free-trade deal with South Korea offers warnings about TPP

Posted on February 11, 2016 in Debates – ROB/Commentary
Feb. 11, 2016.   Jim Stanford

Jim Stanford is an adviser to Unifor, Canada’s largest private-sector union, and Harold Innis Industry Professor of Economics at McMaster University.

Statistics Canada published year-end trade numbers for 2015 last week, confirming another miserable year for Canada’s engagement with the global economy. Total merchandise exports declined 0.6 per cent. Non-energy exports are showing promising growth, but not enough yet to offset reduced energy exports. Meanwhile, imports swelled 4.5 per cent, creating the biggest trade deficit in Canadian history.

One particularly bitter result involves South Korea, with whom we implemented a free-trade deal last Jan. 1. Far from helping Canada’s lousy export performance, free trade with South Korea seems to be hurting it.

Canadian merchandise exports to South Korea fell 3.9 per cent in 2015: seven times worse than the contraction in our exports to the rest of the world. So, free trade hasn’t exactly provided special access for Canadian exporters. In fact, we did much better selling to other countries than to our new partner.

Imports did very well, however. Despite the recession that gripped Canada’s economy for much of 2015 (and depressed demand accordingly), imports from South Korea grew nearly 8 per cent, twice as fast as imports from the rest of the world.

Shrinking exports combined with growing imports pushed an already large trade imbalance to a new record: a deficit of almost $4-billion, according to customs data. South Korea thus single-handedly accounts for 30 per cent of Canada’s global trade deficit. We import almost $2 worth of products from there for every dollar we sell there.

Free trade was supposed to usher in a more mutually beneficial relationship. So why have our exports performed so badly? Beef and pork exports were supposed to be a big winner for Canada; yet, just six weeks into the deal, South Korea banned Canadian beef after a BSE scare. The newly inked pact was useless in preventing or quickly resolving this arbitrary and punitive policy, which remained in place most of the year.

But the story doesn’t end with beef (which accounts for less than 5 per cent of total Canadian exports to South Korea). Other exports also declined. One big reason is our overreliance on sales of unprocessed minerals and resources, which were hammered by falling global prices. They never benefited much from free trade anyway, since Seoul’s tariffs on required resources were very low to start with. In contrast, the sophisticated and expensive manufactured goods we buy from South Korea – cars, smartphones, electronics – faced larger tariff barriers, and hence benefit more predictably from the deal.

South Korea’s economic structure also helps explain the negative impacts. Seoul uses sophisticated, state-directed strategies to boost investment, productivity and exports in key high-tech sectors. Deliberate, opaque efforts to maximize exports (and constrain imports) are crucial to those strategies. Tightly knit homegrown supply chains maximize the trickle-down benefits from exports.

This disappointing experience represents a clear warning for Canadians in the coming debate over the Trans-Pacific Partnership. Several countries in the TPP (including Japan, Malaysia and Vietnam) use the same strategies of state management, non-tariff protections and export-led growth. Similarly, those countries’ purchases from Canada consist overwhelmingly of unprocessed resources (also like South Korea). There is little reason to expect free trade to have meaningfully different effects with those countries.

If we want to improve our Asia-Pacific trade performance – and we should certainly try – free-trade deals won’t make it happen. Instead, we should emulate measures that Asian countries themselves have used to great effect: industrial planning, subsidized exports and conscious efforts to maximize domestic content in supply chains. Those governments don’t trust their future to “free markets,” and neither should we.

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