The Canada-Korea Free Trade Agreement: A First Look at the Numbers

Abstract

This paper analyzes the impact of the Canada-Korea Free Trade Agreement (CKFTA) on the basis of the published text and agreed schedule of commitments. We find that the CKFTA tends to reinforce existing patterns of comparative advantage between Canada and Korea: for Canada, the agricultural sector gains and, for Korea, the industrial sector gains. The sensitive sectors that had held up the deal for years – autos into Canada and beef into Korea – are also the sectors where the major gains are expected. In both economies, the major output gains otherwise come in non-traded services sectors, driven by the deal’s income effects. We find that trade diversion effects are quite significant; this lends support for the domino theory of major free trade agreements – since the Korea-EU agreement broke the ice, the pressure intensifies on third parties to claw back lost preferences by striking their own deals. The evaluation remains ex ante in nature, as the agreement has not been implemented and the trade value assigned to the commitments in the services and investment areas remain to be validated Whether the various transparency and facilitation measures simply remove nuisance factors in services trade and investment or whether they materially affect the costs, resulting in expanded trade flows and inducing investment, will need to be evaluated on an ex post basis. The present study is nonetheless, in our view, a step forward in understanding the impact of the CKFTA.

Keywords: Canada, Korea, free trade agreement, CGE model, preference erosion

JEL Classification: F14, F15, F17