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Free Trade Agreement Makes Canada More Attractive to Investors

Tremendous Optimism for the Canada-Korea Free Trade Agreement!

Canadian Prime Minister Stephen Harper has been hard at work closing a deal with his South Korean counterpart President Park Geun-hye. And the agreement that the two leaders have been working on is the Canada-Korea Free Trade agreement. On the 11th March 2014 the free trade agreement was signed, sealed and delivered and it promises to eliminate 98% of duties on all goods between the two countries. This ground-breaking development has been over nine years in the making, and it offers Canadian investors a fantastic opportunity to tap into the rich South Korean market. For South Korea, this is but one of many massive free-trade agreements that the country has recently signed. Economic analysts point to the recent free-trade deals with the US, the EU and Australia.

How should Canadians feel about the Free Trade Agreement with South Korea?

Free-trade agreements typically provide cannon fodder to opponents of these agreements who worry that local industry will be severely impacted by the elimination of tariffs and duties between nations. Let's assume that a manufacturer in Ontario has been producing vehicles or heavy machinery for export to foreign countries and that tariffs and duties in Canada make imports from foreign countries competitively priced so that local industry can sustain itself. In the absence of tariffs and duties, foreign-produced vehicles - perhaps from South Korea - may in fact be cheaper than domestically produced vehicles, machinery, or equipment. Therein lies the dilemma in respect of free-trade agreements. Fortunately, various safeguards and clauses can be added to protect local industry.

In the US for example, President Barack Obama recently concluded the biggest free-trade agreement in the history of the US known as the Trans-Pacific Partnership (TPP). This free-trade agreement will allow the US to reposition itself as a major economic power in the Pacific, to counter China's growing influence in the region. Again, critics of this free-trade deal worry that the elimination of tariffs, duties and other taxes will make US industries vulnerable to foreign producers. However, the benefits of free-trade agreements are extensive. Since tariffs, duties and excise taxes are effectively eliminated the consumer gets to pay less for goods that are imported from the signatories of the free-trade agreement.

Free-trade deals lower costs for consumers; the trick is to protect local industry from job losses and lower levels of production. What is beneficial to Canada in this instance is that South Korea is a highly advanced country where GDP per capita is among the highest in the world. This means that labour costs, and production costs are similar to Canadian standards of living - so the discrepancies will not be as glaring as they might be if the free-trade agreement was concluded with China. The GDP per capita in South Korea is $24,328 (IMF figures for 2013) while the GDP per capita in Canada for 2013 is $51,989 (IMF figures for 2013).

Ways that Canadians will Benefit from the Free-Trade Agreement

Food producers will benefit immeasurably from this new deal. South Korean duties on seafood, beef and pork have traditionally been very high, but within 15 years they will be removed. Border taxes will also be eliminated on ice wine, lumber, liquefied natural gas, whiskey and the like. Now for more good news: Canada's gross domestic product is expected to rise by $1.7 billion. This is over and above the recent trade deal that was concluded with the European Union in October 2013.

More importantly, the expansionary policy being adopted by the conservative government in Canada is likely to lead to additional free-trade deals with other Asian Tigers like Japan. Unfortunately, Canada was unable to protect its automobile industry with retaliatory measures such as the snapback mechanism that the US negotiated in its free-trade deal with South Korea. There are ways for the South Koreans to make Canadian vehicles more expensive to the local market by imposing greater taxes on imports from Canada.

The 6.1% duty that is currently being levied on all Korean auto imports will all but disappear within 2 years of the finalized trade agreement. This will make South Korean vehicles significantly cheaper - thereby endangering domestic automobile manufacturers. A nifty clause has been included that allows Canada to impose tariffs if the number of South Korean vehicles gets too high.

Supporters of the free trade agreement with Canada/South Korea insist that the deal is far bigger than the automobile industry. The benefits to Canadians extend far and wide. Beef producers and pork producers are particularly pleased at the deal. Their only regret is that the Canadians were unable to negotiate a more rapid phasing out of tariffs in key sectors where Canadian exports are strong.

According to the Canadian government, the Canada-Korea free trade agreement is likely to create thousands of jobs and increase Canadian exports to South Korea by at least 32%. It is also Asia's fourth biggest economy valued at $1.1 trillion. The Canada-Korea Free Trade Agreement will make it possible for Canadian businesses to expand into South Korea and enjoy duty-free access on 81.9% of tariff lines in South Korea. Money saved is like cash in the bank!

Risk Disclaimer: Please ensure that you understand fully the risks involved and do not invest money you cannot afford to lose. The information provided can under no circumstances be considered as a recommendation to engage in any trade.

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Jay Elliott-Purdy joined easy-forex in 2010 and is the UK Branch Manager. He has an MSc in International Economics and has managed portfolios in South America and more recently in London with easy-forex. Elliott-Purdy specializes in trader education on technical and fundamental market dynamics. He has presented at some of the UK's biggest Trading and Investment conferences and has comprehensive knowledge of intra-day demand and supply, behavioral finance and trading psychology.