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Ottawa faces first big test of ‘economic diplomacy’

Canada is facing the first big test of its vaunted "economic diplomacy" push.

Remember the Global Markets Action Plan the federal government unfurled in November? The strategy hinges on harnessing all Ottawa's "diplomatic assets" in relentless pursuit of trade, particularly in a cluster of high-value priority markets. Among the target countries is fast-growing South Korea, the 15th-ranked economy in the world.

"The rapidly changing global economic landscape requires Canada to remain nimble and agile," Trade Minister Ed Fast said at the time.

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"To stay competitive, we must keep challenging ourselves."

Just two months later, Mr. Fast has a chance to put his money (and his signature) where his mouth is. The rough outline of a free-trade agreement with South Korea is finally on the table after eight years of on-again, off-again talks. A tentative deal could be signed any time, according to industry sources.

If Canada wants it, that is.

Far from boldly embracing the challenge, Ottawa is waffling in the face of an apparent cabinet split and opposition from auto makers. In recent weeks, the government has contacted various industry groups, asking them to give a thumbs-up or down on whether they want a deal.

Pretty much across the board, Canadian business likes the deal, with one notable exception – auto makers. The Canadian arms of the Detroit Three, plus the two Japanese vehicle manufacturers with assembly plants in Canada – Toyota and Honda – are "skeptical," as one government official put it. Ford Motor of Canada Ltd. president and chief executive Dianne Craig suggested more bluntly in an interview that it would be disaster for her industry and for Canada.

For Ottawa, doing the deal has become as much a political calculation as an economic one. It comes down to interests concentrated in southern Ontario versus the rest of the country.

At issue is the fate of Canada's 6.1-per-cent tariff on imported vehicles. The Detroit Three worry about a surge in imports here and about persistent non-tariff barriers that keep North American vehicles out of South Korea.

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The tariff is almost certainly doomed – free trade with South Korea or not. Vehicles from the United States and Mexico already enter Canada duty-free. And it's due to be phased out over seven years in the recently reached tentative free-trade deal with Europe. Hyundais, Kias and other South Korean vehicles will enter the United States duty free by next year under an earlier bilateral free-trade agreement.

If successful, the 12-country Trans-Pacific Partnership trade negotiations would also lead to an eventual phase out of the duty. Japan and Canada are already at the table in those talks, and South Korea wants in. So it's difficult to envision a scenario that would not see both Korean and Japanese-made cars eventually landing in Canada duty-free.

The risk of doing nothing, on the other hand, is that Canada falls further behind other countries in the South Korean market. Both the United States and Europe already have free trade deals with South Korea. Every year that goes by, U.S. and European agricultural products, aircraft and various factory goods get cheaper and gain a competitive edge over Canadian products as tariffs are phased out.

Canada is already losing. Canadian exports to South Korea dropped sharply in 2012. And they were down again through the first half of 2013, widening Canada's trade deficit.

Canada's challenge is to compete in a world with low trade barriers and no tariffs. It's hard to imagine that its 6.1-per-cent tariff will be the deciding factor in where global auto makers locate new vehicle production when currencies swing as much as 3 per cent in a week.

For eight years, Canada had little to offer South Korea that would compel it to agree to free trade. But South Korea recently decided that it wants into the TPP. And that means that the 12 existing members, including Canada, hold the key to entry – and a rare bit of leverage.

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If Ottawa is serious about expanding trade in Asia, it shouldn't be afraid to embrace free trade when the opportunity arises. That means being willing to do deals that may be a tough sell in some parts of the country.

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About the Author
National Business Correspondent

Barrie McKenna is correspondent and columnist in The Globe and Mail's Ottawa bureau. From 1997 until 2010, he covered Washington from The Globe's bureau in the U.S. capital. During his U.S. posting, he traveled widely, filing stories from more than 30 states. Mr. McKenna has also been a frequent visitor to Japan and South Korea on reporting assignments. More

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