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Canada to phase out tariffs on Korean vehicles under trade pact

Canada, under a new trade deal with South Korea, will phase out over three years its 6.1 percent tariff on imports of vehicles produced by Korean automakers such as Hyundai and Kia. Photo credit: BLOOMBERG

UPDATED: 3/11/14 12:57 pm ET

OTTAWA (Bloomberg) -- Canada concluded negotiations on a free-trade deal with South Korea that it says will phase out tariffs on cars made by Korean companies such as Hyundai Motor Co.

Under the agreement, Canada will phase out over three years its 6.1 percent tariff on imports of vehicles produced by Korean automakers such as Hyundai and Kia Motors Corp.

Before the agreement was reached, some automakers worried such a deal would prompt a flood of South Korean imports. Ford Motor Co. noted that Canada imported around 131,000 South Korean vehicles in 2012 while exporting just 3,000.

Ford of Canada President Dianne Craig said in a interview with the Globe and Mail newspaper in January that a pact wouldn't benefit Canada because South Korea isn't a "good fair-trade partner."

International Trade Minister Ed Fast told CTV television on Sunday that the deal would reflect many of the auto industry concerns.

"My role isn't simply to promote the narrow interests of the auto sector itself. My role is to promote the national interests. Virtually every other sector of our economy has told us this trade agreement is absolutely critical," he said.

Japanese automakers with Canadian operations initially opposed the deal but later changed their minds on the grounds that the Canadian deal with South Korea could pave the way for one with Japan.

Canadian officials also downplay the potential damage to the auto industry, noting that 88 percent of Canadian-made vehicles are already exported.

The combined share of the Canadian light-vehicle market held by Hyundai and Kia has more than doubled since 2004. In 2013, the two brands posted sales of 209,549, or 12 percent of the market, up from combined sales of 85,075, or 5.5 percent of the market, in 2004, according to the Automotive News Data Center.

Their combined share of the Canadian market peaked at 12.8 percent, on sales of 214,083 units, in 2012.

The overall trade agreement will boost Canadian exports to South Korea by one-third, adding an annual C$1.7 billion ($1.5 billion) to Canada's economic output once the deal is fully implemented, said a Canadian official familiar with the contents of the agreement who spoke to reporters in Seoul, asking not to be named because he's not authorized to speak publicly.

Canadian Prime Minister Stephen Harper, who will meet Korean President Park Geun Hye on Tuesday, has stressed the need to diversify his country's exports from the United States, which bought 76 percent of Canada's foreign shipments last year.

The South Korean deal is the first Canada has reached in Asia, and will let Canadians compete fairly with competitors from the United States and European Union, which have already signed pacts with South Korea, according to the official.

"This is a deal that Canada needed," Joy Nott, president of the Canadian Association of Importers and Exporters, told reporters in Seoul. "This puts us back on level footing with the Americans and the EU."

Negotiations between Canada and South Korea started in 2005 and reached an impasse in 2008. In 2011, the EU implemented its deal with South Korea, while the U.S. brought its own version into force in 2012.

Declining exports

Canadian exports to South Korea declined 32 percent over two years to C$3.44 billion last year, according to Canadian government data.

Over the same period, Canada's trade deficit with that country more than doubled to C$3.9 billion. The agreement will eventually phase out 98.2 percent of South Korean tariffs and 97.8 percent of Canadian duties, the government said in documents released to reporters.

South Korean duties now average about 13.3 percent, while Canadian tariffs average 4.3 percent, according to the documents.

Disagreement over access for Canadian beef and pork, as well as South Korean cars, represented the biggest stumbling blocks to the deal, the Canadian official said.

"This is an important step forward not just for our economy but also for our relations with a country that has long been a friend and ally," Harper said March 9 in a statement on his Web site.

South Korea is "a relatively open economy, a relatively very progressive economy, an advanced democracy, and it has trade linkages all through Asia itself," Harper said. "So this is really the best gateway you can get into long-term trade agreement access into the Asia-Pacific region."

Reuters and David Phillips of Automotive News contributed to this report.

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