BUSINESS

Harper vs. Ford On South Korea Free Trade Deal: What Will It Mean For Autos?

03/11/2014 12:15 EDT | Updated 03/11/2014 12:59 EDT

The battle lines have been drawn in the fight over the newly-announced free trade deal with South Korea, and the main point of contention is the future of Canada’s struggling auto industry.

On one side are the Harper government and exporters in industries like agriculture and liquor, who see the opportunity for a foothold in Asia in the free trade deal that’s expected by the government to grow Canadian exports to South Korea by 32 per cent, expanding the economy by $1.7 billion.

On the other side are the auto industry, auto unions and, to a lesser extent, the Ontario government, who see bad news for a struggling industry.

Prime Minister Stephen Harper and Ford Motor Co. of Canada got into a tit-for-tat Tuesday, with Ford Canada saying the deal will threaten the auto industry, while Harper accused Ford of hypocrisy, noting the company supported a similar U.S.-South Korea trade deal.

South Korea “will remain one of the most closed automotive markets in the world under the deal negotiated by the Canadian government,” Ford Canada CEO Dianne Craig said in a statement.

Craig said that previous South Korean free trade deals with the U.S. and the EU “failed to reverse [a] one-sided automotive trade flow.” She said South Korea maintains a closed market for cars by putting up non-tariff barriers and artificially keeping its currency low.

“Since the U.S. signed its trade agreement with South Korea, the U.S. trade deficit has worsened by more than 50 per cent and the volume of U.S. goods exported to South Korea — not just autos but all exports — has dropped by nearly $2 billion,” Ford’s Craig said in a statement.

Canada runs a large deficit in trade with South Korea. Canada imported $6.4 billion of goods from South Korea in 2012, while importing little more than half that, at $3.7 billion. Backers of the trade deal hope greater access to Asian markets will help narrow that gap.

Speaking from Seoul, Harper accused Ford Canada of hypocrisy, noting that Ford supported the U.S.-South Korea free trade deal, the Globe and Mail reports.

Ford “secured access through the United States to the South Korean market,” Harper said. “What we are doing here is allowing other Canadian companies and other Canadian sectors to have the same access that Ford already has.”

Harper suggested Ford is trying to “have one set of rules for it[self], and another set of rules for the entire rest of the Canadian economy.”

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Under the deal, Canada will phase out its 6.1-per-cent tariff on South Korean automotive goods over three years, while South Korea will drop its 8-per-cent tariff on Canadian cars immediately after the deal is signed.

Ford Canada was joined by automotive industry unions in its opposition to the deal.

"The problem is that Prime Minister Harper did not address the current trade imbalance,” Unifor president Jerry Dias said in a statement.

“We needed our political leadership to broker a deal that addressed the reality that we have 100 000 Korean-made cars being imported to our market, while we are exporting only 100 cars to the Korean market.”

Unifor estimates the deal will cost 33,000 Canadian manufacturing jobs, but didn’t provide an estimate on job impact for other sectors of the economy.

The government of Ontario expressed concern about "the potential for serious negative impacts" on the province's auto sector Tuesday. Economic Development and Trade Minister Eric Hoskins said two years isn't enough time for domestic automakers to adjust to the removal of Canada's 6.1 per cent tariff on imports of Korean cars.

Ontario told the federal government during the free trade negotiations that it needed the longest-possible phase-out period for the tariff, up to seven years. The U.S. negotiated a five-year tariff phase-out period in its free trade deal with South Korea.

Ontario's government has reason to worry about the province's automotive industry, which employs 93,000 people. Even though auto sales boomed in Canada and around the world last year, Canada saw very little of that bounce-back.

Production in Canada is in decline, and last year Michigan took the crown from Ontario as the top North American jurisdiction for auto production.

In 2005 Canada produced over one million more vehicles than Mexico. That’s swung to a near 700,000 advantage for Mexico over the past year,” BMO economist Benjamin Reitzes wrote in a client note last October.

Industry consultant Joe McCabe said last year Canada’s auto industry can expect to see a 28-per-cent decline in production, to 1.8 million vehicles annually by the end of the decade, from just under 2.5 million today.

However, McCabe pointed the finger at Canada’s high dollar as the culprit. With the loonie down 10 per cent over the past year against the U.S. dollar, economists are hoping for a bounce-back in manufacturing exports, at least in the longer term.