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A $13 Billion Reason to Support the South Korean Free Trade Agreement

03/18/2014 05:40 EDT | Updated 05/18/2014 05:59 EDT

If Canadians need a reason to support the just-announced free trade agreement with South Korea, here are a few hundred million: every year, Canadians pay hundreds of millions of dollars in hidden taxes on imported automobiles and auto-related products. At least some of those hidden taxes are in the form of tariffs applied to imports from South Korea.

Canadians are taxed in multiple ways but only some taxes are visible; for example, income taxes, property and sales taxes. Some taxes are mostly forgotten until a traveller arrives back in Canada to face duties at the border. Other taxes, such as government-imposed tariffs on foreign products, are hidden from consumers but cost a small fortune.

Imported goods hit by tariffs include everything from French cheese to foreign cars, trucks and SUVs. Importers pay these tariffs/taxes before the product ever makes it to shelves and showrooms. And the cost is ultimately reflected in the price.

The point of a tariff is protectionism -- to shield existing status quo producers from full competition. Tariffs, therefore, act as a de facto and additional sales tax on consumer choice.

In the case of non-NAFTA automobiles imported into Canada, tariffs can be as high as 6.1 per cent -- the current levy on vehicles from South Korea. That is a not an insignificant sum when applied to something costing tens of thousands of dollars.

That protectionist preference is costly for consumers. In 2013, the collected tariffs on automobiles for personal use, vehicles for business purposes, parts and accessories, and other assorted vehicle-related categories amounted to $820 million, according to Statistics Canada.

Between 1988 and 2013, in total, consumers in Canada paid almost $13.9 billion in tariffs on non-NAFTA automobiles and other items in the related categories.

Those tariffs were collected on more than just South Korean auto-related items. European and Japanese importers also paid into that total tariff "kitty." That is why more free trade deals are preferable to the expensive, status quo protection racket.

The Canada-Korea Free Trade Agreement will see the 6.1 per cent tariff on automobiles removed from imported Korean vehicles over several years. For Canadians, decreased costs for South Korean-made automobiles and increased choices are positive.

And competition works both ways. Korean companies will now face increased pressure from Canadian firms who will sell more beef, pork, metals, minerals, wine, spirits, seafood, and aerospace and forestry products, where existing tariffs can be punishingly high -- for example, 72 per cent duties on Canadian beef. On average, Korean tariffs on Canadian goods are three times higher than Canada's tariffs on Korean products.

Free trade can be a win-win not only for consumers but producers as well. For a real-world example, consider Canada's wine industry. When I was growing up in the Okanagan Valley in the 1980s, most Canadian wine, whether from BC or from Ontario's Niagara region, was what wine aficionados call "plonk"--cheap, low-quality wine.

But a series of 1980s-era developments improved Canada's wine industry. They included improved industry standards, combined with a ruling from the General Agreement on Tariffs and Trade (GATT), and the 1989 Canada-U.S. free trade agreement which ended government protection for domestic producers.

All of this meant Canada's vineyards had to compete or wither on the economic vine. After replanting with better quality grapes, the industry thrived. As a 2006 analysis from Statistics Canada noted, between 1997 and 2005, real GDP growth in the wine industry was the eleventh highest among 215 industry groups. Canada's wine sector showed average annual real growth of 7.1 per cent compared with just three per cent for the nation as a whole.

The improvement is obvious to anyone rudimentarily familiar with Canada's vineyards, three decades ago and today. Higher quality wine, more customers, increased employment, significantly increased wine tourism, international awards and more vineyards, not fewer. As Statistics Canada noted, "With the introduction of the FTA, it could have been thought that domestically produced wines would be displaced by popular California wines, putting Canadian wineries out of business. In fact, the opposite occurred."

By design, free trade agreements tear down the protectionist walls propping up status quo producers. However, even those producers--at least those who reform, will also find a newfound ability to thrive given increased access to markets with tens of millions, or hundreds of millions, of potential new customers. All of this benefits consumers, most obviously when expensive tariffs on their choices, from Korean cars to Canadian beef, are eliminated.