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Tiger by the Tail? Canada's Trade with South Korea
by Sandra Bohatyretz
Asian 'tiger' now an important trading partner for Canada
The signs of Canada's trade with South Korea, one of the "Four Tigers" of East Asia, are easily recognizable as you drive down the highway: Hyundai, KIA, GM Daewoo. Motor vehicles and auto parts are the number one item that Canada imports from South Korea, now the world's 12th largest economy (OECD).
Canada's trade with South Korea pales in comparison with our transactions with the United States, just across the border. However, over the last decade, South Korea has become increasingly important as a trading partner for Canada, although in fairness Canada hardly has the tiger by the tail.
As in the case of China, the growth in Canada's imports from South Korea during the past decade has far outpaced the growth in our exports to South Korea. As a result, Canada's merchandise trade deficit with South Korea has increased 10-fold.
Worldwide, South Korea was Canada's seventh largest source of merchandise imports in 2003, up from 11th place a decade earlier. With respect to exports, South Korea was Canada's eighth largest customer last year, down from sixth largest in 1994.
Within the Pacific Rim group of countries, South Korea ranked as Canada's third largest trading partner of the region, behind China and Japan. In 2003, South Korea accounted for 11% of Canada's exports and nearly 12% of Canada's import trade to this area.
South Korea's expanding market is of great importance to our economy, carrying the promise of opportunities for Canadian businesses.
This article examines the trends in merchandise trade1 flows between Canada and South Korea between 1994 and 2003, and the importance of this trade for Canada in terms of commodities. It also examines the differences in trade statistics that became apparent during the 2001 and 2002 merchandise trade reconciliation study between the two countries. This study pinpointed reasons for the differences in our trade statistics and increased our understanding of each other's trade reporting practices.
Incredible integration into the world economy
South Korea has achieved incredible economic growth and integration into the world economy. It has emerged as the world's 12th largest trading nation, with total trade in 2003 reaching $522 billion, double the level from a decade earlier (KITA).
With an estimated population of 48 million, South Korea is the largest of the four 'tigers'. It has more than twice as many consumers as Taiwan, a little over six times more than Hong Kong, and 12 times more than Singapore.
In 1997, the Asian financial crisis, commonly referred to as the 'Asian Flu', created a severe downturn in South Korea's economy. The South Korean Stock Exchange began to fall, and this was followed by a sudden drop of the South Korean won against the U.S. dollar.
As a consequence, the South Korean government took out an emergency loan from the International Monetary Fund (IMF) and launched various comprehensive reforms to all key sectors of their economy.
The country's rapid economic recovery has been remarkable. South Korea's robust domestic market has provided growing opportunities to foreign firms and Canada is positioned to be part of this expanding market.
Canada and South Korea : Over 40 years of diplomatic relations
Canada and South Korea have maintained over 40 years of official diplomatic relations dating back to 1962. There has been a long history of interaction between the two countries. During the past decade, shifts in our economic connections have changed noticeably.
At the 1993 summit of the Asia-Pacific Economic Co-operation (APEC), the Canada-South Korea 'Special Partnership' was created to develop closer co-operation between the two countries in areas of trade, investment and political dialogue. Both nations recognized the potential for expanded relations and pledged to make every effort to help two-way exports.
In April 1994, the Canada-South Korea Special Partnership Working Group was launched to increase co-operation in areas such as trade, investment, and technology transfer.
The collaboration has led to various changes including, for example, an agreement by South Korea to remove some of the restrictive labelling requirements on imports of Canadian ozonated bottled water and a reduction of tariffs on Canadian canola oil (DFAIT).
Trade flows with South Korea : imports tell the story
Prior to the Asian financial crisis of 1997, Canada's trade with South Korea imports plus exports was basically flat. The volume of transactions with South Korea peaked at just over $5.9 billion in 1995 and fell to about $5.1 billion in 1998.
In 1999, however, South Korea's economy picked up steam. The nation's real gross domestic product that year soared 10.9%, and in 2000, the gain was 9.3% (APEC).
After a setback in 2003, South Korea has rebounded sharply, and in 2004, real GDP is forecast to grow by 6.3% and by 4.8% in 2005 (The Economist).
South Korea's trade with Canada mirrors this growth. In 1999, our total trade with South Korea picked up, and by 2000 had peaked at more than $7.6 billion.
But this gain was largely the result of Canada's heavy imports from South Korea, especially of motor vehicles. Canada's exports to South Korea were hit hard by the economic crisis that gripped South Korea starting in 1997, and have not recovered.
In total, during the past 10 years, the value of Canada's two-way trade with South Korea increased 49%.
During this period, our exports to South Korea fell 15%, while in comparison, our total exports to the world rose 69%. On the other hand, our total imports from the world rose by 65%, while those from South Korea more than doubled (+104%).
Imports of cars mushroom in just 10 years
Canada was ranked as South Korea's 11th largest destination of exports in 2003, up from 13th place a decade earlier (KITA).
In 2003, Canada imported $5.1 billion worth of goods from South Korea, slightly more than double the amount in 1994. Imports of motor vehicles accounted for the vast majority of the increase.
During this decade, Canada's imports of motor vehicles and parts from South Korea surged five-fold. In 2003, they accounted for 30% of total imports from South Korea, three times the proportion in 1994.
In 2003, South Korean companies shipped more than $1.5 billion worth of vehicles and auto parts to Canada.
Automobiles, semiconductors, televisions, VCRs and appliances accounted for almost three-quarters of Canada's imports from Korea last year. A decade earlier, they accounted for about 62%.
Canada well positioned to supply natural resources
As a country with limited natural resources, South Korea depends on imports for primary goods such as crude oil, coal, timber, wood pulp, and organic chemicals. The bulk of their imports are from the United States .
However, South Korea's expanding domestic market will provide growing opportunities to foreign firms, and Canada is well positioned to supply this expanding market.
Since the economic crisis in 1997, our exports to South Korea have fallen and have not recovered to previous levels.
In 1998, our total exports to South Korea were $1.8 billion, a 19% decrease from four years earlier. By 2003, our total exports to Korea reached $1.9 billion, a 15% decline from a decade earlier.
In 1994, Canada was ranked as South Korea's 8th largest source of imports. Ten years later, Canada had dropped to 23rd place (KITA). Competition from emerging markets, specifically China, has played a major part in Canada's weakening position in the South Korean market.
With virtually no raw materials and a large industrial base, South Korea could be a significant market for a wide variety of primary commodities that Canada is able to provide. Our three principal exports to South Korea are wood pulp, coal and aluminium. In 2003, Canadian exports of these three leading commodities accounted for 44% of our total exports to South Korea.
The type of goods that Canada exports to South Korea has remained relatively homogeneous over the past decade, except for our grains. In 1994, almost one-fifth of our total exports to South Korea consisted of grains. Ten years later, this commodity had dropped to a mere 2%. Increased competition from Australia, China and Ukraine have dramatically decreased Canada's share of South Korean grain imports.
Deficits in 8 of last 10 years
Because Canada's imports from South Korea have soared, and our exports have fallen, Canada has recorded merchandise trade deficits with South Korea in eight of the last 10 years.
In 1996 and 1997, Canada had small trade surpluses with South Korea . This changed with the recovery in South Korea's economy following the Asian financial crisis. The trade deficit has doubled from about $1.5 billion in 1998 to $3.2 billion in 2003.
As a proportion of the value of total merchandise trade with South Korea, both imports and exports, our trade deficit rose from 6% in 1994 to 46% in 2003.
Still, this was a far cry from our trade deficit with China, which exploded from $1.2 billion in 1995 to nearly $13.8 billion in 2003.
Understanding conceptual differences
To obtain a better understanding of our trade with South Korea it is important to understand the conceptual differences in how each country counts trade, as well as possible errors in the published data.
Trade statistics collected by countries frequently differ from the statistics published by their trading partner(s). In theory, for example, Canada's recorded exports to South Korea should equal South Korea's reported imports from Canada and vice versa. However, this is not the case.
For example, in 2001, reported Canadian import trade exceeded South Korea's reported exports by $1.5 billion. The following year, the gap was $1.2 billion. Similarly, in 2001, South Korean reported imports exceeded Canada's reported exports by $835 million. In 2002, the gap was $900 million.
Both Canada and South Korea derive their trade statistics from the administrative data provided by their respective Customs agencies. Customs offices are generally more attentive to goods entering the country rather than leaving because of the requirement for tariff assessment and the application of trade agreements. Consequently, import data are usually more reliable than export data.
To improve our understanding of the actual trade flows between these economies, a merchandise trade reconciliation study was undertaken between Canada and South Korea.
The study identified the major differences in the trade statistics, and calculated estimates to better reflect the actual trade occurring between the two countries. It discovered that the principal causes for the discrepancies in trade data between Canada and South Korea were indirect trade and export undercoverage.
The reconciliation study revealed that Canada's merchandise trade deficit was actually just over 30% less than was reported in 2001 and 2002. In 2001, Canada's reconciled trade deficit with South Korea was $1.8 billion. The following year, it was $2 billion.
On the other hand, South Korea's trade surplus with Canada was actually higher than published. It was nearly $2 billion for both 2001 and 2002.
The results from this reconciliation study confirm that the major contributing factor to the discrepancies between the Canadian and South Korean published trade data are that exports are often understated in both directions of trade. Non-filing of export documents and misallocated trade due to differences in the way in which indirect trade has been reported have also had an impact on Canada's trade balance with South Korea.
Canada's merchandise trade deficit using the reconciliation based data was less than that determined using the published data. The same situation occurs with South Korean merchandise trade statistics.
The usefulness of this reconciliation study in identifying differences has also resulted in an agreement between Canada and South Korea to continue discussions and perhaps undertake further reconciliation work.
1. Merchandise trade includes trade in goods and excludes trade in services. Throughout this article customs based merchandise trade statistics are used. These data are derived from the administrative records of the Canada Border Services Agency, the US Customs and Border Protection and Korea Customs Service.
Asia-Pacific Economic Cooperation (APEC). n.d. Korea Economy Report.
Department of Foreign Affairs and International Trade (DFAIT). n.d. Trade Negotiations
and Agreements. 'Opening Doors to the World: Canada's International Market
Access Priorities 2003 - Republic of Korea.'
The Economist. n.d. Country Briefings - South Korea . www.economist.com/countries/SouthKorea (accessed July 23, 2004).
Korea Customs Service: www.customs.go.kr
Korea International Trade Association (KITA). n.d. Trade by Country. www.stat.kita.net/statistics (accessed April 16, 2004).
Korea National Statistical Office (KNSO): www.korea.net
Organisation for Economic Co-operation and Development (OECD). n.d. Statistics Portal. 'Main Economic Indicators'. www.oecd.org (accessed June 15, 2004).
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