Free trade agreement compliance is complex. In this 3-Minute
Explainer we look at the challenges of FTA compliance and how
automation can help.
A free trade agreement (FTA) is an arrangement between two or more
countries to remove trade barriers. Under the terms of the FTA, the
signatories agree to reduce tariffs. Once the agreement is ratified,
they can access each other’s markets with preferential duties — and
sometimes with no duties at all.
As a result, an enterprise that engages in foreign trade can use FTA
compliance to reduce duty obligations by sourcing goods and raw
materials that are eligible for lower or zero duties. A company that
can source goods at a lower price gains a competitive advantage.
Despite this, many
companies do not do so. There is a good reason why — FTA
compliance is a complex challenge.
A laptop manufacturer may make their finished products using
components — such as microprocessors or graphics cards — sourced from
a number of different countries. If the manufacturer assembles the
laptop in Germany, it is “Made in Germany” under non-preferential
rules of origin. In other words, Germany is where the last
substantial transformation of the laptop took place.
However, free trade agreements use preferential rules of
origin. Preferential rules of origin use criteria such as
regional value content, tariff shift, and de minimis thresholds to
determine FTA origin. Governments set out the metrics on how to use
rules of origin to qualify a good. (For more details on these
criteria, please see our explanation of FTA rules of origin vs country
of origin here).
To determine the FTA origin of its goods, a manufacturer must pull
production bills of material (BOMs). Then the manufacturer must
determine how much content the item contains relative to the criteria
outlined in the FTA.
To complicate matters further, FTA origin status changes frequently.
If there are any changes to your suppliers, costs or BOM, you will
need to go through the qualification process again. As a result, a
manufacturer may need to qualify the same product several times over
the course of a year. Multiply that by hundreds or thousands of goods,
and the process becomes almost unsustainable if done manually.
Many enterprises do not leverage all the free trade agreements that
they could because of these challenges. Many lack the internal
expertise or the staff resources needed to ensure ongoing free trade
However, software solutions can simplify some of the most complex and
time consuming aspects of FTA compliance, including automating
origin determination and preferential origin management.
Automated solutions allow companies to determine the FTA origin
status of any product easily. Free trade agreement software can also
automate the solicitation and creation of Certificates of Origin, and
ensure ongoing compliance.
A truly best-in-class solution will cover all free trade agreements
recognized by the World Trade Organization. In addition, it should
offer detailed origin audit records and comply with the necessary
record retention requirements.
Furthermore, your free trade agreement software should allow you to
run “what if” scenarios against upcoming free trade deals. By doing
so, your organization will be able to see any potential benefits
before an agreement comes into force. This includes changes to
existing trade agreements, such as the United States - Mexico - Canada
Agreement, that replaced Nafta earlier this year, as well as free
trade agreements that are several years from ratification.
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QAD Precision, a division of QAD Inc., provides industry-leading global
trade compliance, and multi carrier transportation
execution solutions from a single, integrated platform. An
ISO-certified company, QAD Precision assists companies to streamline
and transportation operations, optimize deliveries, and increase
QAD Precision’s scalable and extensible solution easily integrates
with existing ERP and WMS solutions. Industry leaders in every region
of the world rely on QAD Precision’s global support centers to
leverage thousands of carrier services and manage millions of global
trade and shipping transactions every day. For more information about
QAD Precision, visit www.qadprecision.com.