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 agreement compliance.
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 their import, export and transportation operations, optimize deliveries, and increase logistics ROI.
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.