Free Trade Agreement Compliance: Challenges vs Benefits

Free trade agreements offer enterprises a competitive advantage, but compliance can be burdensome. In this QAD Precision Report we look at the challenges and benefits of automating FTA compliance.

After 14 months of negotiations, the United States, Canada and Mexico agreed the terms of the new Nafta free trade agreement on 30 September 2018. This was just the first step in the process. After that,  the three signatory countries had to ratify the United States - Mexico - Canada Agreement (USMCA).

Naturally, the three countries had different routes, and timelines, for ratification. Mexico first ratified the updated FTA, followed by Canada and then the US. Furthermore, all three countries had to notify one another that they were ready to comply with the new  FTA. On 24 April 2020 the parties completed the final steps. As a result, the USMCA came into force on 1 July 2020.

The Long Road to FTA Ratification

Taking over a year of negotiations, and more than a year and a half for ratification, may seem like a long time, but free trade agreements are a lengthy process. In June 2019, the European Union and Vietnam signed a far-ranging FTA that will reduce tariffs on 99 percent of goods traded between the two. The negotiations, which ended in December 2015, took three and a half years. 

Free trade negotiations can take a significant amount of time — and ratification can add several more years. The USMCA timeline looks positively speedy in comparison to the EVFTA, and even more so compared to the 20 years it took to reach an agreement between the EU and Mercosur, the South American trading bloc, with Brazil, Argentina, Paraguay and Uruguay as full members. In June 2019, both trading parties reached an agreement. However, as the agreement has proved to be controversial, ratification is likely to take many years longer. 

The Benefits of Free Trade Agreements

The long ratification process has its benefits for companies, particularly those with complex, multinational operations. During this time, companies can run “what if” scenarios to see what financial or other benefits might arise from leveraging this FTA. Furthermore, the enterprise can use the interim time to find and qualify suitable suppliers.

As well as removing trade barriers, enterprises that leverage FTAs can source raw materials, parts and goods that are eligible for low or zero tariffs. Therefore, FTAs allow companies to gain a competitive advantage as they can sell goods at a lower price. The duties that a customer would normally pay are reduced or eliminated.

The Challenges of FTA Compliance

There is one major barrier for companies that wish to leverage free trade deals — FTA compliance is a complex challenge. Furthermore, if a company works across many different geographies or trading blocs, these challenges become even more burdensome.

Given this, it is perhaps unsurprising that one study found that only thirty percent of companies leverage all the FTAs that they could. Companies cited three major reasons for this:

• Complexity of FTA rules of origin

• Difficulty in obtaining supporting documentation from vendors

• Lack of in-house expertise

One of the major difficulties with FTA compliance is that not all goods made in a signatory country will be eligible for reduced or eliminated tariffs. In order to determine if a product qualifies, an enterprise has to check it against the FTA’s “Rules of Origin.” Rules of Origin can include where the materials used were sourced, the cost of the materials, and in some cases, the hourly wages of the workers that made the goods. (For more details on Rules of Origin, please see our explainer.) 

Therefore, in order to take advantage of an FTA, manufacturers must qualify their goods. This means they must pull production bills of material (BOM) and perform content calculations using up-to-date Rules of Origin; solicit supporting documentation from vendors; create Certificates of Origin for customers; and abide by an agreement’s record retention rules. 

However, this is a process that a company may need to repeat several times a year. Changes to the BOM, a new supplier or fluctuating prices could mean that a good no longer qualifies. In addition, legislation governing a particular FTA is subject to change. Therefore, companies that qualified goods under older legislation will need to do so again.

How Automation Simplifies FTA Compliance

No company willingly overlooks a competitive advantage. However, as we have seen, FTA compliance is a challenge. As a result, best-in-class companies have turned to automation to help them manage FTA compliance.

An automated FTA solution simplifies compliance by automating the most time- and labor-intensive processes. This includes:

• Automatically qualifying goods using up-to-date Rules of Origin legislation

• Automatically soliciting for inbound Certificates of Origin as well as creating outbound Certificates of Origin

• Performing tariff shift, RVC and de minimis calculations

• Determine which rule portion applies

• Electronically archiving documents for retention requirements

An automated solution enables companies to leverage FTAs while minimizing the risk of preferential origin management errors or other FTA compliance missteps.

Check Your FTA Return on Investment 

One easy way to check how much your company could save in duties is with an FTA Return On Investment calculator. QAD Precision’s FTA calculator covers goods manufactured in 126 countries and imported into the US, Canada, Mexico, and all EU countries, with more destination countries to come. To determine potential savings, enterprises will need to know the commodity codes of the goods they wish to check.  The FTA calculator is free to use and offered without obligation.

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