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 have 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. It was
possible that the Covid-19 pandemic could have delayed the USMCA, but
on 24 April the parties completed the final steps. As a result, the
USMCA comes into force on 1 July.
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. Last June, 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. Despite this lengthy time
frame, the EU-Vietnam Free Trade Agreement (EVFTA), is not yet in
force. In late March this year, the EU
Council signed off on the deal. However, Vietnam has not yet
ratified the trade agreement, although the country’s National
Assembly hopes to do so when it opens — virtually, using online
meetings — this May.
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. Last June, both trading parties
reached an agreement. However, as the agreement has proved to be
controversial, ratification is likely to take many years longer.
Changing Trade Relations: The EU, UK and Brexit
Although free trade deals can take many years to conclude,
governments are willing to invest the time because FTAs remove trade
barriers, thus opening markets for goods, which in turn can support
innovation and reduce poverty.
A notable exception is the post-Brexit trade talks between the EU and
the United Kingdom. Brexit — the decision of the UK to leave the EU —
is significantly different from other FTA talks. For one, the two
sides are not simply negotiating a future trade deal, but also
unraveling a social and economic partnership that goes back to 1973.
All of this makes the 6 months timetabled to negotiate a trade deal
between the EU and the United Kingdom very ambitious. The two sides
had completed one round of negotiations before the Covid-19 pandemic
halted the talks. Nevertheless, negotiations have been ongoing using
video conferencing. A third round of talks ended in mid-May without
much progress. A further round of negotiations begins on 1 June. The
EU and the UK have until the end of June to reach an agreement. If
they cannot, either party can ask for an extension. However, the UK
has repeatedly stated that an extension is not possible.
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. For example, an
enterprise based in the EU that sources goods from China might see
significant cost savings as well as reduced trade barriers should they
switch to a vendor in Vietnam once EVFTA takes effect. 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
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
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 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 risk of 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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About QAD Precision – Trusted Global Trade and Transportation Execution
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
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.