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Global Trade is Complex: Isn’t It Time to Simplify?

Why Enterprises Should Simplify Global Trade and Transportation Operations

Global trade is complex, and getting more so — almost by the day. In the latest QAD Precision Report we look at the current state of world trade and how simplifying processes can benefit enterprises.

 

In 2017, world trade looked healthy. The World Trade Organization reported that global merchandise trade volumes grew by 4.7 percent — the strongest growth in six years. Perhaps even more importantly, the ratio of trade growth to GDP growth was back to its historic average of 1.5. During the years following the 2008 economic crash, the ratio was 1.0.

This expansion was due to growth in across most regions of the world, but especially in developing economies. In 2017, exports from developing economies grew an impressive 12 percent. As a result, together the developing economies reached a 43 percent share of world trade. Significantly, more than half of that trade was between developing economies.

Fast forward to 2019, and the picture looks somewhat different. Geopolitical tensions and uncertainty slowed world trade volumes to 3 percent during 2018. This downward trend is likely to continue during 2019 and 2020.  In April, the WTO forecast that merchandise trade volume growth would slow to 2.6 percent this year. However, WTO economists also argued that 3 percent growth was possible in 2020, should geopolitical tensions abate.

Tariffs and Ongoing Trade Tensions

The alleviation of tensions between some of the world’s largest economies seems unlikely to happen any time soon. This May, trade talks between the US and China ended in Washington without a deal — despite both sides making optimistic statements. Consequently, the US more than doubled tariffs on $200bn of Chinese imports, from 10 to 25 percent. China responded by announcing higher tariffs on $60bn of US goods from 1 June. Following hot on the heels of this announcement, the Office of the US Trade Representative released a list of further Chinese imports worth $300bn that could, in future, face tariffs up to 25 percent.

Tariffs are an ongoing theme. In April, the US announced that it was considering penalizing the European Union for subsidizing Airbus by imposing duties on about $11bn worth of goods. The US contends — and the WTO agrees — that Airbus subsidies negatively impact the US. Nevertheless, the EU responded by drawing up a list of potential retaliatory tariffs on $20bn worth of US products. Although the US and EU reached an accord in July 2018 to work towards a limited trade agreement, relations between the two have been fractious. It is possible that the US will decide to impose duties on EU cars — and should that happen, the EU has threatened tariffs on $22.5bn worth of US products.

The US, the EU and China are the world’s largest economies by GDP. Retaliatory tariffs — and the threat thereof between large economies — can significantly hamper global trade and disrupt customer relations, impacting importers, exporters, manufacturers and consumers around much of the world.

There have been beneficiaries though. Brazil is a case in point. In cases where US products face duties, Brazil benefitted and exported just under $6bn worth of additional goods relative to the previous year. The EU also managed to increase exports to both the US and China as the two giants duked it out.

Negotiating the New Normal

Global enterprises have a number of ways that they can respond to these threats. These include holding back on purchase orders in the hopes that tariffs will be removed or reduced after further trade talks, moving production facilities, or applying for tariff remedy programs. None of these are easy options. Cancelling orders or not fulfilling contracts can come with penalties and damaged supplier relationships. Moving production facilities is time-consuming and expensive, even if you already have a location in a country not subject to tariffs. Applying for tariff exemptions where possible is smart, however, this can take several months or more.

If you cannot move the production of your goods, you might be able to change the classification of them. Changing the design or assembly of a product to minimize tariffs is known as “tariff engineering.”  This allows manufacturers to classify their products with a different Harmonized Tariff Schedule (HTS) code to take advantage of more favorable duties. Manufacturers may also assemble separate parts of their products in different regions to leverage free trade agreements available there.

Tariff engineering — when done correctly — is legal and should be taken into account at the start of the design process. As well as favorable duties, manufacturers should also consider the costs of the materials, the cost of making the goods, transportation and the resources needed to ensure compliance with regulations. Authorities will take a dim view of companies that use artifice to classify products to obtain lower duties.

Taking Advantage of Free Trade Agreements

When you work across different regions of the world, leveraging all the free trade agreements that you are entitled to makes good business sense. If your products qualify for low or zero import duties, you are a more competitive supplier. The majority of global enterprises do not take advantage of all the FTAs that they could, largely because of the complexities of remaining compliant with them. Moreover, there are also significant penalties for violations.

Qualifying products under FTAs is a complex process (read our primer here). To qualify their products, manufacturers need to pull production bills of material, perform respective content calculations, then prepare and distribute potentially thousands of FTA Certificates of Origin.

Manufacturers cannot qualify products just once. It may be necessary to qualify products several times every year, such as if there are changes to the costs of materials or when you add new vendors. Furthermore, with each new qualification, manufacturers will have to produce and disseminate new Certificates of Origin too. For some enterprises, remaining compliant with FTAs may seem too burdensome a task.

Rethinking Policies and Procedures

Difficult trading conditions, tariffs and other geopolitical uncertainties, such as Brexit, can hamper operations and negatively impact profitability. An enterprise facing such challenges should examine their trading policies and procedures. In many companies, including industry giants, strategies that have been in place for a long time often go unexamined. Accordingly, a mindset of “that’s the way we have always done things” prevails. However, “good enough” processes are not the same as “best in class” — and may not be robust enough for current trading conditions.

Manufacturers looking to optimize trade operations and drive efficiencies must first consider critically examine their procedures, map processes and see where gaps exist. Once this exercise is complete, a company will have a clearer idea of what technologies they could use to support their operations.

Simplifying Global Trade and Transportation Operations

Technological solutions can help manage and simplify global trade. International shipping and manufacturing comes with an array of regulations and paperwork — none of which shippers should ignore. Missteps can result in customs hold ups, lost shipments, missed delivery deadlines, loss of export privileges and fines.

Enterprise-level software solutions should automate the most time consuming processes of global trade by ensuring all export and import processes are met, including trade compliance, documentation production and customs reporting. By automating compliance checks, manufacturers can perform due diligence, mitigate risks and create audit-ready electronic reports.

Automating free trade agreement compliance will allow manufacturers to verify thousands of products across multiple FTAs quickly and according to current preferential Rules of Origin legislation. In addition, the solution should automatically solicit for inbound Certificates of Origin from suppliers and generate outbound Certificates of Origin to customers, create detailed audit trails and comply with record retention rules.

Global enterprises benefit from integrating compliance and transportation. This is because switching between a compliance and a transportation solution is time consuming and may require you to re-enter information with the risk of keystroke errors. Furthermore, manually switching between carriers looking for the best rates, transit times and service levels is labor intensive. This is not feasible for high volume shippers, since you must ensure that each shipment is compliant with that carrier’s specific requirements. A transportation solution should also adhere to your business specific rules and include a configurable routing guide to streamline the shipment process.

Simplifying global trade and transportation with integrated solutions offers significant benefits. These include shorter cycle times, an ongoing compliance and risk mitigation strategy, a competitive advantage through low or zero tariffs and increased efficiencies. WIth integrated solutions, your enterprise works smarter — not harder.

About QAD Precision – Trusted Global Trade and Transportation Execution

QAD Precision (Precision Software), a division of QAD Inc., provides industry-leading global trade management, transportation execution and multi carrier shipping software solutions from a single, integrated platform. Preeminent industry leaders in every region of the world rely on QAD Precision’s global support centers to leverage thousands of carriers and manage millions of shipping transactions every day. Our open architecture easily integrates with Enterprise Resource Planning, Warehouse Management Systems and legacy solutions. An ISO-certified company, QAD Precision assists companies to minimize shipping costs, optimize first mile and last mile deliveries, automate free trade agreement compliance, avoid customs delays and mitigate the risks associated with dynamic trading environments to maximize their competitive advantage. QAD Precision’s customers span multiple industries including banking and finance, life sciences, high technology, retail, industrial, automotive, higher education and public sector as well as logistics providers. For more information about QAD Precision, visit www.qadprecision.com.

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