This June, the EU signed two landmark free trade agreements. In this QAD Precision Report we look at the benefits of FTAs and how automated solutions relieve the burden of FTA compliance.
Simplifying Free Trade Agreement Compliance
On Sunday, 1 June 2019, the European Union and Vietnam signed a landmark free trade agreement (FTA). Under the terms of EU-Vietnam Free Trade Agreement (EVFTA,) 99 percent of goods traded between the two will see tariffs reduced. Negotiations to get to this point lasted three-and-a-half years, concluding in December 2015. The EU called the EVFTA “the most ambitious free trade deal ever concluded with a developing country.”
Although historic, this is by no means the only significant deal recently signed by the European Union. After 20 years of negotiations, this June the EU reached an agreement on a new FTA with Mercosur, the South American trading bloc. The agreement with the bloc, comprised of Brazil, Argentina, Paraguay and Uruguay (Venezuela’s membership is currently suspended), gives the EU access to a market of 260 million people. Mercosur is also the fifth largest market outside the EU.
Free Trade Deals Take Time
Free trade negotiations can require a significant investment of time — as the 20 years of Mercosur talks show. Furthermore, the ratification process can add several more years. Recent examples include the EU and Japan Economic Partnership Agreement. Negotiations for the deal finalized in December 2017. A year later — in December 2018 — the European Parliament gave its consent. Consequently, this cleared the way for the agreement to come into force, which it did on 1 February 2019.
The new Nafta — the United States-Mexico-Canada Agreement (USMCA) — is another pertinent example. After 14 months of talks, the three signatory countries came to terms on 30 September 2018. Almost 9 months later, Mexico ratified the USMCA in June 2019. Moreover, it is the first of the three parties to do so. As yet, it is unclear when the US and Canada will follow suit and the USMCA will enter into force.
Although free trade deals can take years for negotiation and ratification, governments around the world are willing to invest the time required. This is because FTAs can remove trade barriers, open markets for goods, support innovation and competitiveness, as well as reduce poverty. The long ratification process works to the advantage of companies. During this time, enterprises can run “what if” scenarios, such as determining whether sourcing from a signatory country is beneficial, as well as finding and qualifying vendors.
Why Companies Do Not Leverage FTAs
When goods are eligible for preferential duties — low or zero tariffs — companies can source raw materials, parts and goods for lower prices. Manufacturers can leverage FTAs to sell their products at a reduced price because the duties normally paid by the customer are reduced or eliminated. Despite the obvious advantage of being able to offer your goods for low or no duties, many companies simply do not bother. As anybody working in global logistics supply chain management will know, keeping up with FTA compliance regulations is a complex challenge no matter what industry you are in. When a company expands into new geographies, these challenges multiply.
One study found that only thirty percent of companies leverage all the FTAs that are available to them. The study found that the three most frequent reasons companies do not take advantage of all possible free trade deals are:
Complexity of rules of origin
Challenges gathering supporting documentation from vendors
Insufficient in-house expertise
It is fair to say that these can seem like sizable barriers. FTA compliance is not only a complicated beast, it can be time and labour intensive.
Qualifying Goods Under an FTA
Not all goods manufactured in a signatory country will qualify for preferential status. The “Rules of Origin” — the metrics that determine if a good qualifies for preferential duties — can take into account the origin of the materials used, the cost of the materials, and even the hourly salary of the workers that made the goods. (For more details on Rules of Origin, please see our explainer.)
In order to leverage an FTA, manufacturers must first qualify their goods. To do this, manufacturers must:
Solicit and manage sourced materials documentation from vendors
Ensure they are using up to date Rules of Origin
Pull production bills of material and perform the respective content calculation
Prepare Certificates of Origin and declarations for customers
Know and abide by data retention rules
If a good is eligible under a particular FTA then it qualifies has preferential treatment and can be sold to your customers with reduced or no duties.
Unfortunately, it is not enough to qualify a product once. Changes in the production bill of materials, suppliers and prices, as well as the legislation governing a particular FTA, will make it necessary to requalify goods. This is a process that may need to be repeated several times per year. For some companies, qualifying their goods and ensuring that they are compliant seems too heavy a burden.
Automating FTA Compliance
Masaaki Kotabe & Kristiaan Helsen, authors of Global Marketing Management found that best in class companies that focus on trade compliance excellence realize improvements by automating processes. This includes maximizing the benefits of FTAs by automating certificate of origin management with suppliers and creating paperless workflows.
Automated solutions can significantly relieve the burden of leveraging and staying up to date with FTAs. A comprehensive FTA solution automates the most time-consuming and labor-intensive steps. This includes:
Automatically qualifying goods according to current preferential Rules of Origin legislation
Soliciting for inbound Certificates of Origin
Preparing outbound Certificates of Origin
Performing tariff shift (both intermediate and base shift), RVC calculations and de minimis checks
Rule portion determination
Electronic archive of documents for retention requirements
An automated solutions not only allow companies to leverage FTAs to gain a competitive advantage while minimizing risk, but also allow them to free employees of non-value-add tasks to concentrate on long term planning and strategy.
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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