If you've been looking into trading abroad, then the chances are you've heard of Free Trade Agreements (FTAs).
However, it might not be clear exactly what they are and why they might matter to companies of all sizes that want to import from or export to other nations.
Let's take a closer look at these deals, their definitions and requirements - and how they could have an impact on your business.
What are FTAs?
An FTA is defined by the World Trade Organisation (WTO) as a deal between two or more countries that acts to remove tariffs and similar restrictions on "substantially all" goods traded between them.
They usually centre on "a chapter providing for preferential tariff treatment", but can also include "clauses on trade facilitation and rule-making in areas such as investment, intellectual property, government procurement, technical standards and sanitary and phytosanitary issues", according to the EC Trade Helpdesk.
Countries remove the tariffs on goods traded between them, but do not adopt the same levies on goods imported from other countries - in other words, the partners charge different external tariffs.
As a result, FTAs have complex rules to define whether goods produced in one partner nation is eligible for tariff-free treatment in another.
These so-called 'rules of origin' definitions prevent valuable products made outside an FTA from being taken into a high external tariff FTA partner from a low external tariff FTA partner and thereby dodging applicable charges.
Not a customs union
FTAs are commonly confused with customs unions, but they are two separate entities. The main difference is their attitude to third parties.
In a customs union, all parties are required to establish and maintain identical external tariffs in terms of trade with non-parties. Conversely, parties within an FTA are not subject to such requirements and can establish any tariff regime to apply to imports from non-parties they see fit.
Benefits of FTAs
FTAs are widely sought-after because they help businesses access new markets and therefore improve their reach and the number of people they can potentially sell to.
They are also seen as being beneficial to consumers because they increase competition and put more products on the shelves of shops, in turn pushing down prices.
Potential drawbacks of FTAs
However, there are some perceived drawbacks to FTAs, including the suggestion that they allow powerful nations to ensure deals bow to their will and not that of smaller countries.
Critics have also argued that they do not encourage trade liberalisation like multilateral agreements, and instead promote large trading blocs that can destabilise the global economy.
Another possible disadvantage is when overseas business rivals impose a predatory pricing strategy, for example, by dumping their products into a particular market in order to force their competitors out.
As you can see, the rules governing FTAs are complex and varied, plus there are hundreds currently in force or being negotiated.
However, businesses wanting to trade abroad do need to keep track of their status in order to avoid falling foul of the law.
There are some free depositories that aim to help you do this, including the WTO's Regional Trade Agreements Information System and the International Trade Centre's Market Access Map.
Let MIC help
Fortunately, MIC has developed specialist products designed to help you make the most of foreign trade, including the pioneering Origin Calculation System (MIC OCS).
It can optimise FTA management along the entire process for a range of agreements all over the world, including JEFTA and ASEAN. It will also help you improve your competitive position by ensuring you reap the rewards of the FTAs currently in force - and guarantee that you follow complex rules of origin and maintain the detailed documentation necessary to conform to the law.
To find out more, just get in touch with one of our friendly and knowledgeable representatives near you today.