If you're a regular reader of our posts here at MIC, you may remember that we talked last month about what free trade agreements (FTAs) are and how they operate - check out the article here if you missed it.
However, especially if you're the owner of a small to medium-sized enterprise (SME), you might not be exactly sure about how they could impact upon your operations and whether or not there are any potential benefits.
For this month's post, we wanted to address that and take a closer look at what an FTA could mean for your company.
How FTAs work
To recap, FTAs are either bilateral (two nations) or multilateral (more than two countries) agreements between governments to govern trade policies.
They focus on reducing or removing tariff barriers that could hamper trade between countries, thereby boosting joint trade and strengthening economies.
In short, they reduce levies on goods and/or services that are manufactured in one country and sold in another.
Some FTAs are between countries that are neighbours or very close to one another, while others cover much wider geographic areas, like the Trans-Pacific Partnership that includes Canada and Australia.
Will FTAs apply to my company?
To consider whether or not FTAs will apply to you, you simply need to ask yourself if your SME buys imported goods or sells goods that are exported.
If the answer is neither and everything your business sells or buys comes from the same country of origin, then FTAs are not likely to impact upon your supply chain.
If, on the other hand, you get components for your products from abroad or sell to foreign customers, you probably will be in the reach of one supply chain or another.
The advantages of FTAs
Many smaller organisations find they are able to become more competitive because they can purchase components from low-cost manufacturing locations within free trade zones and then use them to create products to sell.
Indeed, when two countries that want to trade together come under an FTA, they can benefit from assurances as to how pricing for the products they buy will be governed.
FTAs generally mean SMEs that import can access lower-cost goods, without which they might have to either absorb price increases or charge more to their end customers.
For those that export and are operating under an FTA, they may find markets abroad are purchasing their products because they are tariff-free and therefore cheaper than goods coming from another country without a deal in place.
This can provide a competitive advantage in foreign markets and even help SMEs compete as equals with local businesses.
Essentially, if you're trading abroad, FTAs are likely reducing your costs and improving your ability to deliver to your customers.
Don't look for FTAs just for the sake of it
Having said all this, it's not a good idea to simply pick a foreign market out of thin air because you know your country has a free trade deal with it.
You must first ensure that the market is a good fit for what you are offering and, if you're an exporter in particular, if there is real demand for your products or services in the country in question.
Another point is that it's essential to comply with all the rules governing FTAs if you are to avoid penalties.
There are currently more than 400 deals in place around the world and, while they all aim to enhance trade and offer duty savings, many operate under their own set of regulations.
To make the most of FTAs, you'll need to follow complex rules of origin and maintain detailed documentation. Luckily, this is something MIC's Origin Calculation System (MIC OCS) can help you with if you decide international trade using FTAs is for you.
As you can see, there are plenty of benefits when it comes to taking advantage of FTAs that could really help a smaller organisation grow. However, the key is to manage them properly - and understand what they really cover.
