Are you a small or medium-sized business owner who is involved in international trade? Then you've likely heard the words "Free Trade Agreement" (FTA). But what are they, and how can you leverage them to grow your business, reduce costs, and boost your global reach?
Free Trade Agreements are powerful tools for entrepreneurs and trade professionals. They cut or eliminate tariffs, simplify trade processes, and open new markets to businesses of all sizes. But most businesses don't realize these benefits because they don't know how to qualify or how to best utilize the agreements.
This blog will take you through what FTAs are, the business benefits they provide, and how your business can qualify and utilize them to thrive in the global economy.
Free Trade Agreements, or FTAs, are pacts between two or more countries that aim to reduce trade barriers. These trade barriers typically take the form of tariffs (taxes on imported goods) and quotas (limits on goods or services that can be exported or imported). By easing cross-border trade, FTAs promote economic cooperation and offer companies opportunities to grow internationally.
Some good examples of FTAs include the United States-Mexico-Canada Agreement (USMCA), the European Union Free Trade Agreements, and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).
For many small and medium-sized business owners, FTAs create new markets and cost-saving opportunities that were previously out of reach.
Before we get into the how of qualifying for FTAs, here's why they're game-changers for your business.
Perhaps the most apparent benefit of FTAs is the removal or lowering of tariffs. Think of the 10%, 20%, or more savings on your goods by just availing yourself of the benefits of an FTA. Those are funds that could be reinvested in other aspects of your business, like marketing or expansion.
Best example: USMCA offers tariff-free treatment for numerous agricultural and industrial goods traveling between the United States, Mexico, and Canada, which saves costs significantly for importers and exporters alike.
FTAs often include provisions that simplify customs procedures and address non-tariff barriers. This ease of doing business enables even smaller players to penetrate and compete effectively in foreign markets.
For instance, American small fashion designers are able to reach a European customer base without having to struggle with prohibitive duties, thanks to the EU-US agreements.
FTAs, by lowering costs and procedures, can give your company a competitive edge. You can maintain more competitive prices for your products while you retain healthy profit margins, which enables you to be more appealing to more foreign customers.
The majority of FTAs allow businesses to import raw materials or high-tech parts at reduced costs, enabling them to create higher-quality products without stretching their budgets.
FTAs encourage regional trade agreements, providing businesses with more reliable supply chain options closer to home without adding costs and preserving logistical efficiency.
Understanding the benefits is one aspect; leveraging them is another. Follow these steps to enable your business to qualify for and use FTA benefits effectively.
Start by checking if there is an FTA between your home country and the countries you are trading with. Each agreement is unique and applies to specific industries, products, and trade flows.
For example, if you're exporting electronics from Canada to South Korea, the Canada-Korea Free Trade Agreement can result in tariff exemptions for your goods.
All imported and exported products are assigned an HS (Harmonized System) code. The FTAs use these codes to determine if your products qualify for preferential tariff treatment.
For compliance, work with your customs broker or consult your country's trade office to accurately classify your products.
A key component of any FTA is the "Rules of Origin." These rules specify how much value or production must occur within the FTA member countries for the goods to qualify for reduced tariffs.
For example, if you're exporting a garment to Europe under the EU-Vietnam FTA, a portion of the manufacturing or raw material sourcing must be done in Vietnam or the EU.
Once you've confirmed your goods meet the Rules of Origin, you'll likely require a Certificate of Origin to benefit from the FTA.
Some countries offer online platforms to make this easier, but utilizing a freight forwarder or trade compliance officer will ensure you are meeting proper documentation guidelines.
FTAs can be applied not just to finished products but also to raw materials and components. By strategically sourcing from FTA nations, you can reduce costs throughout your entire supply chain.
FTAs are reopened and revised. Stay informed of any changes that may impact your business. Most countries publish easily obtained materials or subscribe to alerts from your industry associations.
While FTAs offer numerous benefits, there also are potential pitfalls to keep in mind, such as compliance with complex regulations and international trade documentation specifications. Non-compliance with these can lead to penalties or tariff denials, so precision is vital.
A majority of the companies overcome these hurdles by either partnering with trade consultants, relying on international freight forwarding companies, or using trade compliance software to render the process effortless.
Free Trade Agreements are a valuable tool for businesses looking to expand internationally without emptying the bank account. For small and medium-sized enterprises, they level the playing field, opening markets that were previously too costly or complex to access.
If you're an SMB owner, entrepreneur, or logistics professional, now is the time to take advantage of these benefits. Start by researching the specific FTAs that apply to your business activity and ensuring compliance with their requirements.