In today’s globalized economy, businesses are constantly seeking ways to enhance profitability and gain a competitive edge. One powerful tool at their disposal is Free Trade Agreements (FTAs), which have become increasingly important in fostering international trade relationships. In this article, Elena Ozyman, FTA Team Lead at Descartes, explores how leveraging FTAs can help organizations reduce costs, increase market access and improve competitiveness, demonstrating the strategic importance of understanding FTA regulations.
- Enhancing business profitability and competitiveness is a key strategic advantage of FTAs; they often shape a company’s overall strategy.
- By streamlining the supply chain and reducing or eliminating tariffs, FTAs contribute to more cost-effective production.
- Overcoming trade barriers to enter new markets becomes easier with the help of FTAs.
- Companies with complex supply chains, in particular, can benefit from the flexibility of sourcing from multiple countries at reduced tariffs through FTAs.
- To fully leverage the advantages of FTAs, companies should focus on optimizing supply chains, diversifying markets, and investing in R&D.
FTAs are treaties between two or more countries designed to reduce or eliminate certain barriers to trade and investment, and to facilitate stronger trade and commercial ties between participating countries.
They also directly impact a company’s supply chain and manufacturing processes, as FTAs enable efficient sourcing of raw materials and components. It is no surprise to learn that this influences a company’s decision-making process about manufacturing locations and market expansion strategies, all of which contribute to the profitability of the business and the cross border movement of goods.
A primary advantage of FTAs is the reduction or elimination of tariffs and other trade barriers. FTAs often involve the elimination or reduction of tariffs and duties on imports and exports between member countries, meaning that companies can import raw materials and components at a lower cost, reducing the overall production cost.
While lower production costs can lead to increased profitability for businesses, the cost advantage can also be passed on to consumers in the form of lower prices for goods and services. Although there are many factors for this, competitive pressure and market demand are two key critical elements.
FTAs also enable organizations to enter new markets that would otherwise be difficult to enter due to trade barriers. This is permitted by preferential treatment and reduced duties that increase their customer base and revenue streams.
For example, the Euro-Mediterranean agreements, which were established in 90th, created a free trade area allowing for elimination of trade barriers and facilitation of market access. In turn, this promotes political stability, economic integration and free trade between the EU and the countries in the Mediterranean region, which consist of Algeria, Egypt, Israel, Jordan, Lebannon, Morocco, Palestine, Syria and Tunisia.
In fact, this agreement included the gradual elimination of tariff barriers, making it easier for EU businesses to enter the Moroccan market, which was previously challenging due to high import tariffs and complex regulations. This facilitated the entry of EU goods into Morocco, leading to increased trade and investment between the two parties, particularly in sectors such as chemicals and processed food products.
Similar to the Moroccan agreement, the EU-Israel agreement also facilitated trade between the two parties. This agreement included provisions for the liberalization of trade in goods and services, as well as the protection of intellectual property rights. Consequently, this led to an improvement of market access for EU businesses in Israel, resulting in increased exports of pharma, chemical and agricultural goods.
All EU-Mediterranean agreements are part of the Pan-euro-med system, which refers to the network of bilateral and multilateral agreements between the EU and Mediterranean countries. This allows for the cumulation of origin among the countries that have signed these agreements, meaning that goods produced using inputs or components from any of the participating countries can be considered as originating from the Pan-Euro-Med (PEM) zone.
The PEM agreements also employ a common set of rules of origin for all participants. While existing PanEuroMed rules remain valid within the PEM group, businesses have the option to adopt newly revised rules or stick with the current PEM rules as they see fit. These businesses can also choose whether to apply the newly revised rules or the existing rules of origin, of which Descartes Systems maintains and offers both variants, allowing businesses flexibility in compliance choices within the PEM system.
For example, let’s say a German car manufacturer wants to export cars to Algeria, which is part of PEM zone, they can source certain components, such as engines from Italy and electronics from Tunisia, both of which are also part of the same trade system. By cumulating the value of these components, the German car manufacture meets the origin requirements set by Algeria and can enjoy reduced tariffs or preferential treatment when exporting their cars to the Algerian market.
Crucially, this not only lowers the cost of production for the German company, but also enhances its competitiveness in the Algerian market too.
To capitalize on reduced tariffs and barriers provided by FTAs, organizations can implement several strategic decisions.
Firstly, it is crucial to assess and optimize supply chain networks to exploit lower trade costs. For instance, relocating production facilities or sourcing materials closer to FTA partners can help businesses to take advantage of tariff reductions and logistical efficiencies, reducing costs and enhancing competitiveness.
Secondly, market diversification. Expanding into FTA covered regions offers companies a compelling opportunity to tap into new markets by tailoring market-specific strategies that align with the preferences and needs of local consumers. However, this entails thorough market research to understand cultural nuances, consumer behaviors and regulatory requirements, before companies can adapt their operations accordingly.
Last but not least, invest in research and development (R&D). R&D helps to create products that are in line with market demands in FTA countries, which provides the potential to increase demand and offer premium pricing. After all, businesses gain a competitive advantage by performing in a way that their rivals cannot easily replicate, so if R&D efforts drive innovation and differentiation, it will serve as a powerful tool for outpacing competitors.
To achieve these FTA benefits, partnering with a logistics technology leader can play a critical role in assisting organizations in maximizing the benefits of FTAs. Through Descartes Systems’ comprehensive data intelligence and trade compliance options, such as software that can help importers determine eligibility of their shipments, businesses can navigate complex FTA regulations to ensure compliance and optimize operations.
By leveraging this expertise, organizations can determine the appropriate tariff codes more effectively for their products, reduce errors and save time in the customs clearance process.
To find out how you can harness the full potential of FTA and thrive in the global trade landscape, please contact the team here.