Free Trade Agreements: A Small Business Perspective
A free trade agreement is a formal agreement between two or more countries to reduce or eliminate trade barriers, such as tariffs and quotas. The goal is to increase trade in goods and services and to increase cooperation on issues such as intellectual property and environmental protection. Free trade agreements can be bilateral, meaning between two countries, or multilateral, meaning between three or more countries. There are currently 3,461 active free trade agreements globally.
For importers, free trade agreements can be a valuable tool for sourcing goods and services from foreign suppliers. By taking advantage of lower tariffs and other trade barriers, importers can save money on the goods they purchase. In addition, free trade agreements can provide greater certainty and predictability for importers when sourcing goods from foreign suppliers. By knowing that tariffs will not be increased or new trade barriers put in place, importers can make more informed decisions about where to source their goods.
If a company is looking to import goods from another country, they would first need to research whether there is an FTA in place between the two countries. If there is, they would then need to determine whether their goods are eligible for duty-free or reduced tariff rates. To do this, they would need to consult the relevant rules of origin for the agreement. If their goods meet the specified criteria, they would then be able to take advantage of the preferential trade arrangement.
From the perspective of a small business, qualifying for a free trade agreement can be a daunting and costly process. The first challenge is determining if your product is eligible for preferential treatment under an FTA. This can require engaging in costly legal research and consulting with international trade experts. Even if you determine that your product does qualify, you then need to obtain the required documentation to prove it. This can involve obtaining certifications from government agencies or private bodies, which can be time-consuming and expensive.
Most FTAs have retention periods for documentation, during which time you must be prepared to support your FTA claim or risk have to pay back the duty savings and possibly pay penalties. For example, the USMCA requires that businesses keep records of their compliance with the agreement for a minimum of five years. These records must be made available to government officials upon request and must include: documentation of origin, documentation of supply chain, information on shipments, and information on customer orders.
Once you have the necessary documentation, you must ensure that your product meets all the other requirements of the FTA, such as origin rules and product standards. This can be a complex and technical process, requiring expert advice. If your product does not meet all the requirements, you may need to modify it or obtain additional certification, which can be costly.
The final challenge is staying up-to-date with changes to the FTA rules. These rules constantly evolve, and failure to stay abreast of changes can result in your product no longer qualifying for preferential treatment. This could mean paying higher tariffs on your exports, which would likely make your products less competitive in the global market.
Qualifying for a free trade agreement can be a challenging process for small businesses, but it can be vital for companies looking to compete in the global marketplace. With the right trade advice and support, businesses can navigate complex rules and regulations to take advantage of the benefits of FTAs.
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