Globalization has progressed the realization of multiple trade agreements worldwide in the last 15 years. Commonly, it is considered that these are bilateral treaties between countries, but may also include supranational trade unions, similar to what we are seeing with the Trans-Pacific Partnership (TPP) Agreement.
Currently, Free Trade Agreements are multiplying all over the world providing new ways to develop foreign trade. Latin America has prioritized the consolidation of supranational groups, instead of independent agreements between countries to increase the benefits for the efforts.
For example, MERCOSUR, the Andean Community and CARICOM, are customs unions where the member countries constitute preferential tariff arrangements among the participating countries. By participating in these unions the benefits are access for trade between member countries and greater bargaining power with the rest of the world. The downside is the difficulty in successful negotiation of direct agreements with nations outside the country bloc.
The Example of Chile
Some countries like Chile, which did not belong to any country bloc, are those who have signed more treaties independently in the region, showing in its trade balance, the preference to those markets with FTA, demonstrating a significant growth in its economy with increased exports and employment opportunities.
This model was followed in the region by countries such as Peru, Colombia and Mexico, also improving their foreign trade volume; thus attracting foreign investment.
The other side of the coin: Argentina, MERCOSUR and the European Union
To agree on an FTA between MERCOSUR and the EU is a pending task between the two blocs. At present there is optimism in meeting the exchange of offers at the end of this year.
The Brazilian crisis, according to analysts is the worst seen in the last 25 years, noting that the economy is in a recession with a substantial fall in production and employment, aggravated by the slowdown of manufacturing in China. The slower economic growth may accelerate the negotiations in agreements that normally takes nearly two decades of stalemate, due to the protectionist position of some of its members, such as Argentina, who proposed to postpone the beginning of tax-free agreements; a complex consideration in an FTA.
Currently the European Union has benefit with 20% of engagement and a main trading partner of MERCOSUR, while MERCOSUR is the eighth member of the European Union with only 3% of foreign trade (Source: European Commission). This disproportionate trade balance has been growing since the late 90s, where the MERCOSUR mainly provides raw materials and the EU provides manufactured products with high values. These indicators should be strongly considered when evaluating an FTA between the two groups
Small and Big Business: Benefits for all
In general, the participants most to benefit on a FTA implementation are Companies with high export activities. This is because the company gains access to markets at a lower cost than before the implementation of the treaty.
Also, Companies that use import materials and / or capital goods from partner countries benefit because of a reduction of import taxes. The greater benefit is to the stimulation of the entrepreneurial approach between the two countries; generating a stream of new trade opportunities.
In short, we can describe the main arguments for having FTAs:
- FTAs encourage commercial advantages compared to other countries, allowing improved conditions for the target market.
- FTAs improve conditions by not requiring periodic renewals, as with partial agreements between countries, providing greater stability and predictability.
- FTAs reduce costs, since they lead to the establishment of standards of improved terms of trade between participating countries.
- FTAs promote efficient, transparent and streamlined customs operations.
- FTAs can increase sales volumes through preferential trade conditions in external markets, ultimately improving the competitiveness of goods and services.
Getting all juice from FTAs
Now, we know the main benefits of having an FTA, but the day-to-day may be a bit more complex for companies that acquire materials from different markets around the world, while positioning their products in the most competitive way.
There are at least two key points for companies to consider:
- Prior to purchasing goods, does the company identify the market that is more convenient to acquire and consider FTA opportunities?
- As part of their sourcing strategy, does the company identify production costs, with the idea of reducing taxes of import materials from countries without free trade advantages?
That sounds simple, however this may change when the magnitude and volume of operations is global. Given these two points, reducing costs by cents for one material, may cause millions of dollars in production savings, improving the competitiveness of the produced finished goods.
There is no magic into Foreign Trade. When you enter in a world without customs barriers, it has multiple benefits and some risks to face. The country that is entering this dizzying field should know how to engage with globalization and increased competition.
From a business point of view, the best prepared companies are those destined to grow in these markets. Thomson Reuters as a Strategic Partner is present to help you to realize success.
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European Commission (ec.europa.eu)