How free trade agreements can help you maximize duty savings in your supply chain design

Longstanding trade relationships have undergone serious disruption due to the U.S.-China trade war, retaliatory tariffs, sanctions, inflation, political instability, Russia’s invasion of Ukraine and Brexit. To adapt, global companies are reevaluating their supply chain design to prevent disruptions from sourcing scarcity, price fluctuations, and ever-changing regulatory hurdles. Such tasks are often undertaken out of defensiveness and fear, but a thorough supply chain analysis also represents an opportunity to diversify sourcing options, build extra resiliency, and ensure that a company is extracting as much value as possible from its sourcing strategy.

Although overlooked at times, free trade agreements (FTAs) are an area of both potential duty savings and sourcing stability. FTAs allow goods and services to flow between countries without burdensome tariffs or other restrictions and generally create a more favorable trade environment for participation in the global marketplace.

The free trade agreement advantage in supply chain and global trade management

When you look at the benefits, leveraging FTAs in your supply chain design may seem like a no-brainer. But the truth is that many companies have avoided using them in the past because of the false perception that complying with FTAs is time-consuming and ultimately not worth the effort.

Yes, FTAs often require adhering to strict regulations, managing a wealth of origin documentation, and interpreting complex rules of origin. FTA qualification for a supply chain with thousands of different parts can certainly be difficult – but that’s only true if you are manually maintaining documentation and origin determination calculations. There is an easier, more efficient way that gives you a direct return on investment (ROI).

Advances in supply chain and global trade management software can automate the burden of FTA recordkeeping, which means it’s significantly easier for automated trade compliance departments to take advantage of the benefits and efficiencies that FTAs have to offer. Used wisely, FTAs can help “future-proof” corporate supply chains and lower overall duty spend, which in turn can increase profits, lower the overall cost of goods to customers, and improve price competitiveness. There is ROI when you transform your trade compliance department from a cost center into a profit center and save your company money.

How to evaluate free trade agreements and a closer look at the USMCA

Still, it can be difficult to determine whether and how an FTA may benefit a company that does not already utilize them. The U.S. has FTAs in place with 20 countries, and all have different requirements. The benefits, too, depend on the product or service under consideration, as well as the costs associated with compliance. 

To get a clearer idea of how companies can benefit from an FTA, consider some new provisions included in the United States-Mexico-Canada Agreement (USMCA), which went into effect on July 1, 2020 and replaced the 25-year-old NAFTA.

Though much attention has been paid to how the agreement will impact the automobile industry, USMCA’s new origin rules also have far-reaching implications for producers of electronics, medical devices, chemicals, and textiles, as well as farmers, food processors, and other agribusinesses.

For companies in the U.S. that produce electronics and medical devices, the USMCA eliminates numerous redundant regulations and strengthens intellectual property rights, which could reduce administrative costs and legal fees, as well as certain costs associated with product innovation and data protection. In the apparel industry, clothes importers to the U.S. using column one of main duty rate (applicable to all countries except Russia, Cuba, North Korea and Belarus) normally pay tariff rates up to 9.7-9.9% - but qualifying products under the USMCA are duty-free, resulting in significant preferential duty savings. Also, the USMCA gives dairy farmers and dairy food manufacturers new access to the Canadian market, which expands export options and could give small manufacturers of cheese, ice cream, and other dairy products opportunities to grow and diversify their businesses. 

In addition to specific industries and companies that might benefit from participating in the USMCA, the guiding principle behind the law – to encourage and support commerce in and between North American countries – is a factor companies should also consider. If nothing else, the USMCA stabilizes the trading relationship between Mexico, Canada, and the U.S., removing the uncertainty that clouded corporate decision-making for years when the U.S. was threatening to pull out of NAFTA altogether, as it did with the Trans-Pacific Partnership (TPP). And in theory, products produced within the USMCA trading bloc should enjoy supply chain advantages that allow e-retailers to deliver “just in time” orders faster and cheaper than if the products were sourced from countries in other parts of the world.  

Questions to ask yourself when considering potential free trade agreements

The USMCA isn’t the only FTA available to U.S. companies, of course. The U.S. currently has 20 FTAs, some of which are bilateral agreements with individual countries (for example, Australia, Chile, and Israel) while others are multilateral agreements such as the Dominican Republic-Central America FTA (CAFTA-DR), which includes Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and the Dominican Republic.

Depending on one’s business and supply chain logistics, each agreement represents a potential source of supply chain diversification and duty savings. For example, because of U.S.-China trade tensions, many U.S. aircraft manufacturers have moved their assembly operations from China to Vietnam, which currently enjoys friendly bilateral trade status with the United States. If the U.S.-Vietnam relationship were to change, however, a suitable alternative might be a country like Honduras, which is part of CAFTA-DR.

For individual companies, however, the decision to utilize an FTA involves several different factors, and the calculus is rarely easy. To begin the process, a company should at the very least:

• Assemble relevant data on products the company manufactures worldwide
• Identify the most significant products or parts in the company’s supply chain
• Review the applicable regulations and other requirements
• Understand the FTA-specific rules of origin that apply to the company’s products and supply chain
• Conduct a cost/benefit analysis for compliance with the FTA

Companies considering an FTA should also ask themselves:

• How much duty do you currently save or spend on import/export activities?
• How much would you save under the FTA you’re considering?
• How thorough is your duty avoidance program?
• Are your trade compliance processes documented? If so, would they stand up to an audit?
• How much do you currently spend on legal, administrative, and other costs associated with import/export activities? 

FTA management software: The essential FTA tool 

These are just a few of the considerations involved in evaluating the benefits of an FTA, and they are only mentioned here to illustrate the elusiveness of an obvious yes or no answer. The larger question, particularly for multinationals, is whether the company’s leadership is absolutely certain that they are making the best possible use of all the global duty optimization programs available to them.

As involved as the process might be, it doesn’t need to be overwhelming for supply chain or trade compliance professionals. Automation software, such as ONESOURCE Free Trade Agreement Management, can virtually eliminate the guesswork and labor associated with assessing and managing FTA qualification.

Robust data analytics tools now allow companies to run compliance scenarios on current and future FTAs – and, if agreements overlap, identify which is more advantageous. Automated functions help companies comply with FTA-specific rules of origin, track suppliers, calculate duties, issue certificates, and provide real-time monitoring of the entire inventory lifecycle. Custom reports can also be run to record FTA-related savings, and documentation for audit support is automatic. Furthermore, a truly global solution not only tracks the implementation and evolution of FTAs around the world automatically, it can also help companies develop a comprehensive strategy for reducing overall duty spend by  making the most of all available FTAs.

Despite the manifold benefits of a well-managed FTA program, the fact remains that FTAs are an under-utilized source of supply chain stability and efficiency for most global companies. A capable FTA management software solution can help organizations on the fence develop a more systematic approach to FTA adoption – one that doesn’t leave extra cash on the dock at every port of entry.

For more articles on how you can leverage FTAs to optimize your customs duties, see the following resources:

• Thomson Reuters Corporate Global Trade Survey Report: Turbulence tempered by technology
• Article: Trade agreements around the world - The differences and challenges of qualifying from an industry perspective
• Webinar OnDemand: Delivering a Cost-Efficient Trade Management Strategy to Save Money Using FTAs
• Blog: How to leverage Free Trade Agreements (FTAs)in your supply chain