How Free Trade Agreements Around The World Pertain To You
Perhaps you are familiar with free trade agreements (FTA) that pertain to your home country or your region of the world. Is it possible that other regional agreements, where your country is not a participant, have some sort of an impact on your business, be it positive or negative?
Before addressing this question, what are the general benefits of an FTA? Ultimately, they are intended to grow the economies of the countries who participate in them, first and foremost by eliminating most tariffs among its participants. In addition, they work to reduce the red tape of non-tariff barriers, such as quotas or export/import license requirements, which can inhibit trade as much as tariffs can. Also, they try to address investment rules that promote the free flow not only of trade but also of capital investment. Recent agreements provide provisions for the trade in services, as well as address environmental or labor standards. Finally, with the ratification of the recent WTO Trade Facilitation Agreement, new trade agreements are adopting pieces of the TFA, which is helping facilitate TFA implementation.
Among the many agreements, there are some key ones, spread across the regions, that help paint a global picture of global free trade. Starting with Asia there is the ASEAN agreement (covering ten southeast Asian countries – Singapore, Vietnam, Malaysia, Thailand, Indonesia, Philippines, Cambodia, Laos, Myanmar, and Brunei Darussalam) and the RCEP (including all of the ASEAN countries plus six more: Australia, New Zealand, China, India, Japan and Korea).
In Latin America, there is the Mercosur, which technically is a trade bloc that includes free trade privileges, and consists of Argentina, Brazil, Paraguay, Uruguay and Venezuela. There is also the Pacific Alliance, which covers Mexico, Colombia, Peru and Chile. This latter agreement covers countries who comprise 34 percent of total intraregional trade within Latin America.
For Europe, there is the European Union (EU), which functions as a customs union (vs. only a trade agreement). The EU also enters into its own agreements with other individual countries, including both Canada (known as CETA) and Mexico. Mexico and the EU are currently renegotiating their current trade deal in order to expand it by including some items originally deferred and to include some elements more common to recent deals, such as investment, procurement and trade facilitation provisions.
What are the benefits and challenges to be located physically outside one of these agreements? First, have you considered whether your company is located via a subsidiary within the free trade area? If so, the subsidiary can possibly benefit. If not, generally, as you export into the FTA or import from that FTA you will be at a relative price or cost disadvantage to other FTA participants. So considering your own direct competitors, if they are based or have subsidiaries within an FTA, they possibly maintain an advantage of whatever percent tariff is applied to the particular goods entering or existing that region. While this may only be a few percentage points, it could mean a significant effect on the profit margins one way or another.
Meanwhile, many countries that have implemented their own free trade blocs via an FTA (e.g., Mercosur, ASEAN) develop additional free trade agreements with other countries or even with other blocs (that are effective through their own FTAs). Perhaps most notable this year are the ongoing discussions between the EU and Mercosur. Keeping track of these agreements and inquiring which ones might become a benefit to you could provide its own rewards. The ratification of TTIP (between the United States and the EU, which is currently at a standstill), or a potential US agreement with ASEAN (not currently in discussion) would be examples of these types of opportunities.
Finally, what about revisiting those current agreements where your country is already a participant? Evaluating a particular pertinent agreement every so often – they frequently take multiple years to roll out – may uncover a new opportunity.
In all of these areas: foreign FTAs where you can participate via a subsidiary, the prospect of new bilateral agreements, or revisiting an existing agreement, are all areas of opportunity to consider.
The trend continues that the number of agreements expands rather than contracts. Therefore, to have a systematic way to look at what is currently in place will set you up for when applicable FTA benefits become available.
Bill Ansley is vice president of UPS Supply Chain Solutions, Customs, and Trade Compliance. This article does not constitute legal advice.