Trade wars, real wars, Brexit dislocations, and a pandemic have created strong imperatives for companies to re-engineer their supply chains. An April 2020 survey found that 83% of multinational executives were contemplating so-called “reshoring” or “nearshoring”. “Reshoring” refers to bringing all or parts of the supply chain back home; “nearshoring” to relocating it close to home. About 40% of respondents in another 2020 survey of about 1800 companies in the U.S. and Europe reported making changes in overseas suppliers and moving parts of their production. Using preferential trade rules to re-engineer your supply chains can help companies to determine cost-effective approaches to doing so.
“Preferential trade programs” include any trading arrangement between two or more countries that extends trade benefits and from which other countries are excluded. These include Free Trade Agreements (FTAs) and Trade Preference Programs. According to the WTO, there were 354 FTAs in force as of August 5, 2022.
Free Trade Agreements are reciprocal agreements. They encompass mature trading blocs like the European Union (EU) and the North American Free Trade Agreement (NAFTA) between Canada, Mexico, and the U.S. Some operate effectively, while others are a work in progress.
Trade Preference programs on the other hand, are programs created by developed countries to unilaterally extend access into their markets for goods coming from developing countries. Developed country gets to choose what countries benefit and why; to add countries or to kick them off as they determine. The Generalized System of Preference or GSP programs offered by many developed countries are the oldest and most known. The U.S. GSP program is currently lapsed, but its regional African Growth & Opportunities Act (AGOA) for Africa, and Caribbean Basin Initiative (CBI) for the Caribbean are in effect.
Benefits of Preferential Trade Programs
Zero or reduced tariffs: Preferential trade programs provide zero or reduced tariff access for goods and opportunities to minimize trade costs and improve market access. FTAs may also provide additional benefits of harmonized regulations to reduce trade costs and expanded access to services and government procurement opportunities. The preferential tariff rate granted to trade partners through FTAs and trade preference programs typically provide traders duty-free entry of their goods into the given market. A significant enough gap between this preferential tariff rate and the MFN rate available to other traders can provide a cost-competitive advantage. If two products arrive at a country’s border with the same price tag the ability of one to enter their goods duty-free can provide that cost advantage to be passed on to the consumer.
Harmonized rules: In addition to zero or reduced tariff rates for goods, many FTA partners also reach agreement on streamlining the border processes and procedures or even on the phytosanitary or labelling requirements for like products. This could mean, for example, being able to operate one set of manufacturing procedures for domestic and exported products. Huge cost savings! Expanding into a functional customs union, comprised of countries whose members operate under similar trade rules can also provide another route to cost-savings as well as opportunities for market expansion.
Many FTAs also lift the restrictions that impede the flow of investments and ability of companies to establish operations within a given country. They may, for example, remove the need to comply with residency requirements, to partner with a local company, or to meet performance requirements not required of national counterparts.
Skillful use of FTA rules can help your company to access and apply the benefits of lower tariffs, harmonized rules, and liberalized rules for investors as you re-engineer your supply chain.
I am a seasoned international trade and customs attorney, and policy adviser for various companies and governments with a demonstrated history of successfully developing and implementing sustainable and dynamic trade programs. I am experienced in creating partnerships with various business-support organizations to drive compliance and growth in the international market.