Understanding Free Trade Agreements: A Guide by Scarbrough
As global trade continues to evolve and adapt to changing regulations around the world, supply chains are also diversifying as businesses seek to remain agile. As tariffs continue to be a focal point for the Trump administration, one tool has come to the forefront as a particularly valuable negotiating point for other countries: Free Trade Agreements (FTAs).
FTAs can be critical in helping mitigate tariff risks and improving market access among trading partners. In this blog, we will explore what FTAs are and how and why countries use them.
In simple terms, FTAs are agreements between multiple countries that reduce or eliminate trade barriers like tariffs or quotas to facilitate easier trade. They create a more favorable trade environment with preferred partners and reduce the financial burden on importers and businesses operating between those countries.
Because global trade doesn’t operate under a single set of rules, FTAs give countries the opportunity to create specific boundaries and rules with certain partners, creating more predictable conditions. While the World Trade Organization (WTO) provides an overarching framework, FTAs allow countries to dive deeper into specific areas. Agreements can either be bilateral or regional or plurilateral, allowing multiple countries to reap similar benefits.
Traditionally, FTAs focused on tariff reduction, but modern agreements have expanded their scope to include areas such as intellectual property, investments, and access to specific market sectors.
FTAs can vary significantly depending on what each country wants to gain, but the core benefits remain consistent. For importers and supply chain professionals, FTAs make it easier and cheaper to import products from a partner country. As long as proper documentation proves the product originated in the partner country, it may apply for preferential treatment – often resulting in reduced or eliminated tariffs.
The benefits can extend beyond just importers. FTAs can also help strengthen geopolitical ties and relationships between countries. They can also allow businesses to gain access to markets they may not otherwise have been able to break into. Consumers can also reap the rewards of these types of agreements as reduced tariffs could lead to lower prices or potentially expanded product offerings that they might not have access to without the agreement.
Importers also tend to see increased sourcing stability. Preferential treatment can encourage stronger relationships with suppliers in the partner country, allowing for more predictable procurement and shipping cycles.
However, FTAs are not without their challenges. They can provide extra competition to domestic manufacturers if products they already produce are given preferential treatment from a foreign trading partner. They can also lead to uneven benefits across industries depending on what is included in the agreement.
For importers, compliance can be a major hurdle. To qualify for preferential treatment, goods need to be accompanied by a certificate of origin proving they meet the stated regulations. If a product is comprised of multiple components, it can become too time-consuming to collect certificates for each individual piece.
It can also be difficult to stay current. The U.S. has active FTAs with 20 different countries, each with its own rules and product coverage. For companies that handle their own customs entries, it can become overwhelming to stay current on which products qualify for each agreement. If they don’t have the resources or confidence to apply each agreement, it can sometimes be easier to import without claiming the applicable treatment for each shipment.
As the global economy continues to evolve, FTAs will remain an important part of international trade. While it isn’t a necessity for businesses to take advantage of the benefits they provide, it is crucial that they at least understand the terms and how they may impact each importer.
If you’re curious how your supply chain could be impacted by existing FTAs, reach out to Scarbrough today for custom guidance. Your business may be overpaying for some imports without even realizing it.
