FREE trade agreements (FTAs) have been a hot topic in the world economy and are considered by many to be one of the most effective tools to promote and enhance cross-border trade between countries. Especially in recent years, FTAs have taken a central role in the development and management of trade.
According to World Trade Organization (WTO) data, a total of 395 FTAs were in effect globally in January 2015 and the agreements reach every corner of the planet. Including the agreements currently under negotiation, there are more than 600 agreements and it is estimated that at the end of 2015, FTAs will account for 60 percent of global trade. FTAs have thus become the “new normal” in international commerce.
Asean has been particularly active in negotiating and entering into FTAs. The Asean FTA was established about 20 years ago and has steadily developed into an increasingly integrated free-trade area. In the past decade, Asean has established a number of FTAs with external trading partners to boost trade integration and economic growth. To date, Asean has FTAs in force with China, India, Japan, South Korea and a joint agreement that includes Australia and New Zealand. There are ongoing discussions for FTAs, on either a bloc or bilateral basis, with many more, including the European Union.
Given the rapid spread, FTA contents, as well as coverage has developed in many ways. FTA content, at first merely providing preferential tariffs for the exchange of goods, have soon started including further areas like services, agriculture, knowledge exchange, investment and government procurement. Recent agreements frequently also include regulations regarding state enterprises or small and medium enterprises (SMEs). The benefits offered under an FTA can often be significant and help to generate a competitive advantage, resulting in increased profitability and market share.
Despite the growing network of bilateral and multilateral FTAs and the many opportunities they present to the trading community, the primary focus for many companies using or looking for FTA benefits, is still reducing import duties. The proliferation of FTAs, which are broadly similar but vary in operational details, means that in practice, businesses face a number of challenges in realizing preferential tariff concessions when trading goods. Such challenges are often the result of country-specific interpretations and practices around the application of various ambiguous provisions in the legal text of the agreements, or in the areas in which the agreement is silent.
Top 10 issues faced by companies wishing to utilize FTAs
- Information gathering—finding out what applicable FTAs are in place
- Understanding FTA legal text—what does the legalese mean?
- Cost-benefit analysis—is it worthwhile to utilize the FTA, or even possible to quantify the benefit?
- Understanding the rules of origin
- Application of rules of origin—do you qualify for FTA preferences?
- Mapping commercial supply chain realities to FTA “assumptions”
- Getting documentation in place from different company departments
- Approval from government authorities—what, who and when?
- Defense against government post-verification challenges
- Keeping up-to-date with existing and future opportunities.
Despite the many opportunities on offer, the above listing makes it clear that benefiting from FTAs is not a walk in the park. Particularly in the light of increasingly complex international supply chains, FTA texts are often inadequate when dealing with the realities of modern business. It appears that more effort is required to ensure that the efforts made by governments in negotiating the FTAs are not undone by red tape and administrative difficulties. Often unnecessary obstacles go against the underlying principles of FTAs and create barriers for preferential treatment, rather than facilitating and encouraging market access.