There’s been a lot of news and speculation lately around Free Trade Agreements (FTAs) as the new U.S. administration works to review and renegotiate its agreements with countries around the world and Britain figures out the Brexit implications for its own trade deals.
While government and corporate leaders engage in a public discourse about the particulars for various agreements, it’s clear that trade deals are a big deal. But that message isn’t reaching everyone – even the companies who stand to benefit. In fact, FTAs are widely underutilized. A 2016 survey by Thomson Reuters and KPMG found that most organizations globally have an average of 2.5 FTAs in use, and only 29 percent of companies fully utilize all FTAs that are available to them. Twenty-two percent of companies don’t use them at all. Automotive companies are frequent users of FTAs that lower duties on
raw materials, components, and finished products and thus are ahead of the curve in some areas. It seems be be a double-edged sword, however, as increased trade compliance burdens from changing regulation are significantly higher in the automotive industry.
Number of FTAs used by automotive industry respondents
How many FTAs are currently in use in your organization?
FTA challenges for the automotive industry
FTAs offer automotive manufacturers and suppliers a number of important benefits. Here are three of them:
First and foremost, FTAs lower costs. FTAs provide reduced duty rates (and under some agreements duties are eliminated altogether) when crossing international borders. Whether a company is importing parts to manufacture an automobile in a target country or importing fully ready vehicles, it is very important for automakers to get the lowest duty rates possible to stay competitive price-wise and protect their margins. FTAs help keep costs down.
FTA annual savings across industries
Approximately how much import duties (in $USD) does your company save on an annual basis by the use of free trade agreements?
Flexibility in building supply chains
A secondary benefit of FTAs is the flexibility they offer auto manufacturers and suppliers in building multi-country supply chains.
With lower or no duties, manufacturers can source products or materials from whichever country or supplier is best suited for the job and most competitive from a supply chain perspective. This is particularly true of regional FTAs, like NAFTA and future regional FTAs such as RCEP and a possible reincarnation of TPP, which form large manufacturing and consumption clusters in and of themselves.
NAFTA automotive trade in 1994
NAFTA automotive trade in 2015
In some cases, FTAs also allow companies to concentrate manufacturing certain types of components or even finished products in manufacturing hubs that are particularly well suited for regional or global distribution. South Korea and Mexico, which are now among the top seven auto manufacturing hubs in the world, are great examples of that.
“With easy access to both the Atlantic and Pacific oceans, Mexico’s access to global markets has been a powerful tool in attracting automotive investment. This is particularly true for automakers such as BMW and Audi, which specifically plan for their Mexico operations to be global export hubs for the vehicles produced there.”
FTAs in Mexico and elsewhere enable auto manufacturers to choose the optimal locations for their manufacturing operations.
What you don’t know (and don’t use) can hurt you
Right now, there is a lot of uncertainty around various trade agreements and how any changes might impact auto and other sectors. There’s also uncertainty on the part of many companies (28 percent, according to the Thomson Reuters / KPMG survey) about what FTAs are even available in their countries and applicable to their products. But one thing is for certain: to be competitive, automotive manufacturers and suppliers should understand all the FTAs available to them – and most importantly, put them to work.
Download the full report to get more global and regional findings: tax.tr.com/globaltradesurvey
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Uncertainty and risk in the automotive industry – Download the report