Last year, Thomson Reuters 2015 Global Trade Management Survey revealed that the majority of multinational corporations were not fully utilizing free trade agreements (FTAs) and were therefore likely to be paying tariffs and duties in excess. The 2016 Survey validated these findings with deeper insight into global and regional trends, among them that only one-third of respondents have started the process of planning to use the Trans-Pacific Partnership (TPP) to lower their trade duties. Eduardo Vitor, head of Market Development and Product Management, Global Trade Management, explains FTAs and Special Programs and why they are crucial to a company’s supply chain.
DIVIDENDS: What are FTA and Special Programs?
EDUARDO VITOR: In simple words, an FTA is a contract between two or more countries aimed at creating an environment that facilitates, promotes and grows trade among them. Globalization and trade have grown by more than 10 times over the last 30 years, and it has put a spotlight on FTAs as tools to accelerate a country’s economy and optimize a company’s global supply chain. Whether these are bilateral (between two countries) or multilateral (between multiple countries or country associations), the making of an FTA is a colossal effort demanding years – and even decades – of negotiation. It’s a process during which participating countries pursue maximum benefit from the agreed types of collaboration, product classification and barrier-decreasing rules in terms of customs duties and taxes; these terms will enable a country to place its products in a destination country at a lower price and therefore in a competitive position.
On the other hand, Special Programs are country-specific initiatives created by a government to foster pre- or post-export manufacturing activities within its jurisdiction by offering logistics, tax and duty-related benefits. These ultimately translate into cost reductions in the manufacturing and production processes. Special Programs around the world are similar; they either suspend, exempt or refund taxes on products imported to produce goods for re-exportation; among them are Brazil’s RECOF-SPED, Argentina’s RAF, Mexico’s IMMEX, China’s Processing Trade and India’s Advanced Authorization, as well as drawback programs.
DIVIDENDS: What are real cases of successful FTA and Special Programs uses around the world?
VITOR: Success can be seen from different angles. NAFTA is undoubtedly a notable FTA. It has created a US$20 trillion market with 460+ million consumers and dramatically increased trade (400%+) and impacted supply chains in its three member countries (US, Mexico and Canada). Peru and Chile are good examples of countries that have meaningfully augmented their trade volume after FTA implementation. These Latin American countries opened up new markets and made their products competitive in destination markets; they have a wealth of primary products and have intensified their exports to both emerging and mature markets, and they import manufactured goods that are not produced locally.
Almost 95% of Peruvian exports are covered by FTAs!
India has put in force “Make in India,” a government program comprising different export incentives and Special Programs. Its main purpose is to attract investment from multinational enterprises, and it is already turning the country into a manufacturing hub as an alternative to China, which is no longer a cheap option in the region. “Processing Trade” in China is also a Special Program permitting a better tax optimization for manufacturing with imported goods; it currently accounts for approximately 35% of China’s exports.
Similarly, Brazil has the RECOF Special Program, which is expected to quintuple exports from its current $10 billion to $50 billion after the recent regulatory update called RECOF-SPED.
From a private sector perspective, industries with the most complex production processes and global supply chains possess high adoption rates of these programs, among them automotive, chemical, pharmaceutical and aviation. In general, all manufacturers are potential beneficiaries.
DIVIDENDS: So the winning formula lies in combining FTA with Special Programs, but how is this achievable?
VITOR: Exactly. The combined application of Special Programs and FTAs is key to optimizing a company’s supply chain because together they enable cost reduction at both manufacturing and trade levels, allowing for significant product pricing advantages. But to take advantage you must comply, as the risk of noncompliance is a potential high cost for a company, both from a monetary and a reputational perspective. With hundreds of FTAs (many overlapping in the same region and each with its very unique and complex rules and singularities) and additional country-specific Special Programs in existence today, in many cases companies prefer to avoid noncompliance risk by simply not fully utilizing (or not utilizing at all) these tools to their benefit. As revealed by our survey, only 30% of respondents said their companies are fully applying all of the FTAs available to them and 15% reported that their global company uses over six of the 400+ FTAs existing today. The reason why they fail to leverage FTAs and Special Programs is mostly due to the lack of automation tools.
In order to properly make use of an FTA, companies must understand and follow the agreement rules. Similarly, benefiting from a Special Program involves a company comprehending and adhering to local regulation. Both trade tools require full traceability and control around bill of materials, production processes, local and imported purchases, inventory balance, domestic sales and exports. However, the scale and dynamism of today’s globalized world make it impossible to assimilate and process all these rules and information manually. The good news is that agreement clauses can now be translated into computer rules to let technology provide end-to-end traceability and compliance around the big mass of data that is regularly distributed across different company systems.
Furthermore, automation becomes an indispensable asset for strategic planning because it allows for simulation. Simulating business scenarios provides trusted answers for a company to make key decisions by quickly assessing multiple factors; among them the feasibility of a specific market, the availability of FTAs in a geography and selecting the most convenient one when there are several, and the amount of product to import to produce a re-exportable good to comply with a country’s Special Program. An automated solution for FTAs and Special Programs is therefore crucial to efficiently manage a company’s supply chain, to remain in compliance and to aim for business growth and expansion.
|Eduardo Vitor is head of Market Development and Product Management for the Global Trade Management business of Thomson Reuters. He was one of the founders of Softway Company, with headquarters in Brazil, and a leader in software solutions for global trade in Latin America. Eduardo has a deep understanding of global trade challenges based on hundreds of implementations in large Multinational Enterprises (MNEs)/local companies, offering trade automation, cost savings and risk management benefits.|
Explore more findings by downloading the full 2016 Global Trade Management survey.
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