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International business management

FTAs and rules of origin: Made everywhere

Taneli Ruda  SVP and Managing Director, Thomson Reuters ONESOURCE Global Trade

Taneli Ruda  SVP and Managing Director, Thomson Reuters ONESOURCE Global Trade

With suppliers worldwide competing for the same deals, global markets have never been as competitive as they are today, and this competitiveness is constantly accelerating. In this environment, it is crucial for multinationals to use all available sources of cost advantage.

Free trade agreements (FTAs) are one such source. Problem is, too many multinationals aren’t fully leveraging FTAs. Last January, we highlighted a Thomson Reuters and KPMG survey that found a full 70 percent of global trade specialists surveyed said their organization does not use all the FTAs available to them.

Without change, missing these opportunities will only become more widespread because the trend points towards FTAs increasing in both number and complexity. Among the new and comparatively complex free trade agreements currently pending are the Regional Comprehensive Economic Partnership, the Comprehensive Economic and Trade Agreement, the Transatlantic Trade and Investment Partnership, and, of course, the Trans-Pacific Partnership.

Noteworthy and pending FTAs

Agreement Parties

Regional Comprehensive Economic Partnership

Members of the Association of Southeast Asian Nations, Brunei, Myanmar, Cambodia, Indonesia, Laos, Malaysia, the Philippines, Singapore, Thailand, Vietnam; and the six states with which ASEAN has existing FTAs, Australia, China, India, Japan, South Korea and New Zealand.

Comprehensive Economic and Trade Agreement

Canada and the European Union.

Transatlantic Trade and Investment Partnership

United States and the European Union.

Trans-Pacific Partnership

Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States and Vietnam.

As opposed to intra-regional agreements, which seek to effectively form trading blocs, these agreements lower trade barriers on a truly global level, particularly for trade counterparties in the Northern Hemisphere.

Understanding rules of origin is key

It isn’t that FTAs are too complex to be fully used, as pundits occasionally claim. The issue is that many corporations have not invested in the tools required to optimize FTA savings and ensure compliance. Instead, they rely on cumbersome and time-intensive manual processes, leading the trade department to conclude that the burden of compliance outweighs the potential duty savings accruing from FTAs.

Much of this complexity is attributable to stringent rules of origin which are not consistent among free trade agreements. For instance, declaring that a good has undergone substantial transformation requires a four-digit change to its tariff classification heading under the European Union rules of origin regime, but a two-digit change under NAFTA. Rules of origin regimes also routinely vary in the formulas used to determine the amount of originating materials (regional value content, or RVC calculations) and how they apply across different product categories.

Non-preferential rules of origin also cause great anguish. The International Chamber of Commerce recently called for countries to stop implementing non-preferential rules of origin and instead abide by the WTO Agreement on Rules of Origin to somewhat streamline the trade process. But, because non-preferential rules of origin are different from the rules of origin used to receive duty benefits for trade agreements, it’s tough to see this having a direct impact on FTA usage.

The way to fully leverage FTAs isn’t to try to understand them full-circle, but rather to understand how to deconstruct and unpack their many complexities. The respondents to the Thomson Reuters/KPMG survey validated this viewpoint when they attributed the underutilization of FTAs to the process of identifying FTA-specific rules of origin or gathering related documentation, which are both time-consuming processes that trade specialists often perform manually.

A shift in international trade management

Automating the FTA compliance process is one way to alleviate the burden that FTAs’ complexity puts on trade departments. Traversing origin rules to find maximally beneficial ways to qualify a product is a difficult and time-consuming task for a person but an easy and virtually instantaneous one for software. For complex goods with variable bills of materials, automation helps produce accurate origin determination on production batches or at an individual product level. Automation is key if multiple suppliers from different countries are used for the same raw material or component.

What would a fully automated FTA compliance management process look like? Imagine each production batch of a manufacturing facility being automatically screened for origin rules of not just one FTA, but all relevant FTAs based on destination countries. Imagine the trade compliance team runs simulations at the push of a button – before switching suppliers or changing the bill of materials – to verify that the new sourcing setup continues to fulfill the origin requirements of all the FTAs used. And imagine automatically collecting origin documentation from all the relevant suppliers through online tools, combined with analytics tools to keep the trade compliance team up to date on documentation requirements.

This type of automation is no longer a product of imagination. It exists today and helps turn FTA compliance from a burden to a true competitive advantage by removing the barriers between trade specialists and the savings that they could be driving for their employers, with the added value of freeing up time for critical thinking on making the supply chain continuously efficient.

This article was originally published in American Shipper magazine.

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