{"id":10821,"date":"2020-05-20T11:53:21","date_gmt":"2020-05-20T18:53:21","guid":{"rendered":"https:\/\/www.qad.com\/blog\/?p=10821"},"modified":"2023-01-18T11:54:20","modified_gmt":"2023-01-18T19:54:20","slug":"free-trade-agreement-compliance-challenges-vs-benefits","status":"publish","type":"post","link":"https:\/\/www.qad.com\/blog\/2020\/05\/free-trade-agreement-compliance-challenges-vs-benefits","title":{"rendered":"Free Trade Agreement Compliance: Challenges vs Benefits"},"content":{"rendered":"

[vc_row][vc_column][vc_single_image image=”10822″ img_size=”full”][vc_column_text]Free trade agreements offer enterprises a competitive advantage, compliance can be burdensome. In this QAD Precision Report we look at the challenges and benefits of automating FTA compliance.<\/span><\/i><\/p>\n

After 14 months of negotiations, the United States, Canada and Mexico agreed the terms of the new Nafta free trade agreement on 30 September 2018. This was just the first step in the process. After that,\u00a0 the three signatory countries had to ratify the United States – Mexico – Canada Agreement (USMCA).<\/span><\/p>\n

Naturally, the three countries have different routes, and timelines, for ratification. Mexico first ratified the updated FTA, followed by Canada and then the US. Furthermore, all three countries had to notify one another that they were ready to comply with the new\u00a0 FTA. It was possible that the Covid-19 pandemic could have delayed the USMCA, but on 24 April the parties completed the final steps. As a result, the USMCA comes into force on 1 July.<\/span><\/p>\n

The Long Road to FTA Ratification<\/span><\/h2>\n

Taking over a year of negotiations, and more than a year and a half for ratification, may seem like a long time, but free trade agreements are a lengthy process. Last June, the European Union and Vietnam signed a far-ranging FTA that will reduce tariffs on 99 percent of goods traded between the two. The negotiations, which ended in December 2015, took three and a half years. Despite this lengthy time frame, the EU-Vietnam Free Trade Agreement (EVFTA), is not yet in force. In late March this year, the <\/span>EU Council signed off on the deal.<\/span><\/a> However, Vietnam has not yet ratified the trade agreement, although the country\u2019s <\/span>National Assembly hopes to do so<\/span><\/a> when it opens \u2014 virtually, using online meetings \u2014 this May.<\/span><\/p>\n

Free trade negotiations can take a significant amount of time \u2014 and ratification can add several more years. The USMCA timeline looks positively speedy in comparison to the EVFTA, and even more so compared to the 20 years it took to reach an agreement between the EU and Mercosur, the South American trading bloc, with Brazil, Argentina, Paraguay and Uruguay as full members. Last June, both trading parties reached an agreement. However, as the agreement has proved to be controversial, ratification is likely to take many years longer.<\/span><\/p>\n

Changing Trade Relations: The EU, UK and Brexit<\/span><\/h2>\n

Although free trade deals can take many years to conclude, governments are willing to invest the time because FTAs remove trade barriers, thus opening markets for goods, which in turn can support innovation and reduce poverty.<\/span><\/p>\n

A notable exception is the post-Brexit trade talks between the EU and the United Kingdom. Brexit \u2014 the decision of the UK to leave the EU \u2014 is significantly different from other FTA talks. For one, the two sides are not simply negotiating a future trade deal, but also unravelling a social and economic partnership that goes back to 1973.<\/span><\/p>\n

All of this makes the 6 months timetabled to negotiate a trade deal between the EU and the United Kingdom very ambitious. The two sides had completed one round of negotiations before the Covid-19 pandemic halted the talks. Nevertheless, negotiations have been ongoing using video conferencing. A third round of talks ended in mid-May without much progress. A further round of negotiations begins on 1 June. The EU and the UK have until the end of June to reach an agreement. If they cannot, either party can ask for an extension. However, the UK has repeatedly stated that an extension is not possible.<\/span><\/p>\n

The Benefits of Free Trade Agreements<\/span><\/h2>\n

The long ratification process has its benefits for companies, particularly those with complex, multinational operations. During this time, companies can run \u201cwhat if\u201d scenarios to see what financial or other benefits might arise from leveraging this FTA. For example, an enterprise based in the EU that sources goods from China might see significant cost savings as well as reduced trade barriers should they switch to a vendor in Vietnam once EVFTA takes effect. Furthermore, the enterprise can use the interim time to find and qualify suitable suppliers.<\/span><\/p>\n

As well as removing trade barriers, enterprises that leverage FTAs can source raw materials, parts and goods that are eligible for low or zero tariffs. Therefore, FTAs allow companies to gain a competitive advantage as they can sell goods at a lower price. The duties that a customer would normally pay are reduced or eliminated.<\/span><\/p>\n

The Challenges of FTA Compliance<\/span><\/h2>\n

There is one major barrier for companies that wish to leverage free trade deals \u2014 FTA compliance is a complex challenge. Furthermore, if a company works across many different geographies or trading blocs, these challenges become even more burdensome.<\/span><\/p>\n

Given this, it is perhaps unsurprising that one study found that only <\/span>thirty percent of companies<\/span><\/a> leverage all the FTAs that they could. Companies cited three major reasons for this:<\/span><\/p>\n