The battle for FTA preference

Free trade agreements 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.

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, 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 EU. The Philippines, for example, has made little progress in getting the FTA negotiation with the EU going.

The benefits offered under an FTA can often be significant and help to generate a competitive advantage, resulting in increased profitability and market share. Traditionally FTAs were designed with a specific focus on:

•             financial benefits through the elimination of duties,

•             facilitating market access  through labor movement and government procurement,

•             providing more certainty and predictability for companies, and

•             helping to better utilize resources through the expansion of the eligible manufacturing territory, deployment of preferred human and monetary resources, and access to preferred service providers and professional resources such as the facilitation of electronic commerce.

Despite the growing network of 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

1.            Information gathering –finding out what applicable FTAs are in place

2.            Understanding FTA legal text – what does the legalese mean?

3.            Cost benefit analysis – is it worthwhile to utilize the FTA, or even possible to quantify the benefit?

4.            Understanding the Rules of Origin

5.            Application of Rules of Origin – do you qualify for FTA preferences?

6.            Mapping commercial supply chain realities to FTA ‘assumptions’

7.            Getting documentation in place from different company departments

8.            Approval from government authorities – what, who and when?

9.            Defense against government post-verification challenges

10.          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.