Executive Briefings

Three New Free-Trade Agreements Highlight Benefits, Complexities of FTA Management

Analyst Insight: The Congressional bills to implement the U.S. free-trade agreements with South Korea, Colombia and Panama and to renew the Generalized System of Preferences and Andean Trade Preferences Act have gained congressional approval and President Obama's signature, thus paving the way for the long awaited realization of the agreements and their inherent trade benefits and opportunities. Simultaneous approval highlights the challenges of managing global supply chains to take advantage of the benefits provided. - William M. Methenitis, partner, global director, and Kristine L. Price, partner, both of Ernst & Young LLP, Customs and International Trade

The free-trade agreements provide for preferential trade between the United States and each party to the respective agreement. U.S. importers and exporters thus have the potential for more competitive access to additional markets under preferential trade conditions, including reduced or zero tariffs. At the same time, businesses need to be aware of the FTA requirements, particularly with respect to origin and special provisions for certain products and industries.

Current market trends make this challenge even greater - and perhaps more important than ever.

The World Trade Organization reported a record breaking 14.5-percent increase in global trade in 2010, returning trade to peak 2008 levels.  Trade has continued to increase much faster than the general economy through 2011, and continued growth is expected.  But while trade has returned, business is experiencing a very different dynamic across markets.  The World Bank reports that the majority of developing countries have, or are close to, having regained full-capacity economic activity levels.  Some markets, like China and India, are poised for double-digit growth.  Growth in developed markets, such as the U.S. and the European Union, is far more tentative. In some respects the world is getting flatter, as Thomas Friedman argued in his well-known book. The flattening does not seem to be occurring uniformly, however, and successful businesses are recognizing and taking advantage of market differences.

Business strategy is increasingly finding it necessary to adapt to market-specific approaches, and as a result, supply chain executives are increasingly being called upon to effectively execute multiple strategies simultaneously.  For example, the development of multiple innovation hubs with corresponding product diversity for local markets has increased the number and diversity of specific product flows, or trade lanes.  Manufacturing locations are expanding, and are not making identical products for all destination markets.  Sourcing changes are more frequent, and are often locally driven.  While this by itself will be a challenge for supply chain executives, its significance is amplified by the potential applicability of FTAs and preferential trade agreements to reduce customs duties on both component parts and on finished products.

The new agreements are a small fraction of FTA activity.  The World Trade Organization currently reports notifications of 380 active and pending regional trade agreements among members.  That number does not include unilateral preference programs - trade preferences granted to products imported from identified countries without reciprocal benefit required, such as GSP.

Typically, each manufacturing process must be evaluated separately based on the FTA applicable to the destination country; products destined for multiple FTA locations generally require multiple evaluations.  This requires strong internal controls and processes, and quite often, automation.  Customs authorities also recognize difficulty in managing complex supply chains, and we have seen an increased emphasis of audits of FTA activity worldwide.

(The views in this article are those of the authors and do not reflect those of Ernst & Young LLP or any other member of Ernst & Young Global Limited.)


                                           The Outlook

The new agreements provide a great opportunity to revisit FTA planning worldwide. Our experience is that companies which build consideration of FTAs into procurement processes are best able to effectively take advantage of FTA benefits. The expertise of supply chain professionals is critical to this process.

The analysis can be complex, and the environment is not static. Businesses that can effectively optimize this planning, however, can often secure a competitive advantage in a variety of markets.


Keywords: Legal, Govt. & Regulatory Issues, Business Strategy Alignment, Global Supply Chain Management; The United States, Asia Pacific, Latin America, Preferential Trade, Tariffs, World Trade Organization, World Bank

The free-trade agreements provide for preferential trade between the United States and each party to the respective agreement. U.S. importers and exporters thus have the potential for more competitive access to additional markets under preferential trade conditions, including reduced or zero tariffs. At the same time, businesses need to be aware of the FTA requirements, particularly with respect to origin and special provisions for certain products and industries.

Current market trends make this challenge even greater - and perhaps more important than ever.

The World Trade Organization reported a record breaking 14.5-percent increase in global trade in 2010, returning trade to peak 2008 levels.  Trade has continued to increase much faster than the general economy through 2011, and continued growth is expected.  But while trade has returned, business is experiencing a very different dynamic across markets.  The World Bank reports that the majority of developing countries have, or are close to, having regained full-capacity economic activity levels.  Some markets, like China and India, are poised for double-digit growth.  Growth in developed markets, such as the U.S. and the European Union, is far more tentative. In some respects the world is getting flatter, as Thomas Friedman argued in his well-known book. The flattening does not seem to be occurring uniformly, however, and successful businesses are recognizing and taking advantage of market differences.

Business strategy is increasingly finding it necessary to adapt to market-specific approaches, and as a result, supply chain executives are increasingly being called upon to effectively execute multiple strategies simultaneously.  For example, the development of multiple innovation hubs with corresponding product diversity for local markets has increased the number and diversity of specific product flows, or trade lanes.  Manufacturing locations are expanding, and are not making identical products for all destination markets.  Sourcing changes are more frequent, and are often locally driven.  While this by itself will be a challenge for supply chain executives, its significance is amplified by the potential applicability of FTAs and preferential trade agreements to reduce customs duties on both component parts and on finished products.

The new agreements are a small fraction of FTA activity.  The World Trade Organization currently reports notifications of 380 active and pending regional trade agreements among members.  That number does not include unilateral preference programs - trade preferences granted to products imported from identified countries without reciprocal benefit required, such as GSP.

Typically, each manufacturing process must be evaluated separately based on the FTA applicable to the destination country; products destined for multiple FTA locations generally require multiple evaluations.  This requires strong internal controls and processes, and quite often, automation.  Customs authorities also recognize difficulty in managing complex supply chains, and we have seen an increased emphasis of audits of FTA activity worldwide.

(The views in this article are those of the authors and do not reflect those of Ernst & Young LLP or any other member of Ernst & Young Global Limited.)


                                           The Outlook

The new agreements provide a great opportunity to revisit FTA planning worldwide. Our experience is that companies which build consideration of FTAs into procurement processes are best able to effectively take advantage of FTA benefits. The expertise of supply chain professionals is critical to this process.

The analysis can be complex, and the environment is not static. Businesses that can effectively optimize this planning, however, can often secure a competitive advantage in a variety of markets.


Keywords: Legal, Govt. & Regulatory Issues, Business Strategy Alignment, Global Supply Chain Management; The United States, Asia Pacific, Latin America, Preferential Trade, Tariffs, World Trade Organization, World Bank