by Damon Baca
Individuals who are outsourcing material and sourcing goods don’t always consider existing trade agreements in their decision making. For instance, I always hear that China is 14% cheaper than Vietnam based on labor rates. However, the United States has a Free Trade Agreement (FTA) with Vietnam through the Generalized System of Preferences (GSP) that can make goods duty free. So, is China really the cheaper option?
The point is: Purchasers and sourcing professionals are leaving money on the table every time they fail to consider the benefits trade agreements confer in their decisioning. Absent consideration of the possible economic benefits available, actual true costs are not known or factored into the equation.
The key question is, Why? Quite frankly, there are two explanations. First, these professionals are not trained to contemplate harmonized codes and duty rates in their determinations, much less the impact of trade agreements. Second, qualifying goods under trade agreements can be a complicated and time-consuming process. Thus, many companies simply choose to ignore their existence, unaware of just how much money it is costing them.
It is time to shake things up and take the money off the table and put it into importers’ and exporters’ pockets.
The United States has 14 free trade agreements (FTAs) in effect with 20 countries ranging from Australia to Singapore. These U.S. FTAs not only facilitate cross-border trade but also contribute to greater economic growth, productivity and jobs for the involved countries. They also level the playing field for U.S. exporters who face any number of barriers to selling their goods in overseas markets, not the least of which is paying higher tariffs than other countries do. Conversely, more importation of foreign goods translates to more competitive pricing on items that American citizens desire.
Part of the reason why the United States faces barriers to exporting is that other countries have negotiated trade agreements as well. The World Trade Organization estimates there are 420 trade agreements in effect. Although not all provide for free trade, they do eliminate barriers and make conditions more conducive to trade. For ease of discussion, FTA will be used in the rest of this blog to refer to all trade agreements.
To achieve greater savings, we must first teach our purchasing and sourcing professionals to look at harmonized codes and tariffs. They impact the bottom-line cost of goods greatly and need to be considered. We must change the mindset whereby purchasing acquires items based solely on materials costs and labor rates and then passes the buck onto to the import/export department to manage these other costs.
We also need to train our purchasing department to look to FTAs as sources of cost savings. That will require purchasing to identify the FTAs that might bear on the situation. To see whether the goods in question might qualify under a specific FTA, three factors must be considered:
- Where does the product ship from? For example, if you have an American product made in China and going to Canada, it does not qualify under NAFTA because the product did not originate in the United States.
- Is there a tariff shift? Beyond having products originating in and shipped from a country covered by the FTA, to take advantage of an FTA there must be a significant tariff shift. Say, for example, you have raw materials, such as parts of a computer, coming into the United States from countries all over the world. If you bring them in normally, you pay duties and taxes on them. If you then assemble these parts into a computer, a tariff shift occurred. That is, they came into the United States under the harmonized codes for a hard drive, keyboard, RAM, processor, etc., but when exported the harmonized code was for a computer. Without a tariff shift, it is merely a pass-through and you cannot qualify under the FTA.
- What is the regional content value? This last qualifier is the most difficult one. This value varies depending on the FTA and the country. Usually, 51 percent of the value needs to be created within the country that you are exporting from, that is, the nation where the tariff shift happens. Let’s say you bring in a cellphone from China and then all you do is add a cord and ship it out. It will not qualify under the FTA because there is not enough regional content value.
Determining the regional content value can be a challenge, especially if the product is complex. You need a full bill of materials. If it is an engineered product, you must know where each individual component originated and its value versus the value of the final product. Calculations such as these – and the complexity involved – are major reasons why companies step away from FTAs.
Luckily, QuestaWeb’s technology automates the FTA qualification process, making it both simple and fast. Our FTA decision engine is available both as a standalone technology via our TradeGearQW product line and as functionality within our integrated global trade management solutions. It allows you to input the bill of materials and determine whether it qualifies under any of more than 300 FTAs. And, our technology takes into consideration all the rules, regulations and origins in place and automatically calculates regional content value.
Best of all, our technology, by including far more than just the 14 U.S. FTAs, broadens your savings perspective and opens your eyes to worldwide opportunities that can be leveraged. The same decision engine will determine if goods qualify under any FTA, even if the transaction does not involve importing or exporting from the United States at all, moving your firm to a true global supply chain and allowing savings on every single international transaction for which you qualify.
Free trade agreement decisioning is just one more way QuestaWeb is making a difference in our customers’ supply chains.