Article

Advantages of Free Trade Agreements (FTAs)

Trade Compass™ is an international trade solution and support service. It helps businesses to improve the accuracy of their mid- to long-term investments amid international trade challenges such as the United States’ withdrawal from TPP, the renegotiation of NAFTA, and “Brexit”.

For businesses that need to compete globally, the utilization of FTAs should be seen as a “management issue that needs to be strategically approached over the mid- to long-term”. It is an important topic with significant impact on entire businesses.

The importance of utilizing FTAs

The business impact of tariffs is enormous

“Tariffs” refers to taxation by type of goods applied to every import and export. The impact of tariffs on costs is so significant that businesses cannot ignore it (see the figure below). For example, if pretax profit is equal to ten times the import price (e.g. the price of logistics under CIF conditions), a 3% reduction of tariff costs has the same cash impact as a 30% reduction of corporate tax. The impact of tariffs can be great enough to instantly cancel profits produced by careful marketing and efforts to improve operations.

This is why the international trade rules set out in Free Trade Agreements (FTAs) must be used strategically.

The 3% reduction of tariff costs equals 30% of corporate tax

Increasingly stratified and complex global FTAs

There are multiple FTAs with different tax rates

There are already around 400 FTAs globally (including FTAs at the planning stage). They are complexly interwoven, creating a so-called “spaghetti effect”. Furthermore, negotiations are progressing toward the conclusion of multilateral FTAs that are noting but enormous in terms of their economic scale, the population they cover, and the number of countries they involve. Adding to existing agreements, global economic partnerships will become increasingly multilayered and complex.

These agreements specify the reduction and elimination of tariffs for each type of goods, with a great impact on business.

Major FTAs and EPAs in the world

Major FTAs in the world

Barriers to utilizing Free Trade Agreements (FTAs)

In order to use FTAs, high expertise is required to read the agreements

Global companies with multiple bases or with customers in other countries have a complex network of import and export partners.
Before Trade Compass™, there was no tool to enable such companies to sufficiently compare and examine which FTAs they can use based on Rules of Origin* and which combination of transactions is the most appropriate in light of future tax rates. At the same time, it is not easy to secure the right staff promptly because a high level of expertise is required to read the agreements signed by each country.
Trade Compass™ allows you to easily and quickly find the optimal FTAs without reading abstruse agreements.

* Rules for determining the origin of cargo (the "nationality" of goods)

Did you find this useful?