Advantages of Utilizing FTAs

This solution enables businesses to improve the accuracy of their mid-to-long term investment amid international trade challenges arising from trade conflicts between the US and China, the impact of RCEP and expansion of TPP.

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

The importance of utilizing FTAs

Tariffs exert a tremendous impact on businesses.

“Tariffs” refer to the taxation by type of goods applied to every import and export. The impact of tariffs on costs is so significant that businesses cannot ignore them (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% tariff rate would have the same cash impact as a 30% corporate tax.

Even if profits are generated through careful marketing and efforts to improve operation times by the seconds, the impact of tariffs can be great enough to instantly erase such profits

This is why FTAs and other international trade rules must be utilized 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.

Around the world, there are already close to 400 FTAs in existence (including FTAs at the planning stage) that are so complexly interwoven that they create a so-called “spaghetti bowl effect.” To add to this, negotiations are progressing toward the conclusion of multilateral FTAs that will be enormous in terms of their economic scale, the populations they cover, and the number of countries they involve, with global economic partnerships becoming increasingly stratified and complex.

These agreements specify the reduction and elimination of tariffs for each type of goods, and impart a large impact to businesses.

Major economic partnerships (FTAs and EPAs) both active and under negotiation

Major FTAs in the world

Barriers to utilizing FTAs

In order to utilize FTAs, a high level of expertise is required to comprehend the text of the agreements.

Global companies with multiple locations and customers overseas have a complicated assortment of countries from which they export and import goods. For these companies to quickly compare and examine what the most optimal business transaction would be while accounting for future tariff rates from FTAs and rules of origin*, they would need a high level expertise to comprehend the text of the FTAs that each set of countries have concluded. Securing the necessary staff to oversee these operations would be no easy task.

By using Trade Compass™ provided by Deloitte Tohmatsu Consulting, you can not only comprehend abstruse FTAs, but also quickly and easily examine what the most optimal business transaction would be for your company.

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

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