What are trade agreements and what do they mean for your business?

25 January 2021

 

By Chamber International, Senior Associate, Mette Werdelin Azzam (pictured below).

Britain’s decision to leave the EU has led to much talk about trade agreements but what are they and why do they matter to your business?

Globalisation means that, more than ever, manufacturers are using components and ingredients from all over the world so that a single machine, vehicle or even food, can be made in several different countries.

This, and the fact that a growing number of businesses operate globally and have offices or factories around the world, mean that trade agreements are necessary to support the easy movement of goods between different territories.

Trade agreements are negotiated to boost trade with specific countries by eliminating customs duties usually paid when goods, be they components, or finished items, are imported.

However, to be eligible for this preferential tariff treatment, the goods must meet a number of ‘rules of origin’ so importing countries know exactly what they are allowing to cross their borders.

Understanding the rules of origin, and how they affect their own products, allows exporters to issue the necessary Proof of Origin, identifying precisely where goods have come from, to the importing business. This is required for different reasons, such as customs clearance, or payment using a Letter of Credit

Understanding the rules of origin and the necessary certification, enables exporters to trade internationally more competitively and secure existing customers through the mutual benefits they confer as well as attracting new ones. As a result, such businesses can develop their exports and grow their business. 

For most exporters, rules of origin are an additional cost to production and administration.

Increased production costs may be due to having to source a more expensive component, or ingredient, to comply with the rules of origin in a given agreement, while administrative costs are likely to come from additional accounting systems, certification costs and hiring, or consulting, trade specialists who understand the rules of origin.

In addition, the exporter also needs to be able to demonstrate and document that their goods originate and comply with different origin requirements.

While these costs can add up, they need to be balanced against the very real benefits of fulfilling the rules of origin, demonstrated by speed, ease and cost efficiency at the point of import.

Understanding and applying the rules of origin also helps importers by enhancing their competitiveness and choice of suppliers. It also enables them to improve their planning by assessing the possibilities for tariff preferences before the actual importation and helping them take appropriate decisions about sourcing items, including cumulation options, where further processing or refinements can be carried out in the country of destination as easily as in the country where they originated.

In many trade agreements the importer depends on the exporter for the accuracy of Proofs of Origin, but final liability for the correct calculation and payment of import duties lies with the importer.

Trade agreements benefit both exporters and importers by eliminating customs duties and boosting trade, which is one reason why the British government has promised to agree more trade agreements with other countries after its departure from the EU.

About Mette:

A world-renowned expert in rules of origin and trade agreements, Mette, was head of the origin sub-directorate at the World Customs Organization (WCO) for 10 years before joining Chamber International. As technical lead on origin Mette represented the WCO at the World Trade Organization in Geneva. Previously she was the Danish customs attaché based in Brussels.

 

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