Free Trade Agreements – The Next Level of Benefit from Sourcing (Outlook 2009)
Next in the series of prognostications for 2009: look for companies to expand the benefit of low-cost country sourcing by leveraging the duty savings from preferential trade agreements. NAFTA was signed into law in 1993, and in the past decade the number of trade agreements has multiplied many times over. The World Trade Organization tracks this trend and has this nifty chart on the the number of trade agreements in force and also tracks the degree of change (see the solid lines) associated with “notifications” related to regional trade agreements
And if you are interested in the details, here is a link to a database of all 220+ regional trade agreements. Behind each of these agreements is a mountain of legalese that defines the rules to get preferential rates and save on duty. Also called rules of origin, it is pretty straight-forward to determine the origin of the product and whether an adjust to duty is warranted. Where it gets more complicated when a product is assembled from multiple component parts from multiple suppliers and origins. Here the rules of origin try to close the loophole on a simple trans-shipment strategy to test whether the end-item has undergone sufficient processing or has been substantially transformed into a different end-item. If you can master the rules of origin for a trade agreement and integrate this knowledge into how you make sourcing decisions, solicit suppliers and ultimately justify whether a product qualifies for preferential treatment you can save millions of dollars.
Sounds good, but without automation you need a small army of compliance experts to interpret the rules and test each and every product, transaction by transaction to ensure that you are in compliance. This makes sense for a company that has just a few products and sources from a few origins. However, if you source from mulitple countries with an assemble-to-order strategy, it becomes a complicated process that doesn’t scale.
The way to capture this hard dollar savings is through automation. Since the early days of NAFTA, trade agreement solutions have matured and offer a number of benefits to any company that is interested in reducing total landed cost:
- Campaign Management – automate the process of developing campaigns that solicit suppliers to certify the country of origin for their various purchased parts
- Supplier Portal – give suppliers a portal to interact with the import, respond to the campaign and generate certifications
- Multi-FTA Qualification – integrate a qualification engine with your order management system to determine if a give bill of material qualifies for preferential treatment
- Trade Content – identify a partner that can power the qualification engine for the trade agreements that apply to your supply network (hopefully without having to make code changes to your software).
