This guide, from the Institute of Export & International Trade (IOE&IT), explains how trade agreements can help micro, small and medium-sized enterprises (MSMEs) identify potential export markets and provide them with access to preferable arrangements.
1. Seize a competitive advantage
The preferential tariff rates that many trade agreements include can help give MSMEs an advantage by effectively reducing the cost of exporting their products to the market of their choice. It makes their products more competitive in those markets and provides new opportunities and a chance to increase their market share. This can lead to business growth and higher profits.
But it’s important to identify which countries are covered by each agreement, particularly as some can be covered by bilateral agreements on top of wider bloc arrangements. One of these two options might have better preferential tariff rates than the other.
Some countries will also offer developing countries unilateral preferential treatment, such as the Generalised System of Preferences (GSP), meaning many goods from eligible countries can be imported at a reduced or zero rate of duty. So it’s important to understand the markets and the different agreements in place and how that might affect your business.
There are dedicated resources that can help outline the different agreements, including the International Trade Centre’s Rule of Origin Facilitator and export promotion agencies. It’s also worth speaking to your trading partner in a particular country because they will be more aware of trade agreements in their own local jurisdictions.
2. Pick the right time
Understanding trade agreements can also help establish the best time to move into exporting. These arrangements often have phased-in timescales. They may reduce tariffs from the day an agreement is in effect, or gradually in the years after. If you find out there might be more advantageous terms taking effect soon, it might make sense to wait to export until the arrangements are active.
3. Enjoy more efficient customs processes
Customs procedures can be very time-consuming, but trade agreements aim to help to reduce that. Exporting to a market where there is a trade agreement in place can simplify customs procedures, with less paperwork on arrival at the final destination.
Businesses get more efficient movement of goods across borders, which means reduced costs and increased profit margins.
4. Benefit from rules-of-origin
Fundamental to trade agreements is the concept of “rules of origin”. These are the rules used to determine a product’s economic nationality. To benefit from lower tariffs, exporters will need to demonstrate in which country a product was sourced or made.
For manufactured products, most of the inputs must come from the country from which you’re exporting. But there are instances where, if there are trade agreements in place, you might be able to have inputs from other countries that are also part of that trade agreement. Each trade agreement sets out the specific conditions on rules of origin, including tolerance and cumulation.
Under the CPTPP, for instance, a product being exported from the UK to another CPTPP member country that contains computer chips from Singapore may still be eligible for a preferential tariff.
It’s important for businesses to know where items are coming from in their supply chain, including tier two, three and four suppliers.
Don’t just think about what you’re exporting but consider the full supply chain of inputs. This can have a huge impact on preferential tariffs. In some cases, sourcing from a particular country can mean a product that would otherwise have been ineligible will meet the requirements.
5. Access further sources of support
Government organisations, membership bodies – such as IOE&IT– or other trade associations can all help advise on the current state of play around trade agreements and how to start exporting. Such organisations stay up to date on different challenges and opportunities and will keep track of ongoing and future negotiations. They can offer training, advice and qualifications to support your exporting business.
They can therefore help businesses assess what is available now and identify the markets that might be available to them in the short, medium or long term.
These organisations also have links to the embassies in different countries, which can also be a useful source of information around detailed complexities such as local regulations or VAT.
IOE&IT contributors: Henriette Gjaerde, trade and customs stakeholder relationship specialist and Hunter Matson, trade policy and research specialist.
