Why trade agreements are vital for exporters

Fri 9 Dec 2016
Posted by: IOE News

 Free Trade Image


'Trade agreements’ are normally called Free Trade Agreements (FTAs) and allow a reciprocal relationship between countries to be documented by preferential tariffs in the goods or services bought. These are different to the local tax that we call VAT but have various names across the world.

This multi-layer process of trading internationally creates paperwork – sometimes referred to as ‘red tape’ by those who don’t value the security aspects or usefulness of understanding trade flows.

Each trade agreement should benefit both parties and both will look to protect their national business interests while trying to encourage bilateral trade. This by its very nature can prove difficult and negotiation can be arduous, as we have seen with the EU trade deals. Once finalised, though, agreements are very useful for those on both sides of the deal to promote and increase trade between the two countries.

On 30th October, the long-awaited Comprehensive Economic and Trade Agreement (CETA) between the European Union and Canada was signed. After seven years of negotiation, this should take effect on a provisional basis once it has been approved by the European Council and the European Parliament (probably in 2017).

CETA is anticipated to benefit EU exporters by removing up to 90% of tariffs on EU goods sold to Canada and vice versa. It is also expected to open up access to many service sectors, as well as enabling EU businesses to participate in Canadian government tenders, at national and regional levels. As with many free trade agreements, some elements appear more contentious than others and some aspects may appear to be more beneficial to Canadian companies.

The CETA negotiations came to public prominence during the recent UK Brexit referendum campaign, as the “Canada model” was often quoted as a possible option for the UK in a post-Brexit environment.

This agreement, if negotiated along similar lines between the UK and the EU, would certainly have the effect of reducing the impact of customs tariffs for trade between the UK and the EU, without requiring the UK to contribute to EU budgets or accept freedom of movement of people.

It is worth remembering, however, that these tariff benefits would only apply if goods can be shown to originate in the UK or EU, based on complex rules of origin and traders would have to provide proof of originating status, which would have an administrative impact on businesses. Critics also point to the lengthy time typically taken to negotiate similar free trade agreements.

There is a double edged sword here, too. Although any trade deal may be less complicated than finding consensus with 28 countries because only the UK would be negotiating, the fact that it is only the UK may reduce the priority of the deal with members.

The good news is that it is hoped that UK traders will begin to experience the benefits of CETA in 2017, although they will only last for as long as we remain a member of the European Union.

Access to the agreement and the benefits it brings will cease once the UK leaves the EU. Ironically, UK companies may then find themselves disadvantaged, if they are competing to sell goods in Canada against EU companies who will still have the preferential status.

As the UK learns to negotiate trade agreements, you could get a head start by studying with the Institute of Export & International Trade – find out more here.