It is known that companies who strategically source from low-cost countries have a competitive advantage in the global trade network.
However, longstanding trade relationships have undergone serious disruption over the past few years facing turbulent trade wars, capacity constraints and labour shortages.
To adapt, global companies are re-evaluating their supply chain structures to prevent further setbacks from these unpredictable disruptions.
Although overlooked at times, Free Trade Agreements (FTAs) should be looked at as a means to achieve potential duty savings and sourcing stability as part of a low-cost country sourcing strategy.
Using trade agreements effectively requires deep compliance expertise and it is crucial for companies to properly navigate the complex processes to avoid fines and safeguard the benefits. This requires a rich regulatory content database and connections to the rest of the supply chain, in addition to a technology platform with robust capabilities for global compliance execution.
Breaking down trade agreement complexities
Companies must navigate a diverse range of complexities and variable costs to capture the benefits of trade agreements. Unfortunately, this data is typically decentralised in multiple systems and used by various functional teams across the organisation, making it challenging for companies to understand, much less to document their sourcing information.
To gather and deliver the information to the relevant agencies, companies must first accurately track key details about the components used to make finished goods. This allows for classified products to be identified that qualify for any free trade or duty savings agreements.
This task can be a challenge because this essential information comes from the supplier base. With potentially thousands of suppliers and tens of thousands of components, requesting the relevant timely data and organising it for submission to trade agencies can quickly become unmanageable.
Companies must also be able to determine the amount of duty owed not just on imported materials and components but also on post-transformed goods — those that have been substantially modified by being assembled into a finished good or through some other means. In these cases, the importer must understand how each trade agreement’s rule of origin applies to all components and subassemblies as well as the final, exported item.
Automating the process with a Global Trade Management (GTM) solution addresses these challenges and is a key step to controlling the cost of goods by reducing duty obligations.
Leveraging FTAs for their full potential
To effectively administer trade agreements, the manufacturer first needs to implement a trade agreement program and establish systems and processes to efficiently request information and receive timely responses from suppliers.
This is important because most FTAs require a certificate of origin and a trade program certificate from the supplier before the goods qualify. Most manufacturers, when counting all tiers, can have up to 7,000 to 18,000 suppliers. Therefore, managing communication with this many organisations requires automation and collaboration tools.
This can help suppliers understand the country of origin for the parts they provide and whether the demand for those parts increase since the reduction in duty makes them less costly to procure.
Manufacturers must also be able to monitor and control their goods before they arrive onshore. To gain visibility into a country of origin a digital library of detailed part and component data in a hierarchical format can be constructed through a GTM solution which links to every finished product that uses that part from a given supplier.
When importers source from multiple suppliers, it is feasible that a single part has elements sourced from many countries or that a finished product has parts sourced entirely from a single country.
Key to managing a portfolio of trade agreements
This diverse range of sourcing possibilities further complicates the situation for importers. Yet, with well-defined origin information and a clear understanding of the relationships between parts, suppliers and finished goods, importers can effectively determine FTA eligibility.
The ultimate key to managing a portfolio of trade agreements is to automate as many processes as possible, particularly the complex and tedious work of soliciting suppliers for all required FTA documentation. A global trade management solution with built-in campaign management features is the most effective means of gaining these key automation capabilities.
Through a global trade management solution, manufacturers can create mass solicitations to harvest origin certificates regularly. By utilising automation, companies can solicit hundreds of suppliers within a few minutes, eliminating a large percentage of the solicitation effort and managing suppliers’ responses.
Capturing the full potential of trade agreements requires leading-edge technology and information services to identify the best sourcing strategies and synthesise the rules of origin.
Companies can rapidly support new trade agreements by building on the existing processes, framework, and data of available trade agreements in the base portfolio.
Paul Soong is Regional Director at e2open (ANZ), a business-to-business provider of cloud-based, on-demand software for supply chains for computer, telecom and electronics systems, components and services.