The first post in our Unlocking the Chain series:

Firms of all sizes are currently experiencing unprecedented pressures as a result of COVID-19, the ongoing US-China trade war, and even climate change. Such quickly changing market signals have put enormous pressure on margins, leaving companies with sub-optimal networks and trading partners, and making firms more vulnerable to further disruptions and market fluctuations. In such an environment, building a more transparent and robust supply chain risk management program that monitors and responds proactively to potential disruptions has become a C-suite agenda item.

Firms need to re-examine their existing supply chains and ensure that they are fit for purpose in a new, widely disrupted, trade environment. Companies that did not see the point in engaging in potentially complex reengineering of their footprint may be forced to look more closely. Areas of the chain that were previously unimportant may become a top-line challenge while other markets that have traditionally sustained business may no longer do so.

To help lower risks, one key, typically underutilized, tool for companies is effective use of free trade agreements (FTAs). These agreements can limit the scope for sudden shifts in government regulations, policies, tariff levels and services and investment restrictions. Proper use of FTA rules can generate thousands or even millions of dollars in annual savings, providing consistently lower tariffs, plus rules between partners that bring greater certainty and lower risks for regional supply chains.

Asia, especially, leads the world in creating a network of trade deals that cover different partner markets, with a wide range of potential benefits. Asia alone holds over half of the world’s FTAs, and it has seen a 5-fold increase in FTAs signed or in negotiation from 2000-2020. Asian regional FTAs have continued to grow in scope and number, underpinning regionalization and diversification of supply chains.

Many firms think that they already utilize FTA benefits or that they have done an assessment and decided against using trade deals to provide greater leverage. However, most companies do not use trade deals at all, or do so in a suboptimal manner, with limited assessments of the potential benefits from using newer or upgraded trade agreements. This situation is leaving money on the proverbial table for many companies.

As regional networks of FTAs become more complex and comprehensive, a fragmented trade regulatory landscape creates added barriers when importing and exporting from different countries, but also creates new opportunities in two ways. First, businesses can re-locate their supply chains to align with major customers and largest markets to take advantage of existing agreements to reduce cost and ease access. Second, given existing production and sourcing locations, businesses can select the best FTAs to use to import or export to a given target market.

Firms generally do not use FTAs properly for two key reasons:

First, older FTAs offered limited coverage and scope. However, many newer deals, and particularly regional agreements with larger numbers of participating countries, can provide significant advantages to firms. In general, firms derive the greatest impact from two types of trade agreements: those between regions or those that are the most comprehensive.

Second, managing the growing complexity of trade arrangements can be a challenge. Not every product or service traded between FTA participating countries is automatically eligible for benefits: only those that meet specific rules. This requires an assessment of how different FTAs might map onto portions of the supply chain to determine which agreement gives the biggest benefits and the development of a trade compliance strategy to ensure product and documentation compliance. The implementation of such assessment and strategy can be costly for firms that lack end-to-end supply chain and product visibility. However, the development of new trade management software tools and customs solutions that automate and streamline those tasks have made it much easier to take advantage of FTA benefits.

Businesses able to tap on the opportunities that a large and growing network of FTAs provide can optimize their supply chains to protect against regional fragmentation, increase supply chain resilience and flexibility, reduce compliance costs and tariff duties, and tap on large and growing markets to source and export their products.

Unlocking the Chain is a thought leadership series providing business and supply chain leaders with the economic, policy and industry analysis required to build a supply chain that is better protected against regional fragmentation, increase supply chain resilience and flexibility, reduce compliance costs and tariff duties, and tap on large and growing markets to source and export their products.

Unlocking the Chain articles and webinars will inform supply chain reconfigurations that:

Develop models to evaluate opportunities and risks across supply chain alternatives.
Reduce supply chain risks and costs by sourcing and supplying within the region’s network of hundreds of FTA agreements.
Leverage trade management software to implement FTA optimization and trade compliance strategies that optimize for production, customs duties and trading networks
Monitor and respond proactively to the impacts of protectionist measures and opportunities for increased competitive advantage.