Untangling the Complications of Free Trade Agreements

Q: Why should companies consider trade agreements when looking to find the best sourcing option?

A: Companies need to factor into their sourcing decisions the opportunities provided by free trade agreements if they are to truly reduce lead times and take advantage of cost savings available throughout their supply chain. By incorporating trade agreements into their sourcing strategy, companies are able to analyze the savings opportunities that exist when sourcing from countries both local and afar, and determine where preferential duty rates may impact the traditional landed cost of their purchased goods by delivering better tariff outcomes.

Companies that can effectively integrate trade agreements in this way will gain a competitive edge in the marketplace; however, given the dynamic nature of trade and with new agreements signed every other day, for most this is easier said than done.

Q: Why are companies in Asia Pacific foregoing the opportunities created by free trade?

A: The proliferation of free trade agreements over the past decade has contributed to an increased concentration of trade within the Asia-Pacific region, but has also resulted in a myriad of overlapping agreements that lack both consistency of application and requirements. This overlap—or "noodle bowl effect" as it is sometimes referred to in Asia Pacific—has generated a whole new complexity that makes it difficult for companies to take advantage of free trade agreements.

As each agreement comes into force, there is an exponential increase in the time required to source all the relevant information. This administrative burden—coupled with the knowledge required to interpret the rules of origin—often proves beyond the capacity of an organization to manage. For this reason, many companies simply choose not to work with trade agreements. This decision is having a ripple effect throughout the supply chain.

Q: How can companies manage regulatory information and supply chain risks along with incorporating trade agreements into the mix?

A: Successful companies need to react quickly in determining the benefits and implications surrounding different sourcing, manufacturing, and distribution options. Organizations are increasingly focused on "big data" because they realize having the ability to synthesize volumes of data can help them understand patterns.

The best way to leverage both this internal and external knowledge is to use a single platform to see where internal patterns meet external opportunities. Being able to determine the impact of supply chain modifications automatically allows organizations to react more efficiently, therefore developing more agile supply chains.

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