Benefits of trade agreements for SMEs

Trade is the backbone of the economic prosperity in Belgium, and its importance proves itself especially in difficult economic times. Trade is the engine for job creation and growth, and for redistribution. Even though it can be perceived by some as a danger, especially when cross-border movements of money, goods and people are involved, trade is a necessity for the social cohesion and the progress towards a more inclusive society. Even public finances strongly need competitive trade performances to be able to fulfil the demand of public services.

In a global changing landscape, the sustainability of the Belgian businesses requests that they dispose of a stable framework allowing them to trade with the regions of the world where the global economic growth will be generated. Macro-economic projections forecast that 90% of that growth should be expected outside the European Union. While the benefits of internationalization of companies have been highlighted for long, SME’s still appear less present to gain the benefits of the globalization or to compete on international markets.

In line with the G20 Leaders’ Communiqué resulting from the 2016 Hangzhou Summit, it is necessary that the benefits of trade and open markets are better understood by those who account for 70% of GDP and private employment in Belgium: the SME’s, whose share of total export is much smaller. 571.000 jobs in Belgium depend from our sales outside the European Union. In order to grow these numbers for the benefits of all, this post intends to raise the awareness of SME’s leaders on the opportunities for their businesses in relation with free trade agreements, and how digitalization can help them to materialize these opportunities.

General context of the Belgian economy

The Belgian market is rather mature and limited by its demography. It is therefore a necessity for many companies to deploy activities towards third countries to search new consumer market. In first instance these “exports” are towards neighboring countries such as France, the Netherlands, the United Kingdom and Germany. This is logical, as +/- 80% of Europe’s purchasing power lies within a radius of +/- 800 km from Belgium. However, a recent survey established that 75% of the companies realize less than 25% of their profits outside the EU. Even if the Belgian economy has one of the highest export/GDP ratios in the world, more SMEs could take advantage from Belgium of the global market and export outside the European Union (EU). The potential of the economic growth is no longer only within the internal market. Besides, the globalization of supply chains creates new opportunities for SME’s to access global markets, and SMEs are an important driver of export growth.

Growing complexity and interconnectivity of international trade

At the dawn of the 21st century, our world has dived into an overwhelming transformation with the rise of digitalization. This transformation is exponential in the sense that it is simply a tough challenge to predict, with a high degree of precision, how tomorrow would look like. Who has not heard over the past years about buzz words such as big data, disruption, collaborative economy and automation? Where those tremendous changes start affecting our way of living and consuming, they also clearly impact how we envisage Global Trade. A good evidence of this are the constant efforts from the European authorities to make customs as paperless as possible in order to accelerate the speed of communication. For the purpose of this post, we will specifically focus on how digitalization helps businesses leverage Free Trade Agreements (FTA’s ) in a more automated, compliant and efficient way.

There is a growing number of bilateral and regional free trade agreements, while a multilateral agreement is pending at the WTO level. Consequently, global trade looks more like a spaghetti bowl or patchwork rather that clear cut road for doing business. The EU concluded FTA’s with 87 countries from all continents and currently seeks for an FTA with the some of the largest economies of the World, such as US and Japan (possibly also with the UK in the next coming years in the light of Brexit). Next to the reduction of the duty rates, the objective of these FTA’s also encompasses the reduction of Non-Tariff Measures (NTM’s) such as intellectual property, regulatory requirements, sanitary and phytosanitary measures, and public procurement.

Harmonization of rules of international trade and investment

Where digitalization may help resolve and automate complex global trade processes, one may dream that one day this complexity simply disappears by the effect of the harmonization of rules at global level. No one can predict how further harmonization will occur in areas such as the rules on origin, classification of products and valuation methods. The WTO trade facilitation agreement is at least an encouraging trend towards that direction. This Agreement sets out measures for effective cooperation between customs and other appropriate authorities on trade facilitation and customs compliance issues. At the EU level, the Union Customs Code, which entered into force on 1 May 2016 also focuses on digitalization and on a harmonized application of customs rules within the internal market. Finally, we hope this post can provide hereafter the useful tips and tricks for companies to embark on the great export adventure, but also hints to set the record straight in any debate on the role of trade in today’s economy.

This post has been co-written by Nicolas Khedir, Senior Manager EY and Marianne Houman, Manager EY – Global Trade

1. List all the countries you (want to) export to and check if there is any FTA with the EU

Check the website of DG Trade of the European Commission to see if there is an FTA in place with the third country that might allow your clients to import your goods at a reduced rate or duty free.

> http://ec.europa.eu/trade/policy/countries-and-regions/agreements/

2. Check if the goods you export are included in the FTA

Look at the eligible product codes in the FTA and link it to your product portfolio to see if there is a match.
Use the online available EU’s “Market Access Database” to check whether your product is included in a given EU FTA

> http://madb.europa.eu

3. Your products should have an EU or partner country origin

Your product should be fully produced in the EU or in the partner country:

a) your product is sufficiently processed in the EU or in the partner country as explained in the annex of the FTA. Change of the tariff heading, value added and technical criteria are determinant.
or
b) You may request from your vendors that they declare, usually for a two-year period, that the products they are delivering have the preferential origin. This evidence is key in the origin claim process.

4. Documentation of origin in the EU of the third country

If the total value of your shipment is less than 6,000 EUR, you can issue a so-called invoice declaration. This means you can add a sentence on the invoice stating that there the shipped products have a preferential origin.

For shipments above 6,000 EUR or for consecutive shipments of less than 6.000 EUR for identical products, the procedure regarding the documentation is different:

Ask the customs authorities to validate a proof or origin for each shipment

or

File an application with the customs authorities for a license of ‘approved exporter’ that would allow you to issue proofs of origin yourself by making statement on the invoice mentioning your approved exporter license number.

Of course, this does not exclude other possible criteria to benefit from a FTA so each FTA should also be checked individually in detail.

Automation

Claiming an FTA for an inbound or outbound product flow to benefit from a reduced or zero duty rate, requires different steps and, above all, an active knowledge of global trade rules. This to comply with the legal obligations in place, such as meeting the rules of origin stated in the FTA. This is where digitalization can help. Several Global Trade Management (GTM) systems have been designed to streamline and automate Global Trade processes like screening sanctioned party lists, creating import/export customs declarations, processing customs warehouse, classifying goods, etc. One of their core functionalities is the trade preference determination. Basically, those GTM systems are fed with global trade content, such as the unilateral, bilateral and multilateral FTA’s in place. In a powerful way, they automate the whole preference process, from the vendor declaration, i.e. requesting, collecting and maintaining your vendors’ origin declaration, to the customer certificate issue. For a specific purchase or sales order, they will look into the applicable FTA’s and perform the preference determination. Obviously, setting up such GTM systems requires some initial investments. However, it is to be noted that some companies offer pay-as-go models to make it more affordable for small and medium businesses.

Data Analytics

What Data Analytics do for Global Trade also deserves a special section here, specifically when it comes to claiming FTAs. It may sound common, but a great number of companies involved with Global Trade have no high-level visibility on their international flows. In addition, plant relocation decisions or sourcing alternatives do not systematically integrate the customs duties impact triggered by the new import/export setup. It turns out to be difficult for companies to look at sourcing alternatives which can leverage FTAs. This obstacle prevents companies from making comprehensive feasibility studies. Global Trade Data Analytics tools are built to tackle such tricky and frustrating situations. Those tools are uploaded with the company’s customs data (with inputs from their ERP systems or from Government’s data) and populate those data with all existing FTAs, using complex algorithms. Thanks to user-friendly dashboards, they allow the businesses to immediately spot sourcing opportunities as an alternative to their current product routes, i.e. the routes for which an FTA can potentially be claimed. They also integrate functionalities which look at the total landed costs of each existing or envisaged sourcing route.

Global trade is often synonymous with new markets, new adventures and new sales. However, it can result in a complex and, unexpectedly, cost-generating business. Claiming FTAs to optimize a company’s customs debt and to increase its profitability is not much easier. But digitalization brings a fresh wind. A wind of simplification and automation which companies should definitely integrate in their global trade strategy roadmap.


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