To enter the world of trade deals, is to enter a complex web of agreements from which any right-headed business person struggles to emerge with their sanity intact. There are hundreds. The European Union (EU) alone has 23 bi-lateral trade agreements in place. Australia has a deal with China; China has a deal with Chile; Chile has a deal with Mexico. But Mexico doesn’t have a deal with Australia. It’s complex, but is it important for procurement?
The answer depends where you start from, says Alejandro Alvarez, director of operational performance at Ayming, a global advisory consultancy “Trade deals can have a major impact on procurement, or almost none,” he says.
Alvarez, a Mexican national, says Nafta, the North American trading bloc which includes the US, Canada and Mexico, provides a good example. “The starting point was not very advanced. There were a lot of tariffs and regulations were not standardised, therefore, since Nafta came into effect, over the last 20 years, there has been a major shift in production from the US to Mexico, particularly if you look at the automotive industry. It took time for Mexico and the US to see the benefits in reducing tariffs and trade barriers. After that, it boomed.”
This is not always the case. The EU is currently negotiating a trade deal with the US called the Transatlantic Trade and Investment Partnership (TTIP). Its backers claim it will liberalise a third of global trade, but it is likely to have a less dramatic effect on sourcing decisions than Nafta, Alvarez says.
“Between the EU and the US, the tariffs are already quite low, approximately 3%. TTIP could have a positive impact on trade, but its influence will depend on how much effort is put into removing barriers that are not related to tariffs,” he says.
For example, the EU currently has strict regulations governing public procurement, which could make it harder for US businesses to benefit from the EU market and, in the case of the public sector, make sourcing more difficult from the EU to the US.
Procurement professionals should be aware of global trade deals, especially if they are responsible for sensitive categories, but they should only ever be one component in a business case for sourcing decisions, Alvarez says.
“In any procurement decision, you should consider all aspects of the business case. This includes the commercial benefits and legal risks and so on. In sourcing from the US to Mexico, for example, the benefits are clearly labour costs and logistics. When European companies consider outsourcing IT operations to India, there are non-tariff related limitations in terms restrictions in exporting personal data outside the EU. All of these details should be built into a business case,” he says.
On both sides of the Atlantic, the public eye is on trade agreements. In Europe, the UK’s referendum result in favour of leaving the EU raises the prospect of a raft of bilateral deals governing UK trade, as well as new arrangements with EU nations. Meanwhile, the US presidential election is also focusing on trade deals, particularly Nafta.
“Trade agreements are in the spotlight,” Alvarez says. “There is more information available to consumers about the benefits, or lack of benefits, of setting up trade agreement. As the situation changes, CPOs should see it as an opportunity to re-position their strategy; a health check on how they have been hit by trade deals. They want to be ahead of the game.”
Trading arrangement between nations vary according to the type of deal in place, says Totis Kotsonis, a partner in competition law with global law firm Eversheds. At the most basic level sits membership of the World Trade Organisation (WTO). This requires members to offer their most lenient tariffs, as agreed with one trading partner, to all other WTO members – 164 in all, encompassing the vast majority of developed and developing nations outside the Middle East, north Africa and Belarus.
Because further progress in international trade liberalisation has proven difficult at a WTO level, as a result of the requirement for consensus among members, other bilateral and multi-lateral trade arrangements have mushroomed.
These include free trade agreements, which eliminate tariffs for those within the arrangement, but do not prevent participants striking their own deals with those outside, Kotsonis says. “In Nafta, for example, the US or Canada or Mexico can apply different tariffs vis-a-vis third countries. The US has different arrangements with the EU compared with Canada, for example.”
Custom unions go one step further than a free trade agreement: in addition to the elimination of tariffs between custom union members, there is also a common tariff policies, which its members apply to the outside world.
“For example, Turkey has a customs union agreement with the EU, which means that most of its products enter the single market freely but at the same time, Turkey has no right to set its own tariff policies with nations outside the EU. Instead, it has to align its third-country tariff policies with those of the EU.”
Neither free trade agreements nor customs unions accommodate differences in standards and legislation, which can govern anything from how sugar content of food is displayed to health and safety at work, all of which can have an impact on sourcing across borders. A single market overcomes these barriers through harmonisation of policies. The EU is the best example of this concept.
Simon Boggis, former CPO of Ceva Logistics, says procurement professionals should be mindful of trade deals, but not allow them to dictate strategic sourcing. “If you have created a global strategy, but you have to pay a tariff to bring goods into, say, Brazil, then probably, it does not makes sense to do a one off-deal for that country.
“It is possible a tariff could sway the decision, if there is a credible alternative for a specific country: it will be swings and roundabouts. But if you want to get maximum leverage from global spend, you may have to swallow the bitter pill and face up to paying tariffs,” says Boggis, now an independent consultant and interim procurement manager.
The prospect of the UK leaving the EU, should prompt greater interest in trade deals among procurement professionals, he adds.
“Modern procurement people, at least in the UK, have not had to worry much about trade deals for a long time. Now they need to recognise the UK will want trade deals outside the EU, and how that translates to procurement strategy. It should be something they follow.”
How, and even weather, the UK leaves the EU remains to be decided, but it is a small feature of a complex global landscape of trade deals. Understanding how they affect sourcing can reveal opportunities and offset risks.
Past, present and future: trade agreements and their impact
China-Australia Free Trade Agreement (ChAFTA)
Came into force in December 2015. Australia’s minister for trade and investment Andrew Robb, says the agreement will support economic growth, job creation and higher living standards. The Australian government estimates the deals could boost the country’s GDP by around AU$18bn over 10 years.
Comprehensive Economic and Trade Agreement (CETA)
Waiting approval by EU parliament, council and member states after negotiations with Canada were completed in 2014. If it comes into force, it will remove 98% of tariffs between Canada and the EU, as well as non-tariff barriers in environmental, agricultural and fishing laws.
Transatlantic Trade and Investment Partnership (TTIP)
Yet to be finalised, the proposed deal between the US and the EU could boost the EU’s economy by €120bn, the US economy by €90bn and the rest of the world by €100bn, according to the European Commission. However, the deal faces serious opposition from political groups concerned about the impact on state healthcare, the environmental laws and workers’ rights.
North American Free Trade Agreement (Nafta)
Introduced in 1994, Nafta eliminated tariffs that once applied to half of Mexico’s exports to the US and a third of US exports to Mexico. It was also designed to lift non-tariff barriers that existed between the US and Canada. EPI economist Robert Scott estimates some 682,900 US jobs have been "lost or displaced" as a result of the trade agreement. Nafta is also credited with swelling the Mexican middle class, owing to a 50% drop in the cost of basic necessities.
ASEAN Free Trade Area (Afta)
The Association of Southeast Asian Nations (ASEAN) includes Brunei, Indonesia, Malaysia, Philippines, Singapore, Thailand, Vietnam, Laos, Myanmar and Cambodia. However, Afta only applies to the six founding members.
This article is a piece of independent journalism, written by an experienced journalist and commissioned exclusively by Procurement Leaders.