The reduction of trade barriers makes it easier for U.S. companies to export to foreign markets.
Why do countries continue to sign Free Trade Agreements (FTAs) despite internal opposition? The first FTA signed by the United States was with Israel 25 years ago; then came the North America Free Trade Agreement (NAFTA), followed by agreements with Australia, Bahrain, Dominican Republic/Central America, Chile, Colombia, Jordan, South Korea, Morocco, Oman, Panama, Peru and Singapore.
The United States and European Union are currently discussing the possible negotiation of a comprehensive FTA—the Transatlantic Trade and Investment Partnership—among others. Again, why do countries continue to sign FTAs? If the production capabilities and education levels of the workforce were identical in every country, FTAs might not make sense; however, by offering its competitive advantage to others, every country can stabilize and grow its economy. One can apply similar logic to natural resources, geography, technical knowledge, research and other areas.
The Origin of Goods
FTAs are not “free” as commonly defined—they are free after each producer, exporter or reseller fulfills provisions established in the bilateral, trilateral or multilateral agreement based on each commodity’s product classification. The provisions, or Rules of Origin (ROO), are found in annexes, and the origin of goods is determined based on the specific provisions of international agreements.
ROOs enable foreign raw materials purchased by producers, exporters or resellers outside the signing parties to potentially qualify as products of the United States, which may be mutually beneficial for both countries. Most of the time, however, ROOs require a certain level of production of another signing party inside the United States because it’s impossible for a single country to manufacture all the products its society needs and wants.
ROOs also control how a product becomes designated as “Made in the U.S.A.” The Code of Federal Regulation (CFR) Title 19, Section 102.11 provides all of the ROO regulations. Some may argue that FTAs are questionable because they allow products imported to the United States to qualify as “Made in the U.S.A.” However, as the FTA general rules state, “The country of origin for the goods is the country in which the good was wholly produced, produced exclusively from domestic materials or when a producer purchases foreign material, those foreign materials must be subjected to high level of production.”
If a new product enters into commerce, it continues to claim the original country of production. The only way a finished good can become a product of the United States is if it enters as a raw material and is used to manufacture a finished product in the United States.
Products and Transformation
There are situations in which, in appearance, it is advantageous to manufacture a product in a foreign country not related to the international agreement. Later, the finished product may be modified slightly by exchanging some parts considered equal for the purposes of defining its essential character. It may also be disassembled, rearranged or made more efficient by purchasing some parts inside the U.S. However, these manufacturing processes are considered “minor processing” and do not qualify because the finished product is the same as that which arrived from the non-related country. This will be discovered by the classifier because the product to be exported has the same code as the product that was basically manufactured in the non-related country.
It is recommended to conduct a tariff analysis prior to production of the finished product. By knowing the levels of production inside and outside the United States, producers, exporters and resellers can qualify for preferential treatment in the FTA-signing countries and may determine whether their product can be designated as “Made in the U.S.A.”
The ROO provisions require that any raw material, apparatus, part or product to be exported must have been substantially transformed. “Substantial transformation” is one of the main provisions inside the ROO, meaning the finished goods must have a high level of production.
The World Benefits
There are many situations in which the ROO provisions allow for another method, referred to as Regional Value Content (RVC). RVC is an accumulation process, defined by the specific percentage of production calculated using the methods of transaction value, net cost, build-up and build-down. All of these provisions and methods, which are mandatory, ensure that FTAs accomplish specific goals, such as utilizing unused capacity, hiring more people to maximize production, increasing exports, reducing duties to zero, reducing quotas and visas, offering preferential terms in other economies, and more. In addition, entrepreneurs can find new markets at an early stage.
Another positive achievement is that FTA parties are obligated to increase food and drug quality standards and establish manufacturing and drug labeling quality controls. This promotes higher economic standards among parties that directly benefit consumers, protect company property and increase the base of consumer product selection. In turn, the whole world benefits.
Being proactive with regard to FTAs is essential. Ideally, all of the details are connected in line with ROO, which allows for preferential status in 22 economies. Nevertheless, FTAs require additional recordkeeping; these records can be integrated with the standard procedures developed in production, accounting, purchasing and shipping to comply with all provisions and regulations. Because FTAs are not free, due diligence and reasonable care are required for signing parties from an early phase. iBi
Beatriz B. Ramirez is a free trade specialist at the SBDC International Trade Center at Bradley University. She can be contacted at (309) 677-3075 or [email protected].