Tracking Trade

The current trade compliance “soup du jour” is Free Trade Agreements (FTA). The trade compliance world is a buzz with ways to save money by using FTAs. As this concept gets attention, companies will try to implement FTA procurement strategies around the globe. But is that a good use of corporate resources?

There is no question that importing from a country with lower duties can mean real savings. It is just a question of how much. Here are some points to consider before you start:

1. Is your current supplier a trusted partner? What will you lose if they are gone?
2. Is this trusted partner in C-TPAT and would changing add a new risk component?
3. Will the country of export or origin be difficult for your logisitics people to work with? And what is the added cost of this change?
4. Does the supplier have a proven track record of reliability?
5. Will there be quality issues?
6. Will there be country issues? And/or country of origin qualification issues?
7. What if material or component shortages arise for your new vendor?
8. Do you have to fund the new vendor’s pre-export production? Is a letter of credit (LC) required and what will it cost?
9. Can your company (not just the exporting vendor) afford these added financial costs?
10. What about “assists” that may be needed for your new vendor to meet FTA requirements?
11. How easy will country of origin certificates be to verify?
12. Will your current buying agent be able to help in the new FTA countries or do you lose your eyes and ears into the marketplace?
13. Will regional value content and tariff shifts add a new layer of complexity (and cost) to the products?

In addition to these questions, internal company politics can play a major role in working out an FTA procurement strategy. Most purchasing agents have a “stake” in the vendors that they use. This may be a decades long relationship that has proven value in good times and bad. It may also be based on shared technology or building to precise specifications. Asking a purchasing agent (or a purchasing department) to change its buying patterns could be a real challenge. Don’t forget that country shifts may also require learning a new language, geography and even finding a new buying agent.

Less than a year ago, finance would not have been a consideration when developing an FTA strategy. The economic meltdown in the financial sector has altered this situation. New suppliers in FTA countries may not have the financial wherewithal to produce product locally. Even some of the Asian Tigers have had to develop special government-to-government trade finance programs to deal with its financial crisis.

Buyers, sellers, and lenders are all struggling to find the financial resources they need. Securitization of trade receivables in the financial supply chain are vitually gone. Letters of credit, once expected to go extinct by the end of this decade, are on the rise. In addition, the cost of an LC is no longer a mere fraction of the overall cost of goods sold. Today the LC cost could easily dwarf the savings under an FTA.

Big corporations may have vendors from all over the world knocking on their door. For them, choosing an FTA vendor may be easy. However most companies have to be careful that this advantage does not turn into a disadvantage very quickly.

An FTA procurement strategy is worth exploring, but remember that it may not be as free as its name implies.