The African continent has taken a major step towards advancing the free exchange of goods and services under rules that facilitate interaction between the parties. This should foster prosperity and development directly for the parties involved, and even for third parties indirectly, as all this is the result of the profits generated by these transactions.

May 30, 2019 was the launch of the major agreement of Africa Continental Free Trade Area (AFCTA). 52 countries signed the agreement, and are currently ratifying their adherence to it. This means that the weaker economies of the continent can do more business with their African neighbours, and increasingly compete with countries that are already major players in the global economy.

Africa has a very great potential for the production of goods, especially perishable goods and diverse manufactures, because they have an impressive diversity of natural resources; the continent’s other great resource is its people.

The potential to generate significant economic activity

According to the last article published by the World Economic Forum, this agreement will allow the area to generate about $4 trillion USD for investments and commercial transactions of goods and services. This already makes this market more appetizing, for large, medium, small and micro entrepreneurs. The latter are those that can benefit the most, by the removal of the tariff and non-tariff barriers to intra-regional trade, which would now be better called intra-continental. The harmonization of tariff rates is important, since a Free Trade Agreement between two or three countries is not the same as one with 52, and each with different visions and interests.

This is where the political will must assert itself and leave behind the particular interests of rulers who dictatorially determined the commercial, financial and social policy of their respective countries. Their actions unleashed many socio-political problems that always maintained an image of instability and high risk regarding doing business in Africa.

Times have changed in Africa

Now times have changed. There are more democratic governments, and there is more investment and development. True, that has not always been exponential, but has been well directed and has stimulated emerging economies with good attractions such as South Africa (host of a World Cup of Soccer, and being the first African country to participate). Kenya follows, impelling the formalization of its micro and small entrepreneurs, You can also include Equatorial Guinea in the scenario, the hidden oil reserve of Spain and perhaps a good part of Europe.

All this indicates that the horizon looks very promising. There will be growth platforms for the local businessmen of each of the signatory countries, and with that, real wealth increasing through the free exchange of goods and services and investments. However, there are also great challenges to make order and harmony prevail.

Challenges remain

Among these challenges are establishing the minimum and necessary legal frameworks so that resolutions of conflicts and disputes can be carried out efficiently.

Another significant challenge for all governments will be to modernize and improve the road infrastructure of all the countries involved. When talking about road infrastructure, I refer to all forms of transport that are part of the channels of supply chains used in commerce. The network of roads and highways are best to start with, as this should dramatically reduce the transit times of heavy transport and people throughout the treaty regions.

It will be important to accentuate the efficiency of infrastructure and customs personnel within borders, so that there is free transit of merchandise according to the bases of the treaty, combined with the internal laws of the country where it is only transited or is the end point of destination of the goods or people. More investment should also be made in the rail network, as well as in ports and airports.

These last three types of road infrastructures are critical for commercial development, since supply chains that have efficient multi-modal forms bring reduced costs, increasing the competitiveness of all the countries involved in this agreement.

E-commerce is also an important part of the future of this vision, which will be supported by clear rules, together with a modern regulatory framework. It could create the conditions to generate the sale of millions of products, following the major global trends of retail and business to business (B2B).

Another critical and major challenge is financial control, due to the high flow of transactions that will result from the opening of investment markets and the exchange of goods and services, as well as the mobility of people.

This control should be aimed at monitoring monetary flows and their origins. The scourge of money laundering is a global problem, and is also an issue within Africa. It may not be easy to apply more efficient controls and policies adapted to the reality of the way in which criminal structures operate. However, the support of countries with more development in establishing and enforcing financial controls could help Africa, supporting economic growth through trade and investment, and bringing development and prosperity for its inhabitants.

Beyond just sending humanitarian aid (which has been vital in most cases), it is extremely important to support the African continent so that they can make full use of their potential and thereby also enter more markets globally. Being more efficient as a block will also bring improvements at the individual level of each country, since together they can improve their negotiations with other large economies, which otherwise would be impossible.

This treaty is the best example of what looks to be a trend in world trade: an economy of blocks. I firmly believe that Africa is reinventing itself.  We can already see a new Africa, open and determined to compete strongly in the global conglomerate.

The post Can Africa reinvent itself through the Africa Continental Free Trade Area (AFCTA)? appeared first on Trade Ready.

For most who work in international trade, a free-trade agreement between the United States and the European Union makes sense. The EU, after all is the United States’ largest trading partner. In 2017, the United States imported $417 billion in goods from the EU, while exporting $270 billion in goods to the bloc.

The Transatlantic Trade and Investment Partnership (TTIP) has been seen as a way to further open trade between the United States and the EU. For the United States saw the partnership as a way to close the trade deficit, while European leaders hoped it would further bolster trade. On both sides of the Atlantic, TTIP proponents said the partnership could spur further economic growth and add trade and manufacturing jobs.

Amid the Brexit vote and contentious elections in Europe and the United States, TTIP negotiations came to a halt in October of last year after 10 negotiating sessions that spanned three years. With the election of Donald Trump and his outspoken, negative views on free trade, most assumed that the TTIP was a dead deal.

But suddenly, trade leaders in the United States and Europe are discussing resuming TTIP talks, and touting the benefits of a trade deal between the United States and the EU.

Trade leaders on reviving TTIP

On the U.S. side, the first indication that TTIP discussions could resume came in a Sunday morning news interview with U.S. Commerce Secretary Wilbur Ross in May.

It’s no mistake that, while we withdrew from [the Trans-Pacific Parternship trade negotiations], we did not withdraw from TTIP,

Ross stated. “The EU is one of our largest trading partners, and any negotiations legally must be conducted at the EU level and not with individual nations.

“Thus, it makes sense to continue TTIP negotiations and to work towards a solution that increases overall trade while reducing our trade deficit.”

U.S. Trade Rep. Robert Lighthizer more formally addressed resuming TTIP negotiations in June during a U.S. Senate Finance Committee hearing in June. During the hearing, Lighthizer told U.S. legislators that TTIP is currently being reviewed by members of his team, and so far, there is a positive view on moving forward with U.S.-EU trade negotiations.

Lighthizer said he had spoken with EU Trade Commissioner Cecelia Malmström about resuming talks on negotiating an EU-U.S. trade deal.

“On TTIP, we certainly agree that that’s an important negotiation,” Lighthizer said of his discussions with Malmström. “I’ve talked to her about bilateral issues and co-operative issues. I’m not here to make any announcement about it, but it is something that we certainly realize the importance of.”

There’s a lot of momentum behind [a trade deal]; there are a lot of reasons to do it. On the other hand, it wasn’t accomplished, so there are obviously problems.

Lighthizer said any discussions on resuming TTIP would likely be put off until after Germany’s elections in September.

Meanwhile, EU officials have been relatively quiet on TTIP since Trump’s election, though they have cautioned the U.S. against protectionist trade policies and expressed an eagerness to resume U.S.-EU trade talks on several occasions. At the same time, the EU has been adopting similar free trade agreements with other countries, including Canada and Japan, and has expressed a desire to strike more agreements.

What TTIP could accomplish

TTIP aims to iron out a lot of details in European-U.S. trade. The agreement would make trade more transparent and easier for businesses in both countries, according to U.S. Trade Rep. Lighthizer’s office. It also would better lay out environmental, health and safety protections. Previously, one of the sticking points of TTIP negotiations was language on Investor-State Dispute Settlement (ISDS). Detractors have said ISDS procedures were too secretive, but in other trade deals, the EU made steps to create a more transparent ISDS process.

Businesses trading between the EU and the United States could see a big drop in tariffs if TTIP were to pass. While the average tariff for all products traded between the two is 1.6%, there are still tariffs as high as 25%. One leaked TTIP document showed that the agreement would lower tariffs by 97.5%.

In the end, it seems that both sides realize that the strong EU-U.S. trade relationship calls for a new trade agreement. While TTIP talks look like they are likely to resume, it stands to be seen whether EU leaders can balance their desire for free trade with the current tone of U.S. trade politics.

The post Will we see a revival of TTIP negotiations? Trade leaders say, ‘yes.’ appeared first on Trade Ready.

As populist nationalism surfaces across the globe from the U.S. to Europe, Russia and India, adverse effects on free trade are no longer a possibility, but a reality.

In Europe Brexit may only be the beginning. Though Macron’s victory seems to have put an end to Frexit concerns for the time being, Grexit remains a distinct possibility in Greece, and after the Renzirendum, the Italian referendum last December that caused Europhile Prime Minister Renzi to step down, the term Quitaly also popped up.

In the U.S., travel bans, visa restrictions and publicity about both have already cost the U.S. significantly in the loss of tourism and business income. The U.S. President has revoked American participation in the Trans-Pacific Partnership (TPP), and in doing so also killed the Transatlantic Trade and Investment Partnership (TTIP). Trump has also targeted NAFTA, causing Mexico and Canada to wonder if North America will be taking a step backward in business collaboration.

Also in the Americas, a Latin-American free trade zone has been going nowhere for decades. This January, however, the Latin American Integration Association (best known by the acronym for its Spanish name, ALADI) tried to breathe new life into it in light of what´s been happening north of the border.

Closely tied to increasing barriers to trade are impediments to the free movement of labor. Global businesses rely on a diverse workforce, and restricting immigration does not do them any good. Just witness the reaction of many Silicon-Valley multinationals to the travel ban decreed by the new U.S. administration.

Politics is changing the field for global business

Much of global politics for the past few decades seemed to agree with the economic theory that factors of production are best utilized when they are free to flow towards their most efficient use. That was the logic behind, for instance, the European Union´s Schengen Agreement in 1985, aimed at doing away with border controls. In 2016, however, as a reaction to the European refugee crisis, border controls were “temporarily” reinstated in seven countries (Austria, Denmark, France, Germany, Norway, Poland, and Sweden).

Meanwhile, in Asia, The Economist reports on impending labor shortages in countries like China or Thailand. Unfortunately, immigration and visa regulations hinder immigration from countries with labor surpluses like the Philippines or Bangladesh.

All this political mayhem coincides with the reported retreat of the multinational firm, per The Economist. According to their numbers, the profits of multinationals as a group have dropped by 25% in the span of only five years. And politics has little to do with it. Instead, a combination of maxed-out economies of scale and tax arbitrage comes into play. Many multinationals are just too big to be successful. And arbitrage has brought the tax burden as low as it can go.

Moreover, it is not only multinational corporations that feel the heat. In an increasingly complex world, small and medium-sized companies can be hard-pressed to find the resources to navigate the waters of international business.

So, in some ways, it seems that the runaway success of globalization over the past 20-25 years has sown the seeds of its own troubles. As wealth shifts around the planet, steelworkers in America’s Rust Belt stare into the abyss, the “huddled masses” in Africa go looking for greener pastures, and the rising middle class in China´s megacities scrambles to hire illegal domestic workers from the Philippines.

Clearly, the world has changed. And clearly there are some dark clouds on the horizon. What should global business leaders be doing in this uncharted territory?

10 ways you can do what’s right for your business

In the end politicians don’t do business. They only have the ability to either get in the way, or to help facilitate more success. Either way, it’s up to business leaders to get the deals done and to export and import, as well as encourage tourism and investment. We simply need to keep the faith and move forward.

We should have faith that trade is good. Push past any populist noise to do what is right for your business.

Whether you’re in the U.S., Europe, Africa or Asia, 85% or more of new opportunities in the next 5 years are somewhere else outside of your country. Go for it!

Here are some tips you can use to grow globally and successfully:

1. Listen to your tribe. Know your customers and listen to their pains and needs.
2. Create joy for your customers. Keep customers satisfied and wanting more from your team.
3. Globalize. Whatever it’s called and in whatever form it takes, globalize your firm. Prioritize your growth opportunities and execute effectively.
4. Leverage technology. More than ever technology will drive the opportunities, from artificial intelligence, to machine learning, big data and more – be familiar.
5. Have a global vision. View the world holistically and be aware of low hanging opportunities.
6. Stay focused. Keep the main thing the main thing.
7. Add diversity. Add people from different cultures and of different ages, especially young people, to your team. They’ve grown up in the internet age and will help keep you on track.
8. Improve communications. Know your message and keep your team and community aware of progress and next steps. Don’t fear repetition.
9. Stay ahead of shifting news. Keep your ears open for the latest news and make quick decisions.
10. Adjust as you go. Be faster, better, and more flexible than your competors.

Speak now or forever hold your peace

Business leaders must remember that consumers around the world are the primary drivers of the economy, not politicians. In an extreme case like Venezuela, politicians can completely destroy an economy with comprehensively bad policy. But in that case, business leaders have not been given a chance to provide their input in order to help.

In most countries in Europe, Asia and the Americas, business leaders have a voice and typically are not shy to share their opinions. You shouldn’t be either. Speak out for your business and trade in general, and push forward with the tips above, and we’ll all be the better for it.

The post Will populist politics pull the plug on trade progress? Survival tips for executives appeared first on Trade Ready.

Free trade agreements (FTAs) such as the Canada-European Union Comprehensive Economic and Trade Agreement (CETA) and the North American Free Trade Agreement (NAFTA) have been stealing the headlines for the past few months. For all the talk on these agreements, however, it can be hard to find SME-friendly information on how companies can benefit from them.

In fact, Canada has FTAs with 15 countries, and soon an additional 27 nations once CETA is in force.

Admittedly, an FTA is not the only consideration for choosing a market. You still have to make sure there is a need for your product or service, that you have a unique selling proposition, and that you can deliver your offering in a way that meets customer needs. That being said, an FTA can be an important factor in making a current or target export market more attractive.

So, what’s the deal with FTAs and how can your company benefit? Since each FTA is different, the answer depends on which one you’re talking about.

Furthermore, the answer is dependent on whether you’re selling goods, services, and/or looking to set up a physical presence in the country such as a branch office or production facility. Let’s look at FTA benefits for each of these three options, with examples from NAFTA and CETA in particular.

Selling goods to an FTA country

When it comes to selling physical products, the most common benefit of FTAs is also the most well-known: tariff reductions. However, depending on what you are selling and where it was produced, as a Canadian exporter you may not always benefit from reduced tariffs. Here’s how to find out whether (and how much) your company can benefit:

Determine the Harmonized System (HS) code of the product(s) you want to export. This guide by Statistics Canada is a good starting point. Confirm the correct code by speaking with a customs broker. Find one near you using the Canadian Society of Customs Brokers’ online member directory.

Check the tariff schedule of your target market. Each country’s tariff schedule lists customs duty rates by HS code, typically with one column for FTA partner-countries and another for non-FTA partner-countries. In some instances, the difference between FTA and non-FTA rates can be significant, whereas for other goods there could be no difference. The degree of tariff advantage you receive from an FTA therefore depends on your product. This is why FTA tariff rates may be a determining factor in entering a market in some cases but not in others.

1. For the U.S.: Refer to the S. Harmonized Tariff Schedule. Under Column 1, the Special column includes NAFTA rates, and the General column is for goods originating from non-FTA countries (Column 2 applies to North Korea and Cuba only).
2. For the EU: Current duty rates are listed in the EU’s online TARIC Also consult Find your EU Tariff Rate on Global Affairs Canada’s CETA site to see how your rates might change once the agreement is in force.
3. For other countries: Find the link to each country’s tariff schedule on this page.

Verify whether your goods meet the rules of origin of the specific FTA in order to qualify as a Canadian-origin product. These, too, are typically listed by HS code. Your goods can only qualify for preferential tariff treatment if they meet the rules of origin. For example, if you are shipping products from Canada to the U.S. and they are deemed to originate in Vietnam, they would not benefit from the NAFTA rate.

1. For the U.S. and Mexico: See the NAFTA overview within the broader Guide to Exporting to the United States published by the Trade Commissioner Service. Look up rules of origin by product in Annex 401 of NAFTA.
2. For the EU: See Annex 5 – Product-Specific Rules of Origin of the CETA agreement.

Prove that you meet the rules of origin using a Certificate of Origin. See CBSA: Certification of Origin under Free Trade Agreements to access the forms (there is no CETA template yet). The Canadian Chamber of Commerce certifies your Certificate of Origin.

Another possible benefit of FTAs for goods producers is more streamlined product standards and certification requirements. For example, CETA includes a protocol on conformity assessment, allowing some Canadian products to be tested and certified for the EU market from Canada.

Selling services to an FTA country

FTA benefits are even available to companies in sectors such as software, consulting, or tourism that don’t send physical goods across borders. Here are a few:

National treatment. Both NAFTA and CETA specify that service providers in most sectors will be treated as national (i.e. local) companies. This means that they would not face artificial barriers to providing their service in a partner country, such as being required to have a physical presence there. Having these types of provisions written into FTAs makes it easier for nations to hold each other accountable in cases where discriminatory practices may occur.

Easier labour mobility for cross-border travel and employment. For example, did you know that NAFTA provides for five special visa classifications? One of these is the B-1 classification for business visitors. You may not even realize it, but when Canadians travel to the U.S. or Mexico for trade shows or business meetings, we are granted a B-1 visa upon passing through customs with no advance paperwork required. Of course, showing up with relevant documents, such as a travel itinerary, is advisable – see the hyperlink above for advice.

Services will be central to the FTAs of the future. CETA in particular is highly progressive in its provisions for service exporters because the growing importance of the service sector to the Canadian and EU economies was recognized during negotiations. See the FTA’s chapter summaries to read about CETA’s wide-ranging coverage on topics such as telecommunications, electronic commerce, and mutual recognition of professional qualifications.

Direct investment in an FTA country

Companies that provide either goods or services are aware that even with advanced communication technologies and faster shipping times, being close to customers is still a key competitive advantage.

For key markets, you may consider setting up a physical office, whether it’s to respond to customer inquiries in their language and time zone, or whether it’s to produce locally in order to deliver within days as opposed to weeks. Here are some ways that not only FTAs, but also Foreign Investment Promotion and Protection Agreements (FIPAs) and Tax Treaties can make a difference:

National treatment. This is a similar concept to the one explained above: a company setting up an affiliate in an FTA or FIPA partner country is afforded the same treatment as if it were a domestically-owned company.

Avoiding double taxation. If you set up a subsidiary internationally, the revenues you make in that country may be taxed by the local government and your worldwide revenues may be taxed by the Canada Revenue Agency. This presents the possibility of having your subsidiary’s revenues taxed twice, both at home and abroad. FTAs, FIPAs, and Tax Treaties can all help to establish processes to ensure that these revenues are only taxed once.

Integrated supply chains. You may want to send employees or unfinished goods between your various international locations in order to provide better service, even out production capacity, or drive mutual learning between offices. In these cases, the benefits listed in the goods and services sections above can play a huge role in facilitating these movements so that your global operations can be as effective as possible.

FTAs are complex and each one is unique. This explains why it can be so hard to get a clear answer on how exactly your company can benefit when selling to, buying from, or investing in a partner country. Hopefully the points and hyperlinks above give you a clear starting point for understanding how to navigate – and benefit from – these agreements.

Want to know more? Read Getting the Most from Free Trade Agreements by EDC. Make sure to contact your local Trade Commissioner as well as consult relevant experts such as customs brokers, lawyers, accountants, or consultants.

Don’t hesitate to message me on LinkedIn if you have questions on how to further explore the benefits of a specific FTA for your company.

The post How can Canadian SMEs benefit from free trade agreements anyway? appeared first on Trade Ready.

To some degree, that answer has to be yes; but not entirely.

Washington goes bilateral

For decades, trade policy has been led by Washington. No other capital has had a bigger influence on global commerce. Being the largest economic, military and geopolitical power certainly means that any major shift in U.S. trade policy will impact global trade policy as well.

This is seen most clearly with the Transatlantic Trade and Investment Partnership (TTIP) and the Trans-Pacific Partnership (TPP). President Trump has already withdrawn from the TPP, though that doesn’t mean the deal is wholly dead (more on that below). If we extend his logic on the TPP to the TTIP, as investors would be wise to do, that agreement between the U.S. and the E.U. is likely at the end of its road as well.

Under President Trump, Washington has indeed gone bilateral. Trump decries multilateral trade deals as bad for America. His focus, he says, will be on establishing bilateral trade relations and negotiating from a position of strength. He thinks the U.S. can get better deals for its workers that way.

After all, the U.S. is the biggest economy in the world, and it can easily overpower many other countries in bilateral talks. The U.S. negotiators will have an enormous amount of leverage in bilateral negotiations, even with other major economies. By contrast, American bargaining power often decreases when it is negotiating with multiple countries, as was the case with the TTIP and the TPP.

NAFTA’s future is more certain than either the TTIP or the TPP, since it is an existing, entrenched trade deal. With established links and interests, it will be much harder to nix the regional pact. However, a renegotiation is almost certainly going to occur. Donald Trump’s re-election depends on it—he won office because of votes in the Rust Belt, and those voters feel passionately that NAFTA should be scrapped or renegotiated.

NAFTA renegotiations will be an historic challenge for Ottawa. While America’s sights are largely set on trade with Mexico, Canada needs to brace itself for what could be a rough ride as well. Though trade with Canada almost never made its way into a Trump campaign speech, complacency will not serve our policymakers.

Is the TPP dead?

There were two major players in the TPP negotiations—the U.S. and Japan. It was commonly believed during the negotiations that if either of those two countries failed to ratify it, the deal was dead. While Japan ratified the pact, the U.S. will not.

However, that doesn’t mean the TPP is dead per se. Australia is pushing for the deal to continue without the U.S., though this is unlikely. Even if the deal doesn’t get ratified and the TPP is gone in name and country make-up, many of the innovations that came from it may find their way into future trade deals. The TPP was often heralded as the new gold standard for trade—these ideas don’t go away with the end of the pact. Expect to see some of those processes replicated in future deals.

Is the world following the U.S. to bilateral trade?

As Washington pivots away from decades of multilateral trade policy, will the rest of the world follow? To some degree, they will be forced to. Countries that want a trade deal with the world’s largest market will be forced to negotiate bilaterally with the U.S. This includes Japan and the U.K.

However, there is no evidence yet that the rest of the world will only negotiate bilateral deals with other countries.

In Asia, China is still pushing the Regional Comprehensive Economic Partnership (RCEP), which consists of 16 Asia-Pacific countries. Furthermore, ASEAN countries are continuing their economic integration.

Multilateral trade isn’t dead in Europe either. After Trump’s election, Canada and the E.U. ratified the Comprehensive Economic and Trade Agreement (CETA). The United Kingdom, too, is keeping a multilateral E.U. trade deal on the table in its Brexit negotiations.

Nevertheless, there are still storm clouds for multilateral trade in Europe. While the TTIP has not been officially abandoned, anyone who took in Trump’s rhetoric on the TPP cannot imagine he supports the E.U. deal.

The TTIP is further complicated by an E.U. election calendar which is not favourable to the agreement. Over the coming years, France and Germany (the major E.U. players) will both have elections in which populist candidates are either leading in the polls or rising in popularity. The result is that French and German mainstream leaders will be forced to make concessions. While they are unlikely to abandon the TTIP altogether, they may have to tamp down enthusiasm and make some changes. Of course, the victory of right-wing populists in either country could kill the deal as well.

There is no doubt that Donald Trump’s election will change world trade, marking a break from the multilateralism that has become popular in recent decades. However, there is currently no evidence that the rest of the world will shift its policy framework just yet, placing the U.S. at odds with many other countries over the future of international free trade.

The post Does the Donald Trump era mark the end of multilateral trade? appeared first on Trade Ready.

The GATT and WTO

Barriers to trade, including tariffs and quotas, are challenging for international businesses, as they can adversely affect international trade and economic stability as a whole.

Before the end of the Second World War, several government delegates met at the Bretton Woods Conference in the U.S. to, among many goals, establish an International Trade Organization (ITO) in order to promote economic recovery and stabilize world trade after the war ended. But the U.S. Congress refused to approve participation and the attempt to formally establish an ITO subsequently failed.

The attempt to formalize an ITO was not without accomplishment. Its legacy document, the General Agreement on Tariffs and Trade (GATT), was a 1947 document agreed to by all parties, including the United States, which aimed to reduce trade barriers (especially tariffs).

The GATT provided both trade rules and a forum for members to discuss and address trade issues. It also established some basic rules to direct international trade, following several years of gathering members (rounds) for negotiations.

Three major rules were established:

• Tariffs and the Binding Concessions rule: If a WTO member lowers a tariff, it is considered “bound” and the country is prohibited from subsequently raising the tariff. The bound tariff applies to all WTO members.
• The Most-Favoured-Nation rule: The MFN principles prohibit discrimination among like products regardless of their origin and the rules relating to the importation or exportation of goods or payments on the basis of their origin or destination.
• The National Treatment rule: “The requirement, set forth most prominently in GATT Article III, that members treat imported goods no less favourably than domestically-produced like products once the imports have passed customs”. (See Raj Bhala, Dictionary of International Trade Law).

While the GATT made significant progress in the reduction of tariffs, other trade agreements (multi-lateral and bi-lateral) and national protectionism began to emerge as significant barriers to trade. In April of 1994 in Marrakesh, Morocco, more than 100 countries agreed to form a World Trade Organization (WTO) and the WTO came into effect in January, 1995.

According to its website, the WTO is:

• A place where member governments go to try to sort out the trade problems they face with each other
• A set of rules, contracts and agreements binding governments to keep their trade policies within agreed limits
• A harmonious way to settle trade differences through neutral procedures based on an agreed legal foundation The WTO is the only international organization responsible for the rules pertaining to trade between nations for goods, services, intellectual property, dispute settlement, and monitoring members’ trade policies.

Want to learn more about how to excel in new markets by establishing and managing strategic global business alliances? Check out the FITTskills International Market Entries Strategy online course!

Negative impact of trade barriers: the Great Depression

One of the most disastrous examples of the negative impact of trade barriers are the U.S. protectionist measures (quotas, high tariffs) taken in an attempt to mitigate the effects of the Great Depression.

The hope was to acquire revenue from tariffs and to increase the demand for goods produced domestically.

The response of industrialized nations to the crisis of the depression was to impose barriers on trade imports. This periodically paralysed international trade.

There are however, a number of additional organizations working to make international trade freer:

UNIDROIT

The International Institute for the Unification of Private Law (UNIDROIT) is an independent intergovernmental organization that studies “needs and methods for modernising and harmonising private and, in particular, commercial law as between States and groups of States”. 

UNCITRAL

The United Nations Commission on International Trade Law (UNCITRAL) was established by the UN General Assembly in 1966 to play an active role to overcome the “disparities in national laws governing international trade created obstacles to the flow of trade”.

ICC

The International Chamber of Commerce (ICC) is an organization that has worked to harmonize private international law. This Paris-based industry group is also playing a major role as an arbitration institution.

Although the ICC works in tandem with the UN, it is not a governmental organization. Rather, it is a group made up of specially appointed business executives that form a council. National committees of business industry executives volunteer their time to ensure their nations’ business perspectives are heard. As well to help formulate ICC policies and agendas.

In addition, with regards to instruments that will help promote uniformity and transparency in international trade, the ICC creates and makes recommendations to industries and intergovernmental organizations. For example, by codifying the following, the ICC has been influential in harmonizing international contract terms as well as arbitration practices:

• Incoterms: Universally accepted contract terms governing international transportation
• Uniform Customs and Practice for Documentary Credit (UCP 600): Defines terms and credit rules for documentary credits on demands and guarantees predominately used by banks all over the world

Hague Conference on Private International Law

The Hague Conference on Private International Law is a global intergovernmental organization. They are working towards the harmonization of private international laws states have adopted. This will address individuals and corporations connected to more than one state. Representing all continents, it is a melting pot of different legal traditions that develops and services multilateral legal instruments, which respond to global needs.

European Union

Established in 1993, the European Union (EU) is a political community with 28 member states comprising a single economic market. This reduces the barriers and obstacles when moving goods, services and investments within the community. Through a standardized system of laws and a single currency (Euro), EU citizens can freely live, work, study and do business throughout the EU. As well as enjoy a wide choice of competitively priced goods and services.

OHADA

Established in 1993, the Organization for the Harmonization of Business Law in Africa, known by its French acronym OHADA, is working toward instituting more secure legal and judicial measures. As well as establishing a modern and uniform business law in order to attract investors to African states.

CDIP

The World Intellectual Property Organization (WIPO) is a UN agency whose mandate is to develop an international intellectual property (IP) system to ensure creativity and innovation to foster economic development while safeguarding public interest. In September of 2007 it announced the establishment of the Committee on Development and Intellectual Property (CDIP).

The CDIP was established to “develop a work-program for implementation of recommendations adopted in relation to the WIPO Development Agenda. The CDIP is also mandated to monitor, assess, discuss and report on the implementation of all recommendations”.

International law works to improve global business potential by enabling more open borders, modernized customary exchanges and reduced trade barriers around the world.

For entrepreneurs, this in turn can mean opportunities for market and labour growth and specialization, infrastructure research and development, jobs, and global, economic and social stature.

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Currently, free trade is a divisive hot button issue. Some people believe that free trade is often harmful to national economies and has clear winners and losers. Others believe that free trade is ideal for national economies and can benefit every nation, company, and individual who participates in it.

To examine this issue, it is helpful to understand exactly what free trade is. When people in different countries can conduct trade with each other without quotas, tariffs, duties, subsidies, or prohibitions from governments on the goods or services that are being bought or sold, that is considered ‘free trade’.

If trade isn’t free, then governments make money on the duties and tariffs, and domestic companies face less competition. Many argue that this benefits nations.

However, there are often negative consequences from protectionism. For example, if a country places too many tariffs on the goods coming in, then other nations may not do as much business there. This can drive up costs for consumers, who are left with fewer options, as well as limit the availability of certain goods.

Here are the top ways that more free trade around the world helps everybody.

1. Higher trade volumes

The fewer tariffs and other taxes or restrictions there are on goods coming in and out of countries, the easier it is to conduct trade. The easier it is to conduct trade, the higher trade volumes are likely to be.

For example, in 2004, the United States signed a free trade agreement with Chile. By 2013, American exports to Chile were 545% higher than they had been before the agreement. That represents $17.5 billion. Chilean exports to America also increased 180% to $10.3 billion by 2011.

These increases in trade volumes are incredibly significant and perfectly displays how trade volumes can strengthen substantially when free trade exists between two nations.

The higher trade volumes are, the more profits companies can make. The increased export totals represent major profits for American and Chilean businesses, who are now able to sell more easily to millions of new customers.

This means that many business owners stand to gain increased profits from free trade.

The better businesses engaged in international trade do, the more people they can employ. This means higher trade volumes can help create jobs as well, which has positive benefits on a nation’s entire economy.

2. Greater opportunities to capitalize on comparative advantages

Comparative advantages exist when nations focus on producing goods that they have a competitive advantage in producing due to lower opportunity costs. For example, some countries may have an advantage in producing wine, such as ideal climate and soil conditions, while others may be able to produce clothing more efficiently, due to lower labor and material costs.

With free trade, it is much easier for nations to focus on producing the goods for which they have a comparative advantage, and import other goods from countries who have advantages in those areas through trade.

However, without free trade, nations have to spend more time producing goods that do not yield optimum profits because it is much more difficult to get them through trade. This means consumers are left choosing between inferior or overpriced goods, and cannot purchase the best goods for the best prices.

3. More efficient use of raw materials

Some nations have extremely high quantities of raw materials, which they are unable to use domestically in their entirety. For example, Australia has the most iron ore reserves out of any nation in the world, at 35 billion metric tons.  Venezuela has the largest oil reserves, with 297.6 billion barrels.

With freer trade, Australia can more easily sell excess iron ore and oil to other nations, and take advantage of their material surplus to benefit their economy. Raw materials can easily be bought and sold between freely trading countries, preventing the wasting of crucial materials.

It also allows materials to be used to produce consumer products in other countries where manufacturing costs are cheaper, therefore lowering the overall cost of many goods for consumers.

4. Stronger economic growth

Free trade simply makes it easier to buy and sell goods and services between nations. This often leads to increased economic growth. For example, the U.S. Trade Representative Office estimates that U.S. economic growth increased by an additional 0.5 % annually over the past several years because of NAFTA.

As with higher trade volumes, stronger economic growth can also help create jobs. After all, larger, growing economies are successful because more businesses are doing well. These bigger economies can provide more jobs than struggling businesses in economies that are smaller or shrinking.

Stronger economic growth also means that more goods can be purchased internationally, which can help many people around the world access affordable and higher quality products.

5. Promotes peace and cooperation between nations

The more nations trade with one another, the more they can benefit from each other and help each other grow. This promotes peace and cooperation between nations, in the interest of continued growth and economic prosperity.

In fact, one fascinating study from Stanford University proved that the more trading partners a nation has, the less likely it is to go to war. Additionally, this study showed that nations tend to not go to war with their trading partners.

This makes sense. After all, why would nations want to attack countries that can either help provide them with goods, or serve as a market to export to? It would be counter-intuitive from an economic standpoint.

Give peace, trade and greater economic opportunity a chance

Though many people remain skeptical of free trade, it has several clear benefits for the nations who take advantage of it. Higher trade volumes, greater comparative advantage opportunities, more efficient use of raw materials, stronger economic growth, and increased cooperation amongst nations are all positive results created by more free trade.

The fact that trading partners are less likely to go to war with one another is also incredibly significant for the entire world.

If free trade can decrease the number of wars that take place in the world, then policymakers should consider that when they are deciding whether or not to reduce trade restrictions.

Ultimately, it is up to individual nations to decide whether or not free trade is in their best interest. However, with so many compelling benefits of the practice, it is easy to see why many nations have free trade agreements, and more are still to come.

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Following the global trend for political change, the United States elected a candidate Tuesday who has promised to shakeup both the political and economic fabric of the country. Donald Trump has promised to reform his country’s approach to global trade, claiming that he can revive the American economy by bringing back jobs that America has, for decades, exported to other countries. In consequence, those looking to enter the U.S. market may find protectionist measures which will create challenges in bringing their products into the country.

Here are five ways Trump is expected to change the landscape for global importers and exporters:

1.     Pulling out of NAFTA

Trump has said that one of his first targets for reform upon taking office would be the decades-old North America Free Trade Agreement. In fact, Trump’s plan for his first 100 days in office lists the dismantling of NAFTA as a priority.

Ripping up NAFTA could have a serious effect on companies that trade across the Canadian, Mexican and U.S. borders. Since NAFTA was enacted in the 1990s, trade between the United States, Mexico and Canada has tripled, growing faster than the U.S. trade with any other country.

Should NAFTA be eliminated or reformed under the Trump administration, North American exporters in the agriculture, automotive or textile industry will find themselves navigating a new terrain as they work to keep their business models thriving while facing additional trade barriers.

Some have speculated that repealing NAFTA would still leave the Canada-U.S. Trade Agreement (CAFTA), NAFTA’s predecessor, in place. However, it remains to be seen whether this would be the case, and whether Canadians may still continue to enjoy freer trade across the U.S. border.

2.     A pull-back on other trade deals

NAFTA isn’t the only trade deal the President-elect has promised to go after once in office. Trump has said he will reject other trade deals the United States is considering, such as the hotly contested Trans-Pacific Partnership (TPP) and TTIP.

That means that companies importing and exporting across the Pacific will be looking for alternatives to the trade paths that would have been created by the 12-nation deal. Even if they maintain current plans, they will face greater obstacles than expected and may have to revise their business and financial plans accordingly.

In recent decades, companies have enjoyed a global environment that’s been favorable to trade. Borders have been opened to allow goods to flow more freely and easily between countries. If Trump, as president, takes the strong stance against trade deals he has promised during his campaign, companies who do business globally may need to re-evaluate their current plans for international markets and expansion.

3.     Change in the overall global trade environment

Trump has promised to challenge countries whose trade practices are questionable. That could include countries that are subsidizing exports or dumping high volumes of goods into the market. An aggressive approach to international trade compliance by the United States would mark a change that stands to disrupt the entire global trade system.

The U.S. government has largely turned a blind eye to such practices since the 1980s, when Pres. Ronald Reagan took a hawkish approach to international trade. Since then, most administrations have failed to confront countries or companies for such practices because it can be hard to prove and put a strain on diplomatic relations.

When countries take an active stance against one another on trade, it ensnares the companies trading between those nations in the disagreement.

When Pres. Obama imposed tariffs on Chinese tires, China retaliated by enacting heavy tariffs on American automotive parts and poultry entering the country. When faced with unfavorable trade positions by the U.S. government in the past, China also has penalized U.S. automakers and Boeing by favoring their European counterparts.

For countries that trade in markets that are likely to face challenges from the new U.S. government, particularly China, it may be time to start considering risk mitigation. Researching which companies or industries were involved in previous disagreements could also be a helpful step to determine whether your company may be affected.

4.     Stagflation and recession

Since trade is tied so closely to the U.S. economy, measures that make exporting and importing more difficult could have a negative effect, leading to a lack of economic growth and even an eventual recession.

Seven percent of U.S. jobs and 14 percent of the United States’ GDP depend on exports, according to a Morgan Stanley report. Therefore, a shakeup of U.S. trade deals could put these American jobs, as well as corporate bottom lines, at risk.

Lawrence White, an economics professor at New York University’s Stern School of Business stated:

Mr. Trump’s anti-international trade posture would be not good for the financial prospects of probably the 1000 leading companies in the U.S.

Economists have said that Trump’s rejection of trade deals could also lead to a higher cost of goods within the United States. That inflation could lead to higher interest rates and other economic woes that will ripple across the country and could lead to a recession.

Currency declines could create an opportunity for U.S. exporters to present more competitive prices, but if countries implement retaliatory measures in the form of tariffs, both importers and exporters could face a hard time in the years ahead. Preparations to face these times, including greater monetary reserves, slower expansion strategies, and more risk-averse trade finance strategies, are strong options for businesses concerned about their long-term viability.

5.     Uncertainty in the first 100 days

Markets never fail to falter when there’s an air of uncertainty. Perhaps the biggest difficulty in trade that Trump’s election will cause is the degree of disruption caused by his promise to shake up U.S. trade deals.

In the near future, importers and exporters might struggle to make new business deals from and with the United States. America’s international businesses may have trouble selecting new suppliers or forging new trade routes, as the global trade landscape transforms during Trump’s first 100 days in office.

How has this historic election affected your business plans?

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As the dust settles following the UK’s vote to leave the European Union, politicians, financial institutions and businesses alike are trying to figure out how the UK will find a new path to free trade with the rest of Europe.

Experts point out that the UK could find relatively easy access to the European single market through the small European Free Trade Association (EFTA), but even that path to free trade could come with some difficulties.

What is the European Free Trade Association (EFTA)?

The EFTA is a trade organization that was founded in 1960 by 7 countries, including the UK. The association was formed as an alternative to the European Economic Community (EEC), the predecessor to the EU. The UK abandoned the association in 1973 to join the EEC.

Today, the EFTA consists of only four remaining countries: Norway, Switzerland, Iceland and Liechtenstein, all of which enjoy single-market access to EU countries through the bloc. EFTA member countries pay into EU programs, and must follow EU regulations under the terms of the European Economic Area Agreement, which governs the EFTA. However, EFTA countries do not have any vote when it comes to EU programs or policies.

Norway, existing FTAs present roadblocks to Britain

While Brexit supporters have looked at the EFTA as a possible solution to providing Britain with single-market access to Europe, entering the EFTA could pose a significant challenge.

To join the EFTA, the UK would require a vote of approval from the four exiting EFTA countries, and each of the four countries has the power to block British entry with a veto. Norway, the EFTA’s current economic power, has threatened to exercise its veto power. Norwegian officials have said that the UK could upset the economic balance within the trade bloc, as the UK’s economy is larger than the economies of any of the countries within the bloc.

It’s not certain that it would be a good idea to let a big country into this organization. It would shift the balance, which is not necessarily in       Norway’s interests. – Elisabeth Vik Aspaker, Norway’s minister of EU and EEA affairs 

Norway has not shut down the possibility of the UK entering the EFTA entirely, however. While some Norwegian officials have worried about the loss of Norway’s power within the trade bloc if the UK gains entry, other Norwegian officials have speculated that the country and the EFTA would benefit from the economic strength the UK would bring to the group. Norwegian officials are reportedly in talks with Brexit Minister David Davis on the possibility of UK entry into the EFTA.

Another major concern with the UK’s entry into the trade bloc is how that entry would impact other EFTA trade deals. The EFTA has free-trade deals covering 38 countries, including Canada, Mexico, Colombia, Peru, Hong Kong, Korea and Turkey. There is speculation that the addition of the UK to the EFTA would require renegotiation of the bloc’s existing 27 free trade agreements.

Britain’s economy needs single-market access

The UK sends 44 percent of its exported goods and 39 percent of its exported services to EU member countries, making access to the European market a crucial part of its trade economy. That means that in the wake of the Brexit vote, the UK has a lot to lose economically.

Following the vote, the country’s Purchasing Managers’ Index — a measure of manufacturing output and a key economic indicator — suffered its largest one-month drop since 2009, when the global recession was at its worst. A survey by two British human resources firms said one in six British companies were considering relocation to other EU countries as a result of the Brexit.

A report released earlier this month by the Institute for Fiscal Studies (IFS) projected that the UK would lose 4 percent of its GDP by 2030 as a result of leaving the European Single Market.

The IFS report emphasized the importance of membership into the EU’s free market through the EFTA, as membership into the market achieves more than access through a trade deal. With membership, tariffs, licenses and other barriers to trade are removed in a way that trade deals alone can’t accomplish.

Single-market membership could lessen the impact of the Brexit on the British economy. With that in mind, Britain’s new Prime Minister, Theresa May, has pledged to formulate a Brexit plan that allows the UK to remain a part of Europe’s single market.

Other options to access EU aren’t ideal

For the UK, the EFTA provides the quickest route to accessing the EU’s single market. Britain is expected to officially make its appeal to leave the EU early next year. Once they do, the UK and the EU have two years to execute an exit plan, though that deadline could be extended if both groups agree upon an extension.

The only other route the UK could seek to formulate access to the EU is to strike an independent trade deal with the trading bloc, something that would likely take much longer than the two-year Brexit timeframe.

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For example, international development experts at leading institutions such as the OECD suggest that one advantage of healthy and sustained “South-South” trade is that it lets developing and emerging economies nurture industries and commercial capabilities, allowing them to develop under less competitive conditions than in the broader global business environment.

However, there is a more general tendency to favour free trade—a rules-based regime with broad international membership and adherence—and the shaping of the global business environment by market forces. One reality of the new era in trade and global business is that even formerly “pure” command economies are displaying and encouraging characteristics that look suspiciously like entrepreneurship and market-based activity.

The emergence of China’s entrepreneurial class, millionaires and all, is perhaps the most striking example. Similar developments in Russia also demonstrate the new reality. China’s careful handling of Hong Kong after 1997, as well as its welcoming of foreign-educated expatriates—bringing with them expertise and ventures ranging from real estate mega-projects to Internet-based ventures—provides another illustration of emerging realities and converging practice.

At the highest level, protectionism imposes additional costs on economies engaging in such activity and, taken in aggregate, on the global economy and every aspect of global business.

The Great Depression is arguably a stark historical example of this phenomenon.

A more current challenge with global implications relates to the global battle over agricultural subsidies with positions taken by the United States, Canada, the EU and Japan having effectively frozen progress in several rounds of WTO talks. These countries have persistently sought to encourage other countries to agree to a “level playing field” in agriculture trade, but they continue to heavily subsidize their own agricultural sectors and have refused to eliminate these distorting practices.

These subsidies have led to the dumping of staple commodities into less developed countries, which has had severe and negative ramifications for smaller, “unsubsidized” farmers in those markets. This situation has created a deadlock in trade negotiations as many countries have seen the level-playing-field argument as a highly hypocritical posture.

Trade, not protectionism, should be the medicine for many global issues

The impact of international trade and global commerce is believed by many to have transformational potential at all levels, from political and economic considerations to elements of social structure, and every macro-aspect in between.

The argument in favour of engaging in international business and trade with oppressive regimes, or dictatorship for example, is that sanctions rarely work.

A more effective approach is to engage in what might be termed “co-operative influence”: trade and commercial engagement is a win-win and involves contact and some level of partnership.

The business relationship becomes a basis for positive influence and increases the likelihood of engagement in the international community in the future.

Trade is extremely important on a range of levels, from basic survival to less fundamental but perhaps still compelling considerations of standard of living, luxury and prestige. Trade obligations, especially those that are short-term, are settled promptly and consistently. This generally healthy flow, even when less progressive economies and regimes are involved, is an indication of the potential in “engagement through trade.”

There are arguments that suggest that even matters of international security can be addressed, at least partially, through poverty reduction and enhanced quality of life and progress beyond bare survival for a larger portion of the world population. Dissatisfaction with the current state of the world, it is said, can be mitigated through equitable trade as one strategy for encouraging and fostering engagement in the global community.

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