Do your homework on trade agreements

Do your homework on trade agreements

When President Bush signed the Central American Free Trade Agreement last May, it marked the 10th free-trade agreement signed by the current administration and 14th overall for the United States. More are being negotiated, including agreements with Thailand, South Africa, Oman, United Arab Emirates and virtually every country in the Western Hemisphere except Cuba.

Internationally oriented businesses have an enormous opportunity to save millions of dollars by taking advantage of the rules embedded in free-trade agreements. The cornerstone of each one is the elimination of customs duties on most products. But free-trade agreements do more than that, introducing entirely new sets of rules to protect, among other things, intellectual property and foreign direct investment. They also eliminate bureaucratic customs procedures and arbitrary technical standards that impose barriers to trade.

The Grocery Manufacturers of America, an industry group representing food, beverage and consumer-products companies, said CAFTA alone will save its industry almost $9 million in the first year of the agreement. The association also expects industry exports to increase over $300 million when the agreement is fully implemented.

But for many companies, the savings have been illusory - and therein lies the dark underside of free-trade agreements - complexity. Trade "experts" and economists did not negotiate these agreements; politicians did. And politicians have interests to protect. And those interests change depending on the agreement being negotiated. The U.S. sugar industry fought to exclude sugar liberalization from the Australian free-trade agreement. The U.S. textile industry fought against textile liberalization in the Morocco trade agreement. Our free-trade agreement partners, of course, are not immune to this. U.S. chemical manufacturers may face zero duties on exports to some partner countries while facing high duties in others.

And, with so many free-trade agreements being negotiated, it is often hard to know when the time is right to act. For example, should a company seeking a Latin American stronghold invest in Chile, which signed a free-trade agreement in 2003? Perhaps it should wait to invest in Costa Rica, which is part of the CAFTA agreement that is before Congress. Or, how about waiting for Colombia, which is negotiating its own free-trade agreement with the U.S.?

With all of the complexities surrounding free-trade agreements, the result is a patchwork quilt of agreements that can create headaches for companies trying to take advantage of freer trade. And it is getting more complicated, as other countries have begun negotiating trade accords among themselves. The European Union has dozens of free-trade agreements in place and is negotiating significant ones with Brazil and Argentina. China just completed negotiating one with ASEAN, a group of 10 Southeast Asian countries. And Japan is negotiating free-trade agreements with Thailand and South Korea.

Despite the complexity, U.S. companies can save millions of dollars by taking advantage of these agreements. But savings do not magically appear on their own. The key to success? Knowing the rules. That's not easy. Most companies - especially small and midsize businesses - lack the in-house expertise to master the trade laws. Hiring outside counsel can help, but can be expensive. The costs, however, may be dwarfed by the ultimate benefits, which can allow companies to:

-- Reduce supply-chain costs: A basic tenet of free-trade agreements is to reduce customs duties. Knowing which products are in line for duty reductions and the timeline for those reductions can save millions of dollars.

-- Identify markets for export: Free-trade agreements can open up previously unavailable markets. They can give companies an advantage over competitors from non-agreement countries. Under the North American Free Trade Agreement, for example, U.S. businesses have an advantage over others selling goods in Mexico because U.S. goods tend to incur lower customs duties than goods from countries outside NAFTA.

-- Rationalize mergers and acquisitions: Companies can acquire other companies because of solid brands or durable supply chains. But thinking about the trade implications of the merger or acquisition can help integrate the new company more efficiently.

Each company's unique situation will determine whether and how it takes advantage of free-trade agreements. However, knowing the rules can unleash powerful cost savings for a company. Unfortunately, the rules are complicated - and getting more so. That being said, companies willing to invest a little time and money up front to understand the rules will be more competitive and profitable in the future.

Sydney H. Mintzer is counsel at Miller & Chevalier Chartered in Washington. He can be contacted at (202) 626-5800, or at smintzer@milchev.com.