What Free Trade Does for Small Business
Free trade agreements are important for small businesses because they simplify the process of doing business with the partnering countries. Those getting started in exporting or importing should trade with countries that have agreements since small businesses do not have the diplomatic contacts or deep pockets to target complicated markets. These negotiated markets are more feasible as the business has a higher chance of offering the product at the right price to the foreign buyer. The agreement’s preferential treatment can make the difference between being competitive falling flat.
So, how does it all work?
Free Trade Agreements are negotiated by the governments of the participating countries. Some are bilateral (e.g. US & Chile), or they can involve several countries (e.g. NAFTA or CAFTA-DR). The most common benefit of free trade agreements is they offer preferential treatment to goods that originate in from partnering countries. Preferential treatment refers to the waiving or reduction of tariffs when the goods cross borders. This is better illustrated with an example:
Under the North American Free Trade Agreement (NAFTA) I can ship a widget that was made in the US to Canada without paying a duty to the Canadian government. If NAFTA did not exist, then I’d have to pay a duty on the widget upon it entering Canada. This will make my product more expensive to the Canadian buyer. The key is the origination of the product as only goods made in the US will qualify for preferential treatment.
Some people criticize free trade agreements (FTAs) because they are often deemed as an American job reducer. However, exporters play an important role in the country’s economy as well as the current unemployment situation. According to the office of the United States Trade Representative, one billion dollars in new U.S. exports supports more than 6,000 additional U.S. jobs. And, every billion dollars of service–based exports supports more than 4,500 jobs (examples of service exports could include marketing, travel and tourism, architectural, construction, and engineering services).
www.export.gov lists other areas the FTA addresses as follows:
- The right for a U.S. company to bid on certain government procurements in the FTA partner country
- The right for a U.S. investor to get adequate compensation if their investment in the FTA partner country is taken by the government (e.g., expropriated).
- The right for U.S. service suppliers to supply their services in the FTA partner country.
- Protection and enforcement of American-owned intellectual property rights in the FTA partner country.
- The right for U.S. exporters to participate in the development of product standards in the FTA partner country.
The United States currently has 14 free trade agreements in place with 20 countries:
- DR-CAFTA: Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras and Nicaragua
- NAFTA: Canada & Mexico
For more information about free trade agreements, or to schedule an appointment with an international trade specialist visit the following link: