The basic goal of a free trade agreement (FTA) is to make it easier for nations to trade with each other. In its most basic form, an FTA does this by reducing or eliminating customs tariffs on goods that are traded among its partner countries. An FTA can also reduce non-tariff barriers in areas such as labour mobility and standards, or set up protections for foreign investments that originate in one of the partner countries.
Historically, Canada’s most important FTA by far has been NAFTA. But it’s likely the new Canada–EU Comprehensive Economic and Trade Agreement (CETA) will eventually rival NAFTA’s benefits by opening up the EU market and its 500 million consumers to Canadian businesses.
Benefits of FTAs
Not all FTAs cover the same ground. Some merely eliminate tariff barriers among the partner countries, while others can reach into areas such as intellectual property protection. But depending on what was negotiated in the agreement and how it applies to your sector, an FTA may help you do business more easily and cheaply in the partner country or countries. For example, the agreement may:
- Allow you to charge less for your goods in the partner country by eliminating import tariffs. This will help you compete with local firms.
- Streamline customs procedures, which will reduce your costs of doing business in the partner country.
- Make it easier to obtain local product certification via Canadian regulatory bodies. This will reduce your barriers to entry and overall certification costs.
- Simplify entry procedures for your company’s personnel. This will make life easier if you’re a service supplier or if you need to provide after-sales service to customers in the partner country.
- Provide better protection for foreign investors, thus making your investments in the partner country more stable and predictable.
- Allow you to bid on government contracts at national or sub-national levels in the partner country.
Getting the most from FTAs
In many situations, FTAs can be a great help to Canadian exporters and investors. But just because Canada and another country have an FTA, it doesn’t necessarily follow that the market will suit your company’s needs and strengths. An FTA may be one factor in deciding whether you should enter a market, but your key concern should be whether the market is a good fit for your business. Deciding this requires good old-fashioned market research, such as finding out whether there are potential customers for what you’re offering, whether there are local businesses you can partner with and what your best entry strategy might be.
But let’s assume you’ve taken a careful look at your potential market, which has an FTA with Canada. Let’s also assume you’d want to go there even if the FTA didn’t exist. This is a promising situation, so now you have to figure out how the FTA can help you get the best results in your new market. Depending on your type of business, here are some questions you might want to ask:
If the FTA eliminates tariffs on your exports, will this help you obtain enough market share to justify your entry into the market? Could your competitors respond in ways that would neutralize your advantage?
- Product compliance
Does the FTA include provisions that will make it easier and cheaper for your products to comply with local standards and regulations? How much would this contribute to your profitability in the market?
- Service personnel qualifications
If you’re a service company, does the foreign market recognize the Canadian qualifications of your service personnel under the FTA? Would this make it significantly easier to send them to the market to deliver your service there? Or would it be better to set up a local affiliate to provide your service?
- Rules of origin
Will complying with the FTA’s rules of origin give you favoured access to the market over your non-local competitors? Will this translate into more market share?
- Direct investment
If you’re considering an investment in the partner country, does the FTA guarantee the equal treatment of both local and foreign investors there? Will this help you invest profitably in the market? If some sectors of the local economy don’t permit foreign investment despite the FTA, would this apply to your company?
Given how complex the provisions of an FTA can be, you may find it difficult to come up with definitive answers to some or all of these questions. Smaller firms in particular may not have the resources to do the necessary groundwork. If this applies to your business, it’s a very good idea to use outside accounting and legal expertise to obtain an accurate picture of your FTA situation. If you also need financial assistance to establish your company in your new market, Export Development Canada (EDC) may be able to help via its wide range of financing, bonding and insurance solutions.