How Trade Agreements Affect Global Trade & Supply Chain

Taking a business to the global level isn't as simple as stocking shelves around the world. It requires an extensive understanding of existing regulations and tariffs that may affect operations. 

Trade agreements help streamline this process while removing barriers, such as duties, allowing for more efficient and cost-effective supply chains and global trade. International organizations help facilitate these agreements, which provide oversight that protects all parties involved while ensuring fair terms and a just dispute resolution process.

The Impact of Trade Agreements on International Trade

As the economy becomes increasingly global, it's normal to see imported goods on store shelves as frequently as domestic products. A trip down the produce aisle in a grocery store reveals a range of fruits and vegetables imported from other countries with more favorable growing conditions. 

These imports are made possible through extensive trade agreements, which bypass trade barriers by reducing or eliminating tariffs. They allow for further economic cooperation and market access between countries.

Several major trade agreements dominate the international market, including:

• NAFTA/USMCA: The North American Free Trade Agreement went into effect in 1994, eliminating most trade barriers between the United States, Canada and Mexico. In 2020, it was replaced with the United States-Mexico-Canada Agreement (USMCA). 
• EU Single Market: The European Union's single market allows for goods, services, people and capital to move freely within all nations in the EU. It allows citizens to work in any other EU country while expanding the availability of products and services without increased prices or barriers.
• CPTPP: The Comprehensive and Progressive Agreement for Trans-Pacific Partnership allows for free trade between Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, Vietnam and the UK. 

How Trade Agreements Influence Global Supply Chains

Free trade agreements impact global trade and supply chains in several ways. They typically reduce or eliminate tariffs, encouraging more companies to expand into foreign markets. As a result, a wider range of products becomes available at a lower cost since there aren't any tariffs or other fees to pass on to consumers.

Trade agreements impact the supply chain before products arrive on shelves for consumers. They make sourcing raw materials easier at a lower cost, reducing overall production costs for businesses. Trade agreements can also influence logistics strategies by making business partnerships more lucrative due to reduced costs. It may make more sense for companies to source raw materials from a country their nation has a trade agreement with than it would to source them from another country that might offer the goods at a lower cost but with a higher tariff. 

An increase in global trade policies meant to encourage free trade has caused supply chains to become more interconnected than ever before. Even a single vehicle may contain parts sourced from thousands of suppliers across dozens of countries. By gaining access to free trade agreements, manufacturers can develop their products as cost-effectively as possible, allowing those savings to be passed on to consumers.

The Role of International Organizations in Trade Agreements

Trade agreements don't only occur through government negotiations. Several international organizations help facilitate free trade by creating a forum where every country can negotiate freely and equally with others for favorable trade agreements.

The World Trade Organization (WTO) helps facilitate agreements between countries. It also offers a platform for negotiating and resolving disputes between member countries and provides oversight to ensure agreements are honored. 

The International Monetary Fund (IMF) and World Bank also affect trade policies. Developing countries can seek loans and assistance to help them gain access to the global economy. These organizations can also provide advice to countries. 

Regional trade organizations play a similar role, but their scope is limited. For example, the European Union influences trade regulations among its member nations. The Association of Southeast Asian Nations (ASEAN) provides similar benefits to its members. 

Benefits & Challenges of Trade Agreements

Free trade agreements have benefits and drawbacks to consider.

Advantages of trade agreements include:

• Economic growth: Trade agreements encourage more trade between nations, increasing economic activity and growth.
• Job creation: Job opportunities increase as demand for products requires companies to hire more workers to keep up with production.
• Increased market access: New economic opportunities arise when companies enter new markets. 
• Increased competition: Trade agreements allow foreign products to compete with domestic ones. This reduces costs and requires more efficient resource allocation for companies to remain profitable.
• Reduced prices: Because a wider range of the same types of products becomes available, costs tend to drop in a free market, passing on savings to consumers.

Trade agreements also present challenges, such as:

• Job displacement: While free trade agreements can increase job opportunities, they can also lead to job displacement. Some companies may encourage outsourcing labor instead of paying a higher price for labor in their home country. Companies may also opt to operate in countries with fewer regulations to comply with to reduce overhead.
• Regulatory and legal compliance: Trade agreements typically have detailed regulations, especially when multiple countries are involved. These regulations are often amended regularly, making them complex for businesses to follow. Failure to comply with regulations can result in penalties and operational disruption.
• Geopolitical conflicts: During conflicts, countries may enact tariffs and other penalties to suddenly halt international trade or harm the other country's economy. 

Managing Free Trade Agreements for Businesses

Businesses seeking to enter the global market should always leverage free trade agreements to the fullest extent possible to reduce costs and improve profitability and competitiveness. Part of this requires an intricate understanding of compliance requirements, such as tariff classifications and rules of origin. Because these processes can be complex and vary based on the target country's marketplace, businesses should utilize technological resources and seek expert guidance from customs and international trade experts before developing their strategies. 

Expand Into New Markets With Atlas International

Trade agreements play a pivotal role in determining how effectively a business can operate in a foreign country and what its global supply chain looks like. Businesses must remain up-to-date on all trade agreements impacting their industry, which requires extensive resources that smaller companies may not have. That's where outsourcing free trade agreement management comes into play. This allows companies to outsource the planning and monitoring of free trade agreements relevant to their business to help reduce disruptions and maximize benefits.

Atlas International has extensive experience navigating international borders and clearing customs. Since shifting to the global logistics sector, we've helped businesses like yours understand their operations and expand into new markets. Contact us today to start developing your international trade strategies and get your free quote.