Free Trade Agreements
Free trade agreements (FTA) remove or reduce barriers associated with trade, like tariffs or subsidies, making exporting to that market much cheaper and more lucrative.
FTAs can also make moving goods between countries easier by streamlining customs processes and product certification. Arguably the most important aspect of FTAs is that they provide exporters with preferential access to a market, giving them opportunities that aren’t afforded to firms in other countries.
FTAs can provide exporters with preferential access to a market’s government procurement market as well, putting you on equal footing with local firms bidding for the same contracts—this is particularly advantageous given how competitive global procurement markets can be.
Some FTAs also provide protections for foreign investors.
FTAs establish rules for environmental, labour and investment standards that signatories of details are compelled to adhere to. Ground rules established by an FTA can help erase ambiguity in terms of how business is conducted within a country or trading block, and they can help ensure that everyone is on the same page.
Some FTAs are holistic, covering trade in goods, services and investment comprehensively (i.e. NAFTA), while others only cover goods or services.
This video from the U.S. International Trade Administration explains some of the basics of FTAs. It is U.S.-centric, but the details discussed are relevant to Canadian exporters:
Agreements that only cover investment are called foreign investment promotion and protection agreements (FIPA), and aim to protect investors against political risks and currency controls. These agreements also govern taxation and dispute resolution. Canada currently has 37 FIPAs with countries around the world.
The future of the Trans-Pacific Partnership (TPP), a gargantuan trade agreement between East Asian and American countries, was in-doubt when the Trump Administration pulled out of the proposed deal in January 2017. However, after a year of negotiations between the remaining partner countries, the revamped TPP, rebranded the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, is moving forward without the U.S.
Most significant to the deal is freer access to Japan’s massive economy, the third largest in the world.
Our government is also in trade talks with China, India and several nations and trading blocs in South East Asia, Central and South America, Africa and Asia.
In 2015, 80 percent of Canadian merchandise exports were sent to countries with which Canada currently has an FTA in effect. CETA is expected to push this number close to 90 per cent. While the bulk of this trade was with the United States, our primary export partner, the aforementioned figure illustrates just how important FTAs are to Canada.
EDC has judged the 10 best countries for Canadians to do business in currently, and unsurprisingly, all 10 are markets with which Canada has some form of FTA.
FTAs make exporting less expensive, more efficient, faster and easier. If you are trying to decide on a new market to break into, strongly consider one of the nations or trading blocs Canada has an FTA with, especially if it is your first foray into exporting.
More information on selecting and researching potential target markets can be found in section 2.3.
Foreign Trade Zones
A foreign trade zone is a location within a country that has tariff or tax exemptions on the purchase or importation of certain goods, which can be re-exported or sold domestically into that market (allowing for taxes or duties to be deferred to a later time).
Foreign trade zones are generally located in major cities, industrial centres and vital trading ports. Learning where these foreign trade zones are, what benefits they offer exporters and how to take advantage of these benefits, can be a crucially important strategy to infiltrate a new market. Foreign trade zones can reduce costs and red tape, improve efficiencies and get your goods into the hands of your customers sooner.
To find out about foregin trade zones in your target market and what they can offer you, contact Canadian consular services.
Advantages for Importers
The Canadian government offers several programs for businesses that import goods from other countries and then export them. These programs are applicable to both firms that import goods and add value to them through processing or other means, as well as firms that simply buy goods to resell them in different markets.
Duty Deferral Program (DDP)
The DDP is administered by the Canada Border Services Agency (CBSA). The CBSA can postpone or refund duties and taxes you would otherwise have to pay on goods you import.
This program allows you to increase cash flow and price your exports more competitively.
The DDP has three components that can be used individually or in combination:
Customs Bonded Warehouse
A customs bonded warehouse is a storage facility that your company operates under the authority of the CBSA.
Note that it doesn’t have to be an actual warehouse. It can be part of your office building or a hotel conference room, depending on your requirements.
When you set up a customs bonded warehouse, you do not need to pay duties and taxes until the goods you store there enter the Canadian market.
If you export the goods from Canada, you don’t pay duties or taxes at all.
By using a customs bonded warehouse, your up-front costs are reduced, since you only pay duties on the goods you sell domestically, when you sell them:
Duties Relief Program
This program is run by the CBSA, and it allows you to avoid paying duties on imports that you store, process or use to manufacture other products, provided you later export the goods.
If you have already paid for duties on imported goods that you exported, you may still be able to recover those duties through a refund under the duty drawback option.
The Export Distribution Centre Program (EDCP)
The EDCP is administered by the Canada Revenue Agency (CRA). It is a program intended to benefit businesses that import goods, process them to add limited value and then export them.
If you qualify, you don’t have to pay HST on most of your imported goods or on domestic purchases of goods worth $1000 or more.
The EDCP is not intended to benefit companies that manufacture new products that they then export. It is designed to benefit companies that are involved in any of the following processes:
Basically, if you take a product and modify it in any way, adding what the program deems as “limited value”, you can qualify.
You may be eligible for the EDCP if the following applies to you:
Basic services are services which can be performed in a customs bonded warehouse. If a service goes beyond those which can be performed in a customs bonded warehouse, it is a non-basic service.
The Exporters of Processing Services Program (EOPS)
The EOPS program is administered by the CRA. It allows participants to avoid paying HST on imports of goods belonging to non-residents, as long as the goods are imported for processing, distribution or storage, and are then exported.
Unlike EDCP, the EOPS program imposes no minimum level of export sales you need to meet in order to be eligible. It also sets no limits on the value you can add to a non-resident’s goods. You can use goods to manufacture or produce other products for foreign customers.
To participate in the EOPS Program:
More information on these programs can be found at the Department of Finance’s website.
Source: Department of Finance Canada