How can Canadian SMEs benefit from free trade agreements anyway?

04/04/2017

Celebrating colleagues

Celebrating colleagues

Free trade agreements (FTAs) such as the Canada-European Union Comprehensive Economic and Trade Agreement (CETA) and the North American Free Trade Agreement (NAFTA) have been stealing the headlines for the past few months. For all the talk on these agreements, however, it can be hard to find SME-friendly information on how companies can benefit from them.

In fact, Canada has FTAs with 15 countries, and soon an additional 27 nations once CETA is in force.

Admittedly, an FTA is not the only consideration for choosing a market. You still have to make sure there is a need for your product or service, that you have a unique selling proposition, and that you can deliver your offering in a way that meets customer needs. That being said, an FTA can be an important factor in making a current or target export market more attractive.

So, what’s the deal with FTAs and how can your company benefit? Since each FTA is different, the answer depends on which one you’re talking about.

Furthermore, the answer is dependent on whether you’re selling goods, services, and/or looking to set up a physical presence in the country such as a branch office or production facility. Let’s look at FTA benefits for each of these three options, with examples from NAFTA and CETA in particular.

Selling goods to an FTA country

When it comes to selling physical products, the most common benefit of FTAs is also the most well-known: tariff reductions. However, depending on what you are selling and where it was produced, as a Canadian exporter you may not always benefit from reduced tariffs. Here’s how to find out whether (and how much) your company can benefit:

Determine the Harmonized System (HS) code of the product(s) you want to export. This guide by Statistics Canada is a good starting point. Confirm the correct code by speaking with a customs broker. Find one near you using the Canadian Society of Customs Brokers’ online member directory.

Check the tariff schedule of your target market. Each country’s tariff schedule lists customs duty rates by HS code, typically with one column for FTA partner-countries and another for non-FTA partner-countries. In some instances, the difference between FTA and non-FTA rates can be significant, whereas for other goods there could be no difference. The degree of tariff advantage you receive from an FTA therefore depends on your product. This is why FTA tariff rates may be a determining factor in entering a market in some cases but not in others.

  1. For the U.S.: Refer to the S. Harmonized Tariff Schedule. Under Column 1, the Special column includes NAFTA rates, and the General column is for goods originating from non-FTA countries (Column 2 applies to North Korea and Cuba only).
  2. For the EU: Current duty rates are listed in the EU’s online TARIC Also consult Find your EU Tariff Rate on Global Affairs Canada’s CETA site to see how your rates might change once the agreement is in force.
  3. For other countries: Find the link to each country’s tariff schedule on this page.

Verify whether your goods meet the rules of origin of the specific FTA in order to qualify as a Canadian-origin product. These, too, are typically listed by HS code. Your goods can only qualify for preferential tariff treatment if they meet the rules of origin. For example, if you are shipping products from Canada to the U.S. and they are deemed to originate in Vietnam, they would not benefit from the NAFTA rate.

  1. For the U.S. and Mexico: See the NAFTA overview within the broader Guide to Exporting to the United States published by the Trade Commissioner Service. Look up rules of origin by product in Annex 401 of NAFTA.
  2. For the EU: See Annex 5 – Product-Specific Rules of Origin of the CETA agreement.

Prove that you meet the rules of origin using a Certificate of Origin. See CBSA: Certification of Origin under Free Trade Agreements to access the forms (there is no CETA template yet). The Canadian Chamber of Commerce certifies your Certificate of Origin.

Another possible benefit of FTAs for goods producers is more streamlined product standards and certification requirements. For example, CETA includes a protocol on conformity assessment, allowing some Canadian products to be tested and certified for the EU market from Canada.

Selling services to an FTA country

FTA benefits are even available to companies in sectors such as software, consulting, or tourism that don’t send physical goods across borders. Here are a few:

National treatment. Both NAFTA and CETA specify that service providers in most sectors will be treated as national (i.e. local) companies. This means that they would not face artificial barriers to providing their service in a partner country, such as being required to have a physical presence there. Having these types of provisions written into FTAs makes it easier for nations to hold each other accountable in cases where discriminatory practices may occur.

Easier labour mobility for cross-border travel and employment. For example, did you know that NAFTA provides for five special visa classifications? One of these is the B-1 classification for business visitors. You may not even realize it, but when Canadians travel to the U.S. or Mexico for trade shows or business meetings, we are granted a B-1 visa upon passing through customs with no advance paperwork required. Of course, showing up with relevant documents, such as a travel itinerary, is advisable – see the hyperlink above for advice.

Services will be central to the FTAs of the future. CETA in particular is highly progressive in its provisions for service exporters because the growing importance of the service sector to the Canadian and EU economies was recognized during negotiations. See the FTA’s chapter summaries to read about CETA’s wide-ranging coverage on topics such as telecommunications, electronic commerce, and mutual recognition of professional qualifications.

Direct investment in an FTA country

Companies that provide either goods or services are aware that even with advanced communication technologies and faster shipping times, being close to customers is still a key competitive advantage.

For key markets, you may consider setting up a physical office, whether it’s to respond to customer inquiries in their language and time zone, or whether it’s to produce locally in order to deliver within days as opposed to weeks. Here are some ways that not only FTAs, but also Foreign Investment Promotion and Protection Agreements (FIPAs) and Tax Treaties can make a difference:

National treatment. This is a similar concept to the one explained above: a company setting up an affiliate in an FTA or FIPA partner country is afforded the same treatment as if it were a domestically-owned company.

Avoiding double taxation. If you set up a subsidiary internationally, the revenues you make in that country may be taxed by the local government and your worldwide revenues may be taxed by the Canada Revenue Agency. This presents the possibility of having your subsidiary’s revenues taxed twice, both at home and abroad. FTAs, FIPAs, and Tax Treaties can all help to establish processes to ensure that these revenues are only taxed once.

Integrated supply chains. You may want to send employees or unfinished goods between your various international locations in order to provide better service, even out production capacity, or drive mutual learning between offices. In these cases, the benefits listed in the goods and services sections above can play a huge role in facilitating these movements so that your global operations can be as effective as possible.

FTAs are complex and each one is unique. This explains why it can be so hard to get a clear answer on how exactly your company can benefit when selling to, buying from, or investing in a partner country. Hopefully the points and hyperlinks above give you a clear starting point for understanding how to navigate – and benefit from – these agreements.

Want to know more? Read Getting the Most from Free Trade Agreements by EDC. Make sure to contact your local Trade Commissioner as well as consult relevant experts such as customs brokers, lawyers, accountants, or consultants.

Don’t hesitate to message me on LinkedIn if you have questions on how to further explore the benefits of a specific FTA for your company.

Disclaimer: The opinions expressed in this article are those of the contributing author, and do not necessarily reflect those of the Forum for International Trade Training.

About the author

Tanita Alexandridis

Author: Tanita Alexandridis

On EDC’s Advisory Services team, Tanita Alexandridis, CITP, directs Canadian companies to the wealth of resources and services that exist to help them gather market intelligence, enter their target markets, and mitigate some of the risks of exporting. She also contributes articles to My StartUp Canada, a resource for new entrepreneurs in Canada.

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