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FTAs offer a golden opportunity for SMEs

Free trade agreements between two countries not only create better business expectations for large companies but also offer numerous benefits for developing and strengthening exporting SMEs.

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Published by ConnectAmericas

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According to Misión PYME a free trade agreement (FTA) is an agreement between two or more countries that stipulates rules to regulate trade relationships, increase investment and trade flows and integrate economies. The idea of an FTA is to eliminate trade and tariff barriers and to ensure free trade among treaty party members.

FTAs in force in Latin America and the Caribbean include, among others: North America Free Trade Agreement (Mexico, Canada and the United States, Southern Common Market (MERCOSUR, Argentina, Brazil, Paraguay, Uruguay and Venezuela), the Andean Community (Bolivia, Colombia, Ecuador and Peru), TLC Peru-United States, TLC Colombia-European Union, TLC Colombia-United States, and TLC Uruguay-Israel.

Governments usually introduce mechanisms to stimulate SMEs to make use of tariff preferences included in the agreement

Generally speaking, SMEs (small and medium-sized companies) exporting to other member countries have obtained more benefits from the implementation of an FTA than others engaging in trade. This is because companies can now access the partner market at a lower cost than prior to implementation of the treaty. PYMEX explains that FTAs enable preferential access because tariffs are either reduced or eliminated.  

Likewise, SMEs utilizing capital goods and/or input from the partner country also benefit since import costs will be reduced. Additionally, it brings companies from both countries closer together while generating a flow of new trade opportunities. Furthermore, governments usually introduce mechanisms to stimulate SMEs to make use of tariff preferences included in the agreement. It is key for SMEs wishing to trade at an international level to identify the existing benefits and make use of them. 

Ritchi, a Colombian SME that engages in the production of women’s attire, is an example of the benefits provided by FTAs. Although the company already exported to Miami and Los Angeles its objective was to expand within the US market. The FTA between Colombia and the US offered Ritchi the opportunity to benefit from the tariff preferences included in the agreement. Nowadays, the clothing company has representation in several US cities and an online store for clients in this market.

Benefits for SMEs:

  • Trade benefits as compared with other countries: FTAs offer countries better target-market conditions. For example, when the FTA between Colombia, Peru and the European Union (EU) entered into force, preferential conditions in that market were equaled for Mexico and Chile (that already had an FTA with the EU). Summing up, they offer SMEs a better position in the international market given the competitive advantages in production costs and flexibility to adapt much faster to changes in the economy compared to larger companies.
  • Better conditions and stability: one of the main advantages of an FTA is that it does not require periodic renewal, as is the case with partial scope agreements between countries. This offers stability and predictability as to the rules for the two countries trading goods and services. Another positive aspect is that inflation inclines to move closer to international levels, which is generally lower than that of domestic economies in developing countries. This enables SMEs to improve their financial and budget planning and to generate a solid base for long-term growth.
  • Reduction of input costs: FTAs improve trade terms between two countries and promote efficient, transparent and nimble customs operations. Less red tape translates into a reduction of operating costs for the exporting SME. Hence, in addition to the decrease in bureaucratic  costs, exporting SMEs also witness a drop in storage and operational costs. Likewise, tariff reductions not only diminish production costs but bring down the costs of technology upgrades and improve productivity. For example, an SME that manufactures screws could import raw material at a lower cost or upgrade its manufacturing technology resulting in lower production costs, lower prices and more competitiveness.
  • Increase in sales volume: preferential trade conditions in external markets improve competition in the supply of goods and services offered by exporting SMEs. This generally implies an increase in international sales, generating more profit and stability for the company. According to ECLAC, it is worth highlighting the positive impact generated by the FTA between Chile and the European Union that entered into force in 2003. According to data collected by Chilean authorities, of the total amount of companies that exported to the EU in 2007, almost 50% were SMEs. 

To find out more about incentives and benefits of participating in an FTA, contact the Export Promotion Agency, the Ministry of Economy or the Industry Chambers in your country of origin. They offer relevant information and technical assistance and even organize workshops and training events for SME entrepreneurs.

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