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Importance of Free Trade Agreements for International Trade

Lilla Zsitnyanszky

17. Juli 2023

German Version

Free trade agreements are agreements between states, customs unions, or groups of countries that aim to facilitate the trade of goods and services by reducing or eliminating trade barriers such as tariffs and quotas. These agreements are of great significance for international goods shipping as they lower costs and facilitate access to new markets.



When two countries sign a free trade agreement, it means they are opening their markets for the trade of goods and services and eliminating trade barriers. This can help lower the costs of international goods shipping, as the tariffs and fees that would typically apply are reduced or eliminated. Free trade agreements can also ease access to new markets by enabling trade with countries that previously had no trading relationships. This can contribute to increased revenue and maximized profits.



Generally, agreements between countries are made for many years and tend to remain relatively stable over time.



It's important to note that free trade agreements are not only relevant to large corporations but also to small and medium-sized e-commerce businesses engaged in international trade. Lower tax burdens can promote the growth and success of small and medium-sized enterprises. Therefore, these agreements are of immense importance to international trade.



There are numerous free trade agreements worldwide. Here are examples of some of the major agreements:



  1. CPTPP (Comprehensive and Progressive Agreement for Trans-Pacific Partnership): A free trade agreement among Australia, Brunei, Chile, Japan, Canada, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam.

  2. RCEP (Regional Comprehensive Economic Partnership): A free trade agreement among ASEAN countries (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam) as well as China, Japan, South Korea, Australia, and New Zealand.

  3. EU-MERCOSUR Agreement: A free trade agreement between the European Union and the countries of the South American MERCOSUR bloc (Argentina, Brazil, Paraguay, and Uruguay).

  4. USMCA (United States-Mexico-Canada Agreement): A free trade agreement among the USA, Mexico, and Canada.

  5. EU-Japan Economic Partnership Agreement: A free trade agreement between the European Union and Japan.

  6. EFTA-MERCOSUR Agreement: A free trade agreement between the European Free Trade Association (EFTA) countries and the MERCOSUR bloc countries.

  7. ACFTA (ASEAN-China Free Trade Area): A free trade agreement between ASEAN countries and China.



Of course, there are additional free trade agreements around the world, but these are some of the most recent and pertinent ones. Here is an overview of the current agreements between the EU and other countries: https://policy.trade.ec.europa.eu/eu-trade-relationships-country-and-region/negotiations-and-agreements_en 



Customs Perspective



From a customs perspective, a free trade agreement results in the removal of specific customs barriers and trade obstacles among the participating countries. This facilitates and promotes trade between these countries.



In concrete terms, this means that the countries involved levy lower or no tariffs on goods exchanged between them. As a result, companies in these countries can offer their products at more competitive prices, enhancing their competitiveness. Additionally, a free trade agreement often simplifies customs procedures and reduces administrative barriers in cross-border trade.



A crucial component of free trade agreements is the regulation of rules of origin and granting of preferences.



Rules of origin refer to the country in which a product is manufactured or last substantially transformed. Rules of origin are significant because many free trade agreements only extend benefits to products originating from the participating countries. To capitalize on these benefits, a company must demonstrate that its products adhere to the origin rules stipulated in the free trade agreement.



This can be substantiated through various documents such as certificates of origin, manufacturer declarations, or supplier declarations. Therefore, it is essential for companies to have a precise understanding of the rules and documents outlined in the respective free trade agreement and how to implement them effectively. The rules can be viewed here (as of March 2023): https://wup.zoll.de/wup_online/uebersichten.php?id=2&stichtag=17.03.2023 



Granting of preferences also means that the participating countries apply reduced or even completely eliminated customs duties among each other. This allows companies to save costs and enhance their competitiveness. However, specific rules of origin must also be adhered to for this purpose.



Overall, when utilizing free trade agreements in the customs realm, it is crucial to pay close attention to rules of origin and the granting of preferences, and to meticulously create and retain the necessary documents.



traide Support



The customs tariff number plays a significant role in rules of origin and preferential treatment, as the origin of a product and associated preferences depend on it.

Free trade agreements exempt certain goods from duties if they meet specific conditions, such as having their origin in one of the participating countries. The customs tariff number helps determine the origin of a product by providing information about its nature and characteristics.

It's essential to know that the customs tariff number can vary from country to country, even for the same product. Therefore, using the correct customs tariff number is crucial to determine a product's origin and take advantage of the preferences of a free trade agreement.



Thanks to traide AI, you can efficiently and swiftly manage customs tariff classification, leveraging the applicable rules to your advantage. We support you with individual requests or mass classification of hundreds of products. New products are accurately classified, and existing products are continually verified for their classification using our AI technology. This ensures your legal compliance and streamlines your customs processes.



We are excited to provide you with a brief demo call to showcase traide's capabilities. If you'd like, we can also work directly with your data. Feel free to reach out to us at info@traide.ai.

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