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Free Trade Agreements and SAP GTS Risk Management

Services 03/14/2023

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Global Trade drives economic growth and development worldwide. Advances in transportation and communication technologies and developing global supply chains through the World Trade Organization (WTO) and Free Trade Agreements (FTAs) have facilitated international trade over the years. However, global trade can also pose challenges, including the risk of trade imbalances, protectionism, and potential negative impacts on the environment and labor standards.

Free Trade Agreements (FTAs) play an essential role in global trade by promoting economic growth and development by reducing trade barriers and facilitating increased trade and investment between countries. FTAs can also help to promote international cooperation and improve political and financial stability.

Types of Trade Agreements

There are three types of Trade Agreements.

Free Trade Agreements (FTAs): FTAs are treaties between two or more countries designed to reduce or eliminate certain barriers to trade and investment and to facilitate stronger trade and commercial ties between participating countries.

FTAs aim to create a more level playing field for businesses and increase market access for goods and services by eliminating trade barriers. They often include provisions that promote fair competition, protect intellectual property rights, and address issues related to labor and environmental standards.

FTAs can be bilateral, involving two countries, or multilateral, involving more than two countries. Some examples of FTAs include the North American Free Trade Agreement (NAFTA), the Trans-Pacific Partnership (TPP), and the European Union's Single Market.

Economic Partnership Agreements (EPAs): An Economic Partnership Agreement (EPA) is a type of Free Trade Agreement (FTA) that is negotiated between the European Union (EU) and developing countries or regions. The main goal of an EPA is to promote trade and investment between the EU and the developing country or region by reducing trade barriers and increasing market access.

Association Agreements (AAs): Association agreements exist between the European Union (EU) and a non-EU country or region that establish a framework for cooperation and economic integration. They typically cover many areas, including trade, investment, political cooperation, and social and environmental issues.

Free Trade Agreements and their Role in Risk Management

Free Trade Agreements (FTAs) can be an effective tool for managing risks associated with international trade. By reducing trade barriers, FTAs can help businesses increase market access and diversify their customer base, mitigating risks associated with relying on a single market or customer.

FTAs can also help businesses reduce costs associated with tariffs and customs duties, improving profit margins and reducing price volatility. In addition, many FTAs include provisions that protect intellectual property rights, which can help businesses protect their research and development investments.

However, FTAs can also introduce new risks for businesses. For example, increased competition from foreign companies can pressure domestic firms, which may need to adjust their strategies to remain competitive. Businesses may also need help navigating complex regulations and rules of origin requirements, which can be costly and time-consuming.

To effectively manage risks associated with FTAs, businesses should carefully assess the potential benefits and drawbacks of participating in an FTA. This may involve conducting a detailed analysis of the market and regulatory environment in the target country, as well as developing contingency plans to mitigate potential risks.

Free Trade Agreements in the European Union

  • FTAs enable reciprocal market opening with developed countries and emerging economies by granting preferential access to markets. Example: FTA EU-JAPAN
  • By removing most of the tariffs on EU exports to Japan, EU companies stand to make savings of €1 billion per year.
  • Also, by opening service markets, this trade agreement is expected to contribute to the creation of 15000 new jobs in the EU for every extra €1 billion gained from trade with Japan.

Some European Facts and Figures

Click here to Enlarge


Here’s an example of an FTA under negotiation for the EU (European Union)

Click here to Enlarge

Why SAP GTS Risk Management?

According to the European Council, 90% of future global growth is predicted outside Europe (EU and Non-EU). With their significant role in global supply chains, SMEs are well-positioned to leverage this trend.

To ensure that imported products are available at affordable prices, to protect the interests of EU citizens and businesses against unfair trade practices, and to answer concerns raised with specific trade deals, the European Union has taken concrete action. Measures include trade defense instruments and trade provisions protecting the environment and agriculture.

SAP GTS Risk Management is a module within the SAP GTS software suite that enables companies to manage the risks associated with global trade and ensure compliance with regulations while improving supply chain efficiency and reducing costs. Here are some reasons companies should implement SAP GTS Risk Management.

  • The number of Free Trade Agreements is on the rise
  • Complex ruling to calculate “preferential origin”
  • To simplify your administrative burden
  • To identify preferential treatment eligibility
  • To benefit from reduced import duty rates under specific conditions

Trade Preference Management – Business Process

    SAP GTS Risk Management can support businesses by:

    • Identifying the need for Long-Term Supplier Declarations, generating supplier inquiries, and ensuring that incoming LTSDs are properly followed up and managed.
    • Calculating product origin and determining preference eligibility based on updated free trade agreements, product costing, and bill of materials.
    • Automatically generating and managing declarations for customers that purchase your products.
    • Issuing and reissuing declarations in the event of a change in preferential eligibility.
    • Integrating sales, production, and procurement with preference processes.
    • Providing flexibility to support a full range of Free Trade Agreements.

    The Result of Implementing SAP GTS Risk Management

    • Exporter’s customers can import goods duty-free or at a reduced rate of import duty.
    • Organization-wide import duty reduction for globally operating organizations.
    • Reduce the risk of non-compliance by managing preference calculation in a system instead of outdated excel sheets.
    • Through automation and the abolition of labor-intensive manual jobs, you should anticipate a decrease in labor costs as well.
    • Exporter gains a competitive advantage in the market.

    In conclusion, SAP GTS Risk Management is a powerful tool for companies to support exporters in identifying preferential treatment of their goods while meeting all regulatory requirements for customs preferences. Customers of the exporter can import certain goods duty-free or with lower import duty rates based on demonstrated eligibility for preferential treatment, giving the exporter a competitive advantage.

    We understand that implementing SAP GTS Risk Management can be complex, requiring expertise in SAP software and global trade regulations. This is where an experienced implementation partner like ArchLynk comes in. As a certified SAP partner with deep global trade and risk management expertise, ArchLynk can help companies implement SAP GTS Risk Management effectively and efficiently, ensuring maximum value and return on investment. We guide and support businesses throughout the implementation process, from initial scoping and requirements gathering to deployment and ongoing support. To know more, speak to an expert.

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    CLICK HERE

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