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What do Free Trade Agreements mean for your business?

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Since the UK’s departure from the EU, activity around rolling over and negotiating and signing new Free Trade Agreements has intensified. But what do they mean for businesses and what do you need to look out for?

Whether you’re looking at new markets to grow your business or new suppliers to boost your supply chain, understanding how the terms of any FTA could work to your advantage can help your decision-making process and set your business more firmly on the path to global trade success.

Ian Tandy | Managing Director of Global Trade and Receivables Finance at HSBC UK

Free Trade Agreements or FTAs are designed to reduce or eliminate certain barriers to trade and investment, and to facilitate stronger trade and commercial ties between participating countries. Ian Tandy, Managing Director of Global Trade and Receivables Finance at HSBC UK, talks us through the recent FTA between the UK and Vietnam to help show what businesses stand to gain from agreements like these.

“To trade optimally overseas, businesses need to operate with as little friction as possible,” he points out. “That means reducing as many barriers to trade as you can – both tariff and non-tariff. If we look at the FTA between the UK and Vietnam in more detail, we can see how the terms negotiated achieve that.

“Vietnam is a dynamic and growing economy, strategically significant within the ASEAN region and part of the CPTPP or Comprehensive and Progressive Agreement for Trans-Pacific Partnership (a free trade agreement between 11 countries around the Pacific Rim.: Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam), which the UK has applied to join.

“Vietnam has a large consumer market, young and increasingly middle-class demographic, and an increasingly liberal economy. Existing trade between the UK and Vietnam doubled between 2011 and 2020 and the new UK Vietnam FTA (UKVFTA) not only provides those businesses with certainty but presents opportunities for other firms considering trading with or investing in the region.”

Tariffs

“Often the most obvious barriers to trade are financial, and tariffs are the main focus of any cross-border activity,” says Ian. “Tariff reductions or elimination are often the highlight of FTAs. The scale and timing of these will usually vary depending on the type of business or sector involved. In the UKVFTA, for example, tariffs are due to be eliminated on a sliding scale over the next 6-9 years, covering 99% of tariffs by the end of the period.

“Tariff elimination on many products, such as fabric, for example, will potentially help to lower prices for both businesses and consumers.”

Non-tariff barriers

Non-tariff barriers can be a source of frustration and can make trade inefficient, so identifying what the FTA says about reducing or eliminating these can make a huge difference to easing trade between countries, and it can have particular relevance in certain sectors. “Looking at the UKVFTA, there are commitments to work towards international regulatory standards, sanitary and phytosanitary measures affecting trade in agricultural products, food, drink and so on, greater transparency, and the easing and simplifying of customs procedures,” explains Ian. “The easing of restrictions on UK goods entering Vietnam will also be welcomed by businesses.”

Services and investments

If you’re a service provider or a business looking to invest in a particular country, understanding how the FTA may open up opportunities, allow foreign investment or the flow of funds will be crucial. “The UKVFTA supports the liberalisation we’ve already seen and aims to create a more stable environment for investors,” says Ian. “The terms explicitly state that ‘Vietnam has committed to higher standards of treatment for UK service suppliers and investors’ and, while the degree of market openness does vary depending on the sector, share of capital, size or type of activity is largely unrestricted.”

Other areas of note

The type of business/trade you conduct as well as the sector you operate in will determine which sections of the FTA is most relevant for you. “If you’re looking for opportunities in infrastructure or services, for example, commitments around government procurement may be key,” explains Ian. “In the UKVFTA, Vietnam has pledged to open up public procurement to the UK centrally and in two of its largest areas initially. For businesses with concerns about IP protection, reviewing those aspects of the agreement will be important. In this case, the FTA affords higher IP protection than that available under WTO terms, with UK businesses having recourse to a number of tools to protect their rights.

“Provisions may also be made for key sectors. Pharmaceuticals, for example, is to benefit from greater market access, the food and drink sector will see protection for some UK geographical indicators like Scottish salmon, and capital limits are to be increased for telecommunications and transportation investment. Where FTAs really can make a difference is in sectors that are traditionally hard to crack. In the case of Vietnam, that’s the automobile products sector, which has always been closely protected. The terms of the UKVFTA will see most tariffs eventually eliminated and the market opened up by 2030.”

Sustainability

In today’s business climate, other factors are also important. With stakeholders taking an increasing interest in ESG (environmental, social and governance) credentials across business supply chains, how the FTA approaches these issues is also something many will be looking at says Ian. “When it comes to sustainable development, FTAs will often follow international guidance, such as the Paris Climate Agreement, the UN’s Sustainable Development Goals, and so on. The UKVFTA promotes strong ESG practices in terms of labour rights, environmental commitments and corporate responsibility and, in this way, supports sustainable global trade.”

Understanding how Free Trade Agreements can benefit your business can be a crucial step in maximising global opportunities. “Whether you’re looking at new markets to grow your business or new suppliers to boost your supply chain, understanding how the terms of any FTA could work to your advantage can help your decision-making process and set your business more firmly on the path to global trade success,” says Ian.

To discuss your options, contact your Relationship Manager or visit https://www.business.hsbc.uk/en-gb/tomorrow-ready-programme/prepare-for-exporting-and-brexit .

To find out more about the opportunities for UK businesses trading with Vietnam under the FTA, the Department for International Trade has created a handy guide, available here

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