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Since the UK’s decision to leave the EU was made, there has been much talk about negotiating a Free Trade Agreement (FTA) with the EU and with other partners around the world. But what exactly is a Free Trade Agreement?
A Free Trade Agreement is a deal between two trading partners that determines the terms on which they trade. The partners could be a single country, such as the UK, or a trading bloc made up of multiple nations, such as the EU.
FTAs are primarily designed to remove restrictions on trade and one of the main areas this applies to is tariffs.
Tariffs are fees charged on goods imported into a country, known as duties. As well as a way of generating revenue for that country, they are used to restrict imports of certain types of products by making them more expensive in that market and thereby protecting domestic industries. Different tariffs will apply to different products, depending on which industries the government wishes to protect.
High tariffs can be a barrier to international trade as they can mean that a company cannot be competitive in certain overseas markets. Of course, this depends on the nature of the goods that you are exporting and the specific tariff that applies to them.
FTAs seek to create more favourable trading relationships in a number of ways, but particularly by reducing tariffs. This will be negotiated between the two trading partners for mutual benefit. It means that an exporter can usually be more competitive in those countries because they don’t have to factor high tariffs into their prices.
Territories that have FTAs will nearly always be easier to trade with than those that don’t, depending on the type of goods traded.
Partners who don’t have an FTA in place, would usually default to World Trade Organisation (WTO) rules. Under WTO rules, no one country can place less favourable tariffs for goods being sold into it than that which it has set for the ‘Most favourable nation’ (MFN). This means that you cannot set a lower (or higher) tariff for one particular partner; all partners must trade under the same tariffs and terms.
All businesses engaged in international trade will need to factor tariffs into their costs but SMEs are often more sensitive to cost increases than larger businesses who may be better positioned to absorb cost or withstand price increases on their products. As all the nations in the EU are classed as one trading bloc, we don’t currently incur tariffs when we trade between EU nations. After we have left the EU, unless we have an FTA in place, we will find that we may have to pay tariffs, according to WTO terms. This will also affect trade between the UK and any partners that the EU has an FTA with, as we will no longer be part of the EU.
As previously stated, different products attract different tariffs in different countries. Some will find that their goods attract much higher tariffs and some will not change too much. You can check the WTO tariff schedules of your target markets on the WTO website.
Don’t assume that this only applies to companies that export goods. If you are importing goods from the EU, or partners with whom the EU has an FTA with, you may find that they become more expensive due to an increase in the tariffs that apply to them.
