Trade agreements: this is how they work
- Rinke den Os
- 5 July 2022
- Edited 15 January 2024
- 6 min
- Managing and growing
Many business owners who do international business benefit from the trade agreements the EU has with dozens of countries all over the world. One of the major advantages of trade agreements are reduced import duties, but - as business owner Monique Ansink knows only too well - the agreements have their drawbacks too. In this article, you will find out more about trade agreements and their advantages and disadvantages.
Monique Ansink is the owner of Jumbo Spanbandfabrikant, a Hoorn-based manufacturer of luggage straps and other tie-downs. In 2010, the company opened a new production facility in Vietnam to be closer to the equator, where the rubber trees grow that Jumbo Cargo Products needs for its products.
Ansink supplies products to 26 countries all over the world, and for its imports into the EU Jumbo has not had to pay any import duties at all for over a year. This has everything to do with the EU-Vietnam trade agreement, which has been in effect since 2020.
Countries sign trade agreements in order to promote trade between them. Removing barriers to trade is supposed to increase production, prosperity, boost production, and accelerate the development of society. In treaties, countries make agreements to facilitate trade, lowering or even eliminating trade barriers such as documents and import duties.
Because trade agreements promote freer movement of goods and services between trading partners, they are also known as free trade agreements. The EU can also negotiate trade agreements with other countries on behalf of the Netherlands.
Import duty relief
For Ansink, the main benefit of the trade agreement with Vietnam is the reduction in import duties. “In many cases, no duties have to be paid at all.” Jumbo uses a document of origin to prove that the export goods were produced in Vietnam, which are usually not subject to any import duties in the EU due to agreements made in the trade treaty.
“In the past, import duties used to be about 5 to 6%, but now you won’t have to pay any duties at all in many cases. I hope that this will bring Vietnam into the picture as a production country, for instance as a feasible alternative to China. This would lead to a more even distribution of financial flows in the region. After all, Vietnam has a population of over 90 million and they also deserve to live in greater prosperity.”
Ansink often wonders “why we are still paying import duties, anyway? They were once invented as a way for countries to protect their own industry, but the world has changed considerably since then. Looking at our own products, it is clear to see that rubber trees cannot grow in the Netherlands, nor are there any steel factories here that make the ratchets we use. We have no other option but to buy these resources and tools internationally. It is high time that we reconsider whether import duties still serve a practical purpose instead of perpetuating a system ‘just because’. I could imagine levying import duties on products you would rather not have enter the country, such as plastic balloons and other products that are harmful for the environment. You could charge a 20% duty on any business importing them as a disincentive.”
Although import duties are probably the most important part of a trade treaty for business owners, treaties contain agreements on many more topics. Countries could agree on product requirements, for instance, to ensure that all parties involved know what requirements their products have to meet. Trade treaties also contain agreements about the following:
ban on child labour
ban on the use of certain chemicals
testing and certification of medical devices
funding a project in a partner country
protecting local produce, such as Gouda cheese and champagne
treating each other's businesses equally
The trade treaty with Vietnam contains agreements on corporate social (CSR). “We had already embraced CSR before the treaty”, Ansink explains, “Because why would we treat our employees in Vietnam any different than our people here? They are also entitled to fair wages and a comfortable place to work.” Ansink is pleased to see that this topic is finally receiving the attention it deserves. “Although it is not enforced as strictly as it should be, there is finally a legal minimum wage.”
Trade agreements have many advantages for the economy, for governments and for businesses:
Trade between treaty countries prospers.
Prosperity can increase in the treaty countries.
Treaties lower import duties.
Treaties relax quotas, or the maximum quantity of a particular product that can be imported or exported. This causes prices to fall and supply to increase.
Declaring goods to customs is made easier because the countries involved know each other’s customs rules, which accelerates and simplifies the import and export process.
In trade treaties, countries recognise each other’s safety and standardisation tests, which means that imported products do not have to be tested again because the treaty has specified that electronics, foodstuffs, medication and machine and vehicle parts, for example, already meet all criteria.
By signing a trade treaty, countries give permission to each other’s subjects to work in either country. Recognising each other's degrees makes it easier for service providers and professionals to get started.
There are also disadvantages to trade agreements.
Lower import duties, for example, come at the cost of an increase in foreign competition, because trade agreements also make it easier for foreign business owners to sell their goods in the Netherlands.
In some sectors, an increase in foreign competition prompts job losses.
The standards for product requirements, food safety, and privacy, for example, can differ between treaty countries. This becomes an issue when businesses in the other country use chemicals that are banned in the EU, for instance, as it means that the products in question cannot be sold on the EU market. In some cases, the EU may have stricter food safety requirements than the treaty country. EU negotiators then check that all agreements in a trade treaty are compliant with EU standards.
Monique Ansink has noticed that trade agreements can also have another disadvantage: exclusion. Her business had already been in Vietnam for a decade before the treaty was signed. “I would never deny that trade agreements have their perks, but when two or more countries start working together, other countries might be excluded, which can have far-reaching consequences. “If it were up to me, we would have trade agreements with every country on earth.”
How trade agreements work
The European Commission (EC) negotiates with other countries on behalf of the EU, which ultimately signs the trade agreements. These negotiations take place in several stages and are performed by different stakeholders at different stages. Finalising a trade agreement can take a very long time: it can be years before the final agreement is signed.
For a list of all the preferential trade agreements that are in force between the EU and other countries see this overview of trade agreements.
Individual business owners do not get much of a say into the contents of a trade agreement, but you can make your voice heard by banding together with industry peers. Consider joining a trade association to make your wishes known to the Ministry of Foreign Affairs via the General Trade Council. The ministry will then pass on your thoughts to the negotiators in Brussels.
The EU recently signed trade agreements with the UK (2021), Vietnam (2020), Japan (2019), Singapore (2019), and Canada (provisionally effective from 2017). Negotiations are ongoing with Australia, New Zealand, and Mercosur (Brazil, Argentina, Paraguay, and Uruguay).
Few trade agreements came together as quickly as the Trade and Cooperation Agreement (TCA) between the EU and the UK, which provisionally came into effect within 18 months. The parliaments of member states have yet to give their final approval to the agreement, but the impending Brexit put pressure on the negotiators to flesh out a deal quickly.
In addition to trade agreements involving the EU, there are many different trade agreements between all countries or groups of countries worldwide. The UK, for example, is negotiating trade treaties with various different countries, having left the EU.
Back in 2014, while employed by the Clingendael Institute, journalist and political scientist Ko Colijn wrote a column in which he argued the same point. At the time, it seemed that it would only be a matter of time before the TTIP treaty was signed, although it never materialised in the end. Colijn pointed out that China would feel left out of the TTIP treaty, which the US and EU were looking to sign in accordance with ‘the old Western rulebook’. In the end, however, even the Trans Pacific Partnership mentioned below fell through.
“Countries like China are arguing that Trans-Atlantic treaties like the TTIP will likely come at their expense, because with the EU and US making agreements about mutual recognition, products from third countries would most likely have had to meet two sets of standards. That aside, the question is whether it is politically convenient to exclude a superpower like China from a deal. Since the US is also looking to fashion a Trans Pacific Partnership (with Japan and South Korea, but without China), Beijing will feel surrounded and discriminated against.”