The Role of Free Trade Agreements (FTAs) and its Impact on Supply Chain under COVID-19 Pandemic

Updated: Mar 5, 2021

This is time to consider FTAs seriously to ensure a resilient and secured supply chain in the New Normal

Customs duty continues to be a significant element in the total cost of trades. Since 1817, the ideological concept of Free Trade was created by economist David Ricardo, it has been a key driving force of international supply chain management. Free trade is beneficial for both export and import sides by opening markets opportunities.

Yet by acknowledging the amount law requires, many companies still pay more duty than that amount which leads to direct impact on less business profitability.

In an ideal world, multilateral rules facilitate global trades broadly, however with trade negotiations heating up in recent years, companies from related countries are passively affected in terms of costs and business performance.

The most talked about example: The US-China decoupling requires quick responses by businesses, countless business owners are anxiously following up news every minute to deal with overnight earth-shaking changes.

Not all companies taking enough care of customs duty

However, with Forizons’ clients, we identified a few common negligence.

  • First one is lack of the proper department: Global Trade Compliance team to professionally manage all import and export related activities, to coordinate with internal stakeholders (such as logistics, finance, legal etc.) and external stakeholders (such as customs brokers, customs authorities etc.).

  • Second one is relying on single source. During first half of 2020, companies faced US-China Trade War and COVID-19 pandemic at the same time, it was double whammy to companies use single source, they were brought to their knees.

How to avoid risks under “black swan” events

The Covid-19 outbreak has alarmed some companies’ adjustment on globally distributed supply chains which had already begun because of rising trade tensions and other geopolitical dynamics.

At the time pulling of a Localization or Regionalization strategy would have been a strategic masterstroke.

A recent IPC flash shows that two-thirds of electronics manufacturing executives believed that moving toward regional supply chains is a long-term choice.

But as tensions rise and connections weaken, successful Localization and Regionalization strategies become ever more difficult. Even Localization and Regionalization strategies are not free of risks, but better to isolate risk to a market or a region, ensuring disruptions will not lead to a big scale.

What are key points to win in The New Normal

Singapore is known as the leader of global trade connectivity, it has signed 25 FTAs with countries, covering 85% of its global GDP. Under its wide-ranged FTA framework, diversified sources of products enable success of costs, quality, less-risk and availability.

For example, rice is the staple food in Singapore, having FTAs with various countries supports diversified purchasing channels which making sure no shortage of rice supplements in any severe cases during COVID-19.

As regional or global events cause significant dislocations and adjustments in end-to-end supply chains, this puts a premium on preparedness for future the New Normal.

Reassess location of sources and manufacture sites

Recently there are efforts to move manufacturing operations to countries neighbouring China, such as ramp up production in Vietnam and Thailand. Taking FTA relationship between sources and markets into consideration.

Find balance between number of sources and lower sourcing cost

During pandemic, single sourcing leads to inability meeting demands when the country of source is impacted by disease or trade war. Multiple sourcing avoids this kind of failure but be mindful of number of sources to reach lower total costs.

Relocate regional hub in APAC

A June 2020 survey of the American Chamber of Commerce in Hong Kong indicates that 60% respondents believe national security law will harm their business. Moreover, the relationship between China and the United States is increasingly understood as a zero-sum game, either to strengthen the regional hub in Hong Kong or China, or build in Singapore, Thailand and other south-eastern countries is a strategy bet.

We Forizons have supported clients from different industries on logistics network design topic, based on companies’ growth strategy as well as macro-environment trend, to define 3-5 year network development plan.

Always have contingency plan

The current predictions about the future scenario may prove wrong, and it is possible that we will once again enjoy the fruits of globalization or there will be more dire warnings. We sincerely hope that you to be prepared for it. But hope is not a strategy, and it’s always better to be started.