The future of global sourcing and free trade agreements

on Friday, February 26, 2016

The future of global sourcing and free trade agreements

This year, a number of global trade agreements, regulation adjustments and economic changes will contribute to a shift in the supply chain industry. According to a Supply Chain Digest benchmark report, since the recession, international trading has slowed, but many expert organizations expect it will soon speed up again. For example, the World Trade Organization predicts a growth of approximately 3.9 percent this year.

The report revealed that these expectations for a surge in trade activity can be largely attributed to certain market trends. As the economy strengthens and people's incomes increase, more companies are driving revenue through globalization. And they are starting to focus on which lower cost countries they can source from; not as many are relying on China as a top sourcing region because the economy has fluctuated and managers want to minimize supply chain risk.

Cross-border trade acts and agreements
Furthermore, the source found that some of the top factors businesses cite as priorities in making global sourcing decisions include product quality, price, capabilities and consistency. More than 40 percent of companies have at least 100 off-shore suppliers and nearly half said they predict they will increase the use of global suppliers by 10 percent or more in the near future.

Another trend influencing the growth rate is the rising prominence of free trade agreements. SCDigest revealed that there are at least 500 trade deals now floating around. The Transatlantic Trade and Investment Partnership is currently in the negotiation stage between the U.S. and European Union and the African Growth and Opportunity Act, which is a preferential, not free, trade agreement, has been passed.

However, the one that is playing the most pivotal role in the global sourcing and trade market is the Trans-Pacific Partnership. It has not yet been formally approved, but it already has 12 member nations, including the United States, Mexico, Japan, Chile and Canada. If it is ratified, it will be the largest global trade deal ever and could drastically alter many aspects of economic transactions.

The TPP would remove 18,000 tariffs and facilitate a greater flow of goods and trade. The competitive atmosphere would significantly change. And while the partnership provides companies with a wide range of advantageous opportunities, such as lower production costs, uniform worldwide policies and greater global expansion, there are also many challenges that make effective strategizing imperative.

What the TPP means for supply chains
Key areas that may be affected were recently highlighted in an article by Melissa Harrington for Supply & Demand Chain Executive. Lower trade barriers and the removal of certain restrictions will mean, to meet qualification standards, businesses will be required to demonstrate compliance on a global scale. Sourcing and production strategies will have to be reassessed, as well as shipping networks.

As the SCDigest report also pointed out, the opening of borders leads to more import and export regulations and "taxes on business are also going up, meaning a highly tax efficient supply chain is a source of competitive advantage. That means being able to have quality information about all duties, tariffs, taxes and other potential non-product costs, as well as leveraging where possible the growing number of Foreign Trade Zones."

The proliferation of these trends indicates the global trade market will continue to grow over the next few years. And while the ratification of the TPP will seriously alter the reality of many supply chains and provide firms with an extensive array of opportunities, there will be a lot of strategic decision-making needed. Everything from how and who to partner with to streamlining production will require a second glance from executives.

And, when it comes to global sourcing processes, the benchmark study found that there is definite room for improvement. Only 21.1 percent of those surveyed said their existing approach to off-shore operations and inbound logistics was very strong and 36.7 percent rated it as average. These findings underline the importance of improving supply chain visibility, a topic that has gained paramount attention lately.

To create a more integrative, automated and ultimately successful global supply chain, companies must leverage innovative systems and technologies that enable better compliance and collaboration. Doing so will make them more attractive to both domestic and international partnerships and will boost their presence in an increasingly competitive market.

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