Canadian businesses looking to expand into new markets have a distinct competitive advantage in countries governed by one of Canada’s 14 free trade agreements (FTAs). By removing tariffs on goods and services, FTAs open doors of opportunity around the globe for Canadian companies in various sectors.
There are two major types of trade agreements: free trade agreements and foreign investment promotion and protection agreements
Free trade agreements
Free trade agreements focus on lowering or removing the tariff barriers that hamper trade in goods and services between countries. This helps increase joint trade, which strengthens the economies of the partner countries and improves the lives of their citizens.
Foreign investment promotion and protection agreements
These agreements protect investors from harmful actions by a local government such as expropriation. They can help promote foreign investment in a country and ensure a stable environment for investment flows. This can encourage the economic growth and increase the prosperity of both partners in the agreement.
How free trade agreements work
The basic goal of a free trade agreement is to reduce the tariffs on the goods and services manufactured in one country and sold in another. Depending on how they’re negotiated, they can also cover non-tariff barriers such as quotas, product standards, labour mobility and intellectual property. Free trade agreements can be between two countries such as the Canada-South Korea Free Trade Agreement, or among three or more countries, like the Canada-United States-Mexico Agreement (CUSMA).
Free trade agreements may also regulate investment among the partners, so that the rules are the same for investors from all the member countries. If an agreement includes such investment rules, it may provide the same types of investor protections as a foreign investment promotion and protection agreement (FIPA).
If you’re a Canadian company looking to sell internationally, a trade agreement between Canada and your target market can make it easier for you to do business there. Depending on your sector and on the specific provisions of the FTA, the agreement may help you compete as an equal with local firms—for example, by eliminating export tariffs on your goods, which helps you compete on price in the local market.
Canada has free trade agreements with several countries and negotiations for several more are continuing. For full details, you can refer to the Trade and Investment Agreements section of the Global Affairs Canada website.
For more information, be sure to check out our upcoming webinar.
Should you use a free trade agreement?
The basic goal of a free trade agreement is to help companies do business more easily in international markets. But just because Canada and another country have an agreement, it doesn’t necessarily mean the market will suit your company’s needs and strengths. The free trade agreement may be one factor in deciding whether you should enter a market, but it shouldn’t be the only factor.
If the potential is there, the next step would be to determine whether the market is a good fit for your international business strategy in other ways. For example, you’ll need to:
- Find out whether there’s actually demand for your product or service, and whether the demand is large enough to justify entering the market.
- Identify potential customers—who they are, where they are, and exactly what they are looking for.
- Identify potential partners who could help you take advantage of the market’s opportunities and share its risks. This can be especially important for smaller companies that don’t have the resources to do everything themselves, from licensing their technology to distributing their goods. Having a local partner can make it much easier to do business in a market, with or without a free trade agreement.
- Visit the market to find out how the local business environment works, and to develop relationships with potential customers and partners.
- Assuming you decide to enter the market, identify your best entry strategy. Will you sell directly to customers there or use intermediaries such as agents or distributors? Set up a branch office? Partner with a local manufacturer to produce your goods?
Top dos and don’ts when using free trade agreements
- assess whether the agreement’s provisions apply to your products or services.
- ensure that you comply fully with its rules.
- build relationships with your customers and partners.
- use expert help to assess your overall free trade agreement position.
- make a free trade agreement the sole reason for entering a market.
- neglect your market research just because there’s an agreement in place.
- depend solely on an agreement to keep you competitive.
Recognizing the importance of trade to the Canadian economy, successive governments have negotiated FTAs enabling companies to access new markets around the world. Simply put, trade agreements create a level playing field for companies to compete in international markets. They open markets to Canadian businesses of all sizes by reducing trade barriers such as tariffs, quotas or non-tariff barriers. They create more predictable, fair and transparent conditions for businesses operating abroad.