Recent global supply chain disruptions can present an opportunity to diversify. While there are many factors to consider when choosing a new manufacturing location, one area that doesn’t seem to get enough attention from brands is trade agreements. Trade agreements are agreements between two or more countries to provide favorable terms for trade between the countries. Products traded between two countries under a trade agreement are often duty-free, providing an enormous cost-saving opportunity for brands.
Below we highlight a few of the most common US free trade agreements and the countries that fall under them:
The USMCA is a trilateral trade agreement between the US, Mexico, and Canada, which came into effect in July 2020, replacing NAFTA. While there are many similarities between the two trade agreements, the USMCA comes with more stringent environmental protections and labor laws, with several amendments to bring the agreement into the digital era. Despite the changes, the essence of the agreement remains: to reduce friction and stimulate trade between the three countries, largely through duty-free trade.
For brands looking to take advantage of duty-free manufacturing in these countries, it is essential to understand specific eligibility requirements to ensure that your products qualify. For example, the USMCA has specific rules of origin to determine whether a product can qualify as having “originated” from that country. You can find more information on product eligibility under the USMCA here.
CAFTA-DR is a free trade agreement between the United States, Costa Rica, Dominican Republic (DR), El Salvador, Guatemala, Honduras, and Nicaragua. This agreement gradually took effect between 2006 and 2009 and provides duty-free trade between these countries. With no termination date currently set on the agreement, investment into the region has grown in recent years, propelled by the pandemic and renewed efforts by brands to nearshore their products.
Similarly to the USMCA, CAFTA-DR also has specific rules of origin that apply to products traded between these countries to qualify for no duty.