Leveraging Free Trade Agreements (FTAs) and Preferential Policies: Reducing Indirect Costs Through Tariff Reductions

Introduction: The Invisible “Cost Hollow”
While companies strive to optimize direct logistics costs like shipping and warehousing fees, a significant and often overlooked area of cost reduction lies within the customs department at the port of destination: import tariffs and VAT. These costs are paid by your overseas customers, but ultimately become part of your product’s final selling price, directly impacting your market competitiveness. Cleverly leveraging Free Trade Agreements (FTAs) and various preferential policies to achieve tariff reductions is a strategic, high-leverage means of reducing indirect costs, creating a win-win situation for both you and your customers.

I. Core Mechanism: How Tariff Reductions Reduce “Total Costs”
Although tariffs are paid by importers, their benefits directly impact the competitiveness of exporters:

Improving Price Competitiveness (Strengthening Market Advantage):

Scenario: Your products are exported to ASEAN countries, where the standard tariff rate is 10%. If you can provide a certificate of origin from the China-ASEAN Free Trade Agreement (ACFTA), the tariff can be reduced to 0.

Effect: Your customers’ import costs will immediately drop by 10%, meaning your offer can become more attractive, or your customers will enjoy higher profit margins and be more willing to expand their business. This helps your customers make money, securing orders for you.

Reducing Customer Supply Chain Total Cost of Ownership (TCO):

For long-term customers, stable tariff reductions can significantly reduce their overall procurement and supply chain costs. This elevates you from a “supplier” to a “value-creating partner,” significantly enhancing customer loyalty.

Optimizing Your Cash Flow (under DDP/DAP terms):

If you have signed terms with your customers, such as DDP (Delivered Duty Paid) or DAP (Delivered at Place), where the seller bears the import duties and taxes, tariff reductions can directly save you significant cash.

II. Key Tools and Policy Benefits

1. Free Trade Agreement (FTA) – The Most Powerful Tool

What is it: An agreement signed between China and its partner countries (regions), one of the core elements of which is the mutual granting of tariff reductions and exemptions on each other’s goods.

How it works: You need to prove that your product is “originating in China.” This proof is a Certificate of Origin (COO), such as the Form E certificate for the China-ASEAN Free Trade Agreement.

Examples of China’s major FTA partners:

RCEP (Regional Comprehensive Economic Partnership): Covering Japan, South Korea, Australia, New Zealand, and the ten ASEAN countries, it is the most important agreement currently in place, with highly flexible rules of origin.

China-ASEAN Free Trade Agreement (ACFTA): Solid foundation and high utilization rate.

China-South Korea and China-Australia FTAs: Large preferential treatment margins.

China-Switzerland, China-Iceland, China-Costa Rica, etc.: Covering Europe and the Americas.

Bilateral agreements: Such as China-Chile, China-Peru, and China-Pakistan.

2. Generalized System of Preferences (GSP) – A traditional tool (although shrinking, still useful)

What it is: Developed countries (preferentially giving countries) grant developing countries (preferentially receiving countries) general, non-discriminatory, non-reciprocal tariff preferences for exports of finished and semi-finished products.

Current Situation: With China’s economic development, traditional preference-granting countries, such as the EU, have gradually withdrawn their GSP treatment for China. However, attention remains, as some countries (such as Norway and Turkey) still grant GSP treatment to certain Chinese products.

3. Export Tax Rebate Policy – China’s Domestic Dividend

What is it?: A refund of the VAT and consumption tax paid during domestic production and distribution for goods declared for export.

Effect: While it does not reduce or exempt foreign tariffs, the refund of domestic taxes directly reduces your product’s ex-factory costs, giving you greater confidence in your international pricing. This is a policy you absolutely must take advantage of.

III. Strategic Implementation Path: From Reactive to Proactive
Step 1: Self-Diagnosis and Market Analysis

Product and Market Analysis: Identify the HS codes of your export products and your primary target markets.

Check Preferential Tax Rates:

Use the China Council for the Promotion of International Trade, the official website of the General Administration of Customs of China, or third-party search tools to verify whether your products qualify for FTA or GSP preferential tax rates in your target country, and the extent of the preferential rates.

Key Comparisons: Compare Most-Favoured-Nation (MFN) rates, standard rates, and FTA preferential rates.

Step 2: Complying with Rules of Origin (the Core of FTAs)
This is the technical core and the most difficult step. You must prove that the product is “originating in China.”

Wholly Owned: Examples include agricultural products grown or minerals mined in China.

Substantial Transformation: For products using imported raw materials, specific rules must be met:

Change of Tariff Classification (CTC): The HS code of non-originating materials used in the production process has changed.

Regional Value Content (RVC): The product’s value content originates from China or the FTA region, reaching a certain percentage (e.g., 40%).

Processing (SP): Specific processing steps are completed in China.

Action: Review the product’s BOM (Bill of Materials) with your procurement and production departments to determine compliance with the rules. If close but not yet met, consider optimizing your sourcing strategy to prioritize raw materials from China or FTA partner countries to meet the standards.

Step 3: Apply for a compliant Certificate of Origin

Issuing Agency: China Customs or China Council for the Promotion of International Trade (CCPIT).

Process: Prepare relevant materials (product cost breakdown, etc.) and apply through an online system (such as the China International Trade “Single Window”). Advance filing is usually required.

Note: Ensure that the certificate information (product name, HS code, amount, etc.) is exactly the same as the commercial invoice and bill of lading; otherwise, you may not receive preferential treatment at the port of destination.

Step 4: Customer Communication and Optimization of Terms

Proactively Inform: Proactively explain to customers that you can offer preferential Certificates of Origin to help them reduce or exempt tariffs. This is an excellent value selling point.

Trade Terms: During negotiations, include “assisting with the processing and provision of Certificates of Origin” as a contractual clause to clarify the responsibilities of both parties.

Long-term Partnership: Communicate this with customers as a long-term cost-reduction strategy to jointly optimize supply chain costs.

IV. Common Misconceptions and Risk Avoidance
Misconception 1: “Applying for a certificate is too troublesome, so I might as well not do it.” → Countermeasure: Calculate the total annual export volume and the total amount of tariff reductions and exemptions; the “benefits” far outweigh the administrative costs of the application.

Misconception 2: “Just fill in any HS code.” → Countermeasure: Accurate declarations are essential; failure to do so could be considered tax evasion, resulting in heavy fines or even loss of preferential eligibility.

Misconception 3: “FTA rules don’t concern us; they’re our customers’ business.” → Countermeasure: Shifting your mindset can be a powerful tool for increasing order conversion rates and customer loyalty.

Risk: Destination customs origin verification. Ensure that all supporting documentation related to raw material procurement and production (such as invoices, work orders, and QC records) is properly preserved for at least five years for verification.

Conclusion: Transforming Policy Benefits into Core Competitiveness
In global trade competition, lean management has extended beyond the obvious aspects of logistics to deeper issues such as tariffs and policies. Skillful utilization of FTAs and preferential policies is no longer optional; it’s a standard requirement for high-performing foreign trade companies.

It requires companies to:

Shift from “passive execution” to “proactive design”: Proactively optimize supply chains to comply with rules of origin.

Shift from “going it alone” to “chain collaboration”: Sharing benefits with customers and suppliers, forging closer partnerships.

Shift from “price competition” to “value competition”: Providing customers with comprehensive cost solutions beyond product delivery.

Ultimately, this “invisible” effort will create “visible” market advantages and solid customer retention.