The Preference Utilization Rate of EU Free Trade Agreements

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container ship © fotolia/robertmandel

Market access abroad is vital for export-oriented German industry. However, free trade agreements yield economic benefits only if companies make use of the customs advantages guaranteed in those accords. This is not always the case, as there is significant variance in tariff preference utilization across EU Member States, partner countries, and sectors.

The European Commission recently published two reports on the practical application and implementation of European free trade agreements (FTAs) over the past two years. The reports contain data on preference utilization rates (PUR) organized by Member States, industry sectors, and trading partners. The PUR indicates the value of trade that takes place under preferences as a share of the total value of trade that is preference eligible in an FTA. According to these reports, the average EU preference utilization rate is 77.4 percent. Germany, which is responsible for 29.6 percent of EU exports, has a preference utilization rate of 78 percent, just above the average. It is, however, in 14th place in the Union. The Austrian utilization rate, for example, is significantly higher in second place with 88.7 percent. German exporters therefore demonstrate clear potential to increase their competitive advantage by better utilizing the preferential tariffs agreed in the trade accords of the European Union.

Utilization of European FTAs by German Exporters

Through a comprehensive survey of German companies and expert interviews at German and European level, BDI has sought to examine the key challenges that German exporters face in their utilization of EU FTAs. The results of this study build on the perspectives of 24 branches of industry.

According to the BDI study, the five factors that most hinder the utilization of EU FTAs by German exporters are:

  1. the extensive costs and bureaucracy associated with compliance with the rules of origin;
  2. narrow tariff margins (the difference between the general MFN tariff rate under WTO rules and the preferential tariff rate of the specific FTA);
  3. variance of rules across several EU FTAs;
  4. inadequate internal capacity to manage the usage of FTAs, and
  5. high compliance risks associated with goods clearance on the basis of complex supply chains.

Improving the Preference Utilization Rate

There are many ways to make the utilization of EU FTAs for merchandise trade more attractive and to better take advantage of the untapped potential in the agreements. According to survey participants, the rules of origin should be significantly simplified and harmonized across agreements. This would reduce administrative expenses and better facilitate the implementation of the rules within IT systems. A uniform European IT user interface would also significantly simplify the process of collecting supplier declarations. In addition, the problems associated with the direct transport principle and the use of regional hubs could be countered by innovative technologies such as microchips.

Moreover, small- and medium-sized enterprises should be supported, particularly firms with little experience with FTAs. Finally, communication with customs authorities in partner countries should be improved in order to quickly and efficiently identify and solve possible problems and challenges in goods clearance.