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 utilisation 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 utilisation rate is 77.4 percent.
Germany, which is responsible for 29.6 percent of EU exports, has a preference utilisation rate of 78 percent, just above the average. It is, however, in 14th place in the Union. The Austrian utilisation 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 utilising the preferential tariffs agreed in the trade accords of the European Union.
Utilisation 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 utilisation 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 utilisation of EU FTAs by German exporters are:
- the extensive costs and bureaucracy associated with compliance with the rules of origin;
- narrow tariff margins (the difference between the general MFN tariff rate under WTO rules and the preferential tariff rate of the specific FTA);
- variance of rules across several EU FTAs;
- inadequate internal capacity to manage the usage of FTAs, and
- high compliance risks associated with goods clearance on the basis of complex supply chains.
More than half (54 percent) of surveyed companies indicated that there are FTAs that they do not utilise, although they maintain trading relations with the country/countries with which the agreements were concluded. Furthermore, 72.6 percent of surveyed companies and associations estimated that companies in their branch of industry do not take full advantage of the free trade agreements of the EU.
Improving the Preference Utilisation Rate
There are many ways to make the utilisation of EU FTAs for merchandise trade more attractive and to better take advantage of the untapped potential in the agreements. The rules of origin should be significantly simplified and harmonised across agreements. This would reduce administrative expenses and better facilitate the implementation of the rules within IT systems. German industry advocates for consistent, cross-industry value-added rules. In addition, BDI calls for greater coherence of product-specific rules of origin. A uniform European IT user interface would also significantly simplify the process of collecting supplier declarations.
Many free trade agreements apply the direct transport principle. In order for a good to qualify for preferential tariff treatment, it must be shipped directly from one partner country of the agreement to the other. As a consequence, companies that use central storage facilities (hubs) for long delivery routes often do not benefit from preferential tariffs. The problems associated with the direct transport principle and the use of regional hubs could be solved by innovative technologies such as microchips placed directly on the goods.
Moreover, small- and medium-sized enterprises should be supported, particularly firms with little experience with FTAs. Finally, chains of 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.