FTAs provide many advantages, including for the importation and exportation of goods. Consumers and companies tend to enjoy lower prices while domestic companies can sell their products more easily in foreign markets. Furthermore, FTAs provide companies in the contracting parties with similar and sometimes even better market access compared to their competitors from third countries.
This privileged market access provides a competitive advantage in the form of lower or eliminated import duties (i.e. customs duties), which were agreed to during the negotiations of the FTA. However, these preferential customs duties do not automatically apply. Importers and exporters have to request preferential treatment during customs procedures. Moreover, products must fulfil specific conditions which were negotiated for each FTA to benefit from the tariff preference, such as providing a valid proof of origin.
Exporters and importers in EFTA States and partner countries do not always use the preferential tariffs provided by FTAs. This leads to considerable untapped additional tariff savings that could be achieved thanks to an FTA.
Considering this situation, policymakers in the EFTA States have started to look more closely at the question of how companies’ effective use of FTAs can be facilitated. For example, in August 2020, the Swiss State Secretariat for Economic Affairs (SECO) published a comprehensive data analysis on the preference utilisation of Switzerland’s FTAs. The study was designed to answer three key questions:
- To what extent do companies make use of FTAs and what is the amount of tariff savings achieved as a result thereof?
- Does the utilisation rate differ between imports and exports?
- How much does the utilisation rate vary across partners, over time, across sectors, and product groups?
Based on positive reactions by both policymakers and the public in Switzerland, the EFTA States agreed to build on the work by Switzerland and to expand the FTA Monitor to the EFTA level. The first version of the EFTA FTA monitor was published in June 2022 and is updated on an annual basis.
The EFTA FTA Monitor only covers trade in goods. Other areas of trade such as services and investment are not covered by the FTA Monitor.
Additional information on the analysis is available in the Monitor. The analysis may be developed at a more detailed and product-specific level for selected FTAs in future research. EFTA also reserves the right to make adjustments and corrections to the existing output, if need be.
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1. What are the benefits from free trade agreements?
As developed economies with relatively small domestic markets, the EFTA States are highly integrated into international value chains and dependent on foreign markets for both imports and exports. Free trade agreements (FTAs) ensure predictable and preferential market access to foreign markets and improve the economic framework conditions with partner countries. Among many other aspects, an important feature of FTAs is that they eliminate or reduce customs duties on the importation and exportation of goods. As a consequence, consumers and companies tend to enjoy lower prices while domestic companies can sell their products more easily in foreign markets.
Furthermore, other provisions in the FTA, such as trade facilitating procedures or regulatory cooperation, contribute to further reducing frictions and facilitate exchanges between the partners. The European Free Trade Association (EFTA) currently has 29 FTAs in force with 40 countries and territories outside the European Union (EU). Developed over decades, FTAs represent a central element in EFTA Member States’ policies and complement their agreements with the EU and with other partner countries signed bilaterally.
2. How can free trade agreements be used?
FTA tariff preferences are not granted automatically. Companies may benefit from FTAs only if their products meet the preferential rules of origin laid down in the respective FTA. This means that a product must have been wholly obtained, manufactured, worked or processed to a significant extent in a Party to the relevant agreement in order to benefit from preferential duty exemption or duty reductions in FTA partner states.
For example, if a Swiss company produces watches in Switzerland or Liechtenstein, the watches can only be imported into the Republic of Korea under the FTA with preferential tariff treatment if the value of the non-originating materials used in the production does not exceed the defined threshold. Similarly, Norwegian or Icelandic salmon exported to Chile under the FTA must originate or have been “sufficiently processed” (e.g., filleting, smoking, etc.) in Norway or Iceland.
Further information on preferential rules of origin is available on the EFTA website and on EFTA Member States’ customs websites:
- Iceland: Iceland Revenue and Customs
- Norway: Norwegian Customs
- Liechtenstein: Office of Economic Affairs
- Switzerland: Federal Office for Customs and Border Security
3. Why is the use of FTAs sometimes modest?
The utilisation rate of FTAs varies greatly depending on trading partners, product groups, time, firm, and delivery mode. This can have various reasons, such as:
- Type of products that are traded and their preferential rules of origin: For certain products that are produced in highly fragmented international value chains, it may be difficult for companies to meet the requirements in the rules of origin (list rules) in order to achieve preferential origin.
- Administrative and financial burden: Companies must obtain information on the requirements related to the use of FTAs, document the production process and, if necessary, adapt it in order for their products to achieve preferential origin. Companies may therefore decide not to use FTAs if the costs of these adjustments exceed the potential benefits.
- Products transiting via non-parties to the FTA: Many products destined to EFTA States are transiting via non-parties to the FTA, especially major harbours in the European Union. If those products do not follow the requirements on transit and storage set out in the FTA, they lose the eligibility for FTA preferences.
- Example: If a shipment of pineapples from Costa Rica destined to the Norwegian market transits through a storage and distribution hub in the European Union, it will not lose its preferential origin and still benefit from the FTA (provided that the pineapples remain under customs supervision). However, if the shipment is unloaded and temporarily moved inland to another storage facility out of supervision of the customs authorities, the pineapples will lose their FTA benefits once reshipped to Norway and be subject to the normal duties.
- Data limitations: The data on preference utilisation in the FTA Monitor is based on import data collected and processed by different parties. Thus, the existence of different sources for the import data might limit the accuracy and comparability of the output due to possible differences in data and methods applied. Furthermore, some complex preferences such as tariff rate quotas, ex-outs within tariff lines or variable tariffs have not been considered in the calculations due to the difficulty to quantify them through customs statistics. The trade picture shown by the FTA Monitor may therefore not always fully reflect the real use of the FTA. This can be particularly the case for FTA partners exporting primarily to EFTA States under such preferences. A comprehensive overview of data limitations can be found in the FTA Monitor.
- Other reasons not yet known: The FTA Monitor provides descriptive information on the use of existing FTAs. It thereby lays the foundation for future, detailed analyses of the factors that may explain the variation in the use of FTAs across trading partners, product groups, and time.
4. Why does only a small share of trade occur under the FTA for some countries?
This may happen because the applied non-preferential (most-favoured-nation, MFN) tariff for the products traded is already duty free or very low. Indeed, some countries grant duty-free market access on an MFN basis to a wide range of products. It is for example the case for Singapore and Hong Kong, China. As a result, EFTA companies exporting to these countries will not use the FTA, resulting in seemingly low preference utilisation under those FTAs.
Similarly, some EFTA States do not apply import tariffs on industrial products, although they could do so according to their obligations to the WTO. This is especially the case for Norway and Iceland. In addition, some countries grant preferences on the basis of other international agreements, such as the Generalized System of Preferences (GSP) or the WTO Agreement on Trade in Civil Aircraft. Imports from FTA partners under those categories will therefore likely be registered under “MFN” or “other preferences” and not as FTA trade. For these reasons, the FTA Monitor provides additional information on the value and share of duty-free trade occurring under different trade regimes.
Nonetheless, even for products with zero duties under other trade regimes, FTAs remain important since they prevent partner countries from increasing their tariffs (e.g. increase of an MFN applied tariff from 0% to the WTO bound rate of 10%). This provides predictability to business owners in the long term.
5. Why is the export data missing for some countries?
For imports from EFTA countries into FTA partner countries, the FTA Monitor relies on import data provided by FTA partner countries who have agreed to provide the data required for this analysis. To date, the analysis on the export side covers Albania, Bosnia and Herzegovina, Canada, Chile, Colombia, Costa Rica, Ecuador, Georgia, Hong Kong China, Mexico, Montenegro, Panama, Peru, the Philippines, the Republic of Korea, Serbia, Singapore, and Türkiye. Some years may also be missing due to the inability of the FTA partner to provide data. EFTA remains in contact with its FTA partner countries and expects to expand this coverage over time.
6. What further steps does EFTA plan to take?
Since the publication of the first results of the study, the EFTA Secretariat and responsible authorities in EFTA States have already initiated further work to identify the factors that lead to incomplete use of free trade agreements, such as in-depth analysis, business surveys or dedicated discussions with FTA partners. The aim is to identify measures to increase the use of FTAs, especially for products with high tariff saving potential. Those works and dialogues with FTA partners and domestic stakeholders will be continued in order to find mutually agreeable solutions to improve the use of FTAs by economic operators on both sides.