Better Utilization of EU Free Trade Agreements by Bundesverband der Deutschen Industrie e.V.

POSITION | EXTERNAL ECONOMIC POLICY | FTA

Better Utilization of EU Free Trade Agreements Policy recommendations for more effective utilization

November 2022 Key Recommendations According to the European Commission, although European exporters and imports make relatively high use of the EU’s free trade agreements (FTA), utilization consistently falls short of its potential (German exporters’ preference utilization rate is 60%). In January 2020, BDI examined the factors behind this in a comprehensive survey of German companies and sectoral associations, deriving policy recommendations together with its members. This survey and the resulting recommendations were updated and adapted in this new study: ▪ Conclude FTA with strategic trade partners – German industry supports the European Commission objective of concluding FTA with strategic partners. Even when preferential tariffs are not fully utilized, tariff reductions have positive economic effects. In addition, economic benefits derive from numerous other aspects of a modern FTA. These agreements should therefore be comprehensive and take into account the challenges of modern trade. In addition to tariff reduction (except for sensitive agricultural products), they must include so-called WTO+ topics including the dismantling of technical barriers to trade, opening up public procurement and rules for digital trade. At the same time, FTA should not be too overloaded in order to ensure ratification by European trading partners. Inherently, the EU’s FTA must comply with the WTO framework for free trade agreements. ▪ Simplify rules of origin and create incentives for use – in order to boost preference utilization of EU FTA, it is crucial to simplify and standardize the rules of origin for various sectors. If possible, German industry advocates for uniform, cross-industry value-added rules of 50 percent for chapters 25-96. Better IT systems could classify exports in a uniform system and thus reduce expenses for companies associated with origin provision. Modernization of older agreements should be used for greater harmonization of rules of origin. ▪ De-bureaucratization and digitalization – BDI advocates for a uniform European IT user interface through which supplier declarations can be automatically exchanged. Challenges associated with the direct transport principle and the use of regional hubs could be addressed by the EU with innovative technologies or alternative evidence. Process standardization, for example based on blockchain, would be desirable.

Better Utilization of EU Free Trade Agreements

▪ Provide better, more precise, and product-specific information on FTA – businesses need more support to reap the benefits of EU FTA. This can be ensured through improved communication between the European Commission, Member States, customs authorities, and business. In addition, the private sector should already be involved during the negotiation process in order to more quickly and precisely identify potential problems in the utilization of European FTA and if possible, to prevent them.

Better Utilization of EU Free Trade Agreements

Table of Contents Key Recommendations ....................................................................................................................... 1 Policy Recommendations from German Industry............................................................................ 4 Conclusion of Comprehensive, Modern Free Trade Agreements with Strategic Trade Partners ......... 4 Simplification of Rules of Origin and Creation of Incentives for Use ..................................................... 4 Broader Application of Preferential Rules for Product Chapters 25-96: Cumulation, de minimis and Regional Value Content ........................................................................................................................ 5 De-Bureaucratization and Digitalization ................................................................................................ 5 Provision of Better, More Precise and Product-Specific Information on FTA ....................................... 6 Utilization of Tariff-Rate Quotas ............................................................................................................ 7 Context: Preference Utilization Rates of EU Free Trade Agreements ........................................... 8 Imprint ................................................................................................................................................ 19

Better Utilization of EU Free Trade Agreements

Policy Recommendations from German Industry Conclusion of Comprehensive, Modern Free Trade Agreements with Strategic Trade Partners German industry supports the European Commission objective of concluding FTA with strategic partners such as Australia, India, and Indonesia. These agreements should be comprehensive and take into account the challenges of modern trade. This means, for example, that they must consider globalized value-added networks and the use of central transshipment and storage centers. In addition to tariff reduction (except for sensitive agricultural products), they must include so-called WTO+ topics including the dismantling of technical barriers to trade (TBT), opening up public procurement and rules for digital trade. Trade and sustainable development (TSD) chapters also belong in modern trade agreements. At the same time, FTA should not be too overloaded in order to ensure ratification by European trading partners. It is also vital to provide mechanisms for monitoring, fast and effective dispute settlement, and mediation. This applies all the more at the current time when the dispute settlement mechanism of the World Trade Organization (WTO) is only functioning to a limited extent. Inherently, the EU’s FTA must comply with WTO framework for FTA (GATT Article XXIV, GATS Article V, Enabling Clause for Developing Countries). Simplification of Rules of Origin and Creation of Incentives for Use In order to boost the preference utilization rate (PUR) of FTA, it is crucial to simplify and standardize the rules of origin for various sectors. Particular attention should be paid to IT feasibility in order to streamline processes and reduce bureaucratic hurdles. German industry therefore advocates uniform, cross-industry value-added rules of 50 percent, based on the EU calculation method (EEU) within the framework of the rules of origin. Agricultural products of the Combined Nomenclature (CN) chapters 1-24 are to be excluded. The BDI is also in favor of greater harmonization of product-specific rules of origin. This would eliminate the need for extensive and cost-intensive preliminary checks in the origin determination process. IT systems could classify exports in a uniform system and thus reduce expenses for companies associated with origin provisions – a positive incentive, especially for small and mediumsized enterprises, to utilize tariff preferences under FTA. Individual sectors should be closely involved in the design of product-specific rules of origin to ensure that companies can implement the rules and that they reflect the production processes. If possible, future FTA should provide legally secure incentives for self-certification, thus contributing more to reducing costs in the origin provision process. Special attention must be paid to confidentiality and legal certainty in verification and post-certification. The protection of know-how is of particular importance to German industry and must not be jeopardized by the use of FTA. German industry also advocates a move away from separate storage. According to this principle, materials with preferential origin must be separated from materials without preferential origin in the manufacturing process. Keeping goods of the same nature but of different origin physically separate makes both storage and production considerably more difficult and expensive. Strict separation is uneconomical, particularly for liquids and small bulk goods. As a consequence, companies that use regional distribution centers tend to be disadvantaged, thus making global value chains more difficult. Accounting segregation of production material and merchandise should replace physical separation of originating and non-originating goods required so far in all preferential agreements. This should be done in accordance with proper accounting standards to enable companies to apply it in an

Better Utilization of EU Free Trade Agreements

uncomplicated manner. For documentation of accounting segregation, the existing documentation in the companies, which complies with national legal requirements, should suffice. As a rule, preferential duties can be refunded retroactively in the event of late submission of proof of origin. In order to increase the preference utilization rate (PUR), all agreements should contain a rule obliging both contracting parties to guarantee corresponding refunds. So far, existing EU FTA only provide for this in justified exceptional cases. Within this framework, refund of duties already paid can be applied for within the statutory limitation periods if proof can be provided that imported goods had preferential origin. The German business community proposes that preferential tariffs benefits in principle be claimed retroactively for a period of at least three years. Finally, rules of origin in European FTA must keep pace with technological progress. They should therefore be revised regularly. Only then can be ensured that they reflect modern production processes and that companies can make use of the tariff preferences granted. Broader Application of Preferential Rules for Product Chapters 25-96: Cumulation, de minimis and Regional Value Content Cumulation means that operations carried out in other countries are counted towards origin provision. Depending on how many countries are involved, a distinction is made between different types of cumulation. Cumulation takes into account the globalization of value-added networks. German industry welcomes the fact that the latest EU free trade agreements allow full cumulation. Accordingly, materials and sub-products do not necessarily have to pass an initial verification in order for the final product to benefit from preferential tariffs. Thus, the EU legislators show their appreciation for the intellectual labor involved in the final steps of the value chain in complex manufacturing processes. In any case, cumulation rules of future FTA should be simplified. When modernizing existing agreements, the cumulation rules should be extended to full cumulation. Positive incentives to utilize agreements would also be set through higher limits on the de minimis rules: the possibility to process a higher proportion of non-originating input materials in the manufacturing process would allow more products to benefit from preferential tariffs. Here, even small changes can have a major impact for exporting companies due to positive economies of scale. BDI advocates a uniform tolerance of 15 percent in the EU’s FTA. A similar effect could be possibly achieved by lowering the regional value content (RVC) percentage or raising the maximum value of non-originating materials used in relation to the ex-works price (MaxNOM). As a result, products with a lower value-added in the EU could also benefit from preferential tariffs. However, this must be examined on a sector-specific basis. De-Bureaucratization and Digitalization Supplier declarations play a crucial role in proving origin of goods but are designed and handled differently in practice. BDI therefore advocates for a uniform European IT user interface through which supplier declarations can be automatically exchanged. Individual economic operators already use digital processes amongst themselves to simplify processes. Such creative individual solutions should be standardized and become the rule. Consistent digitization on the basis of process standardization offers the opportunity for significant simplification. This benefits not only the economic operators, but additionally the customs authorities, and would also simplify verification of supplier

Better Utilization of EU Free Trade Agreements

declarations. It would particularly relieve the burden on small and medium-sized enterprises without comprehensive internal system-based solutions and simplify the utilization of FTA. Furthermore, the proof of origin should be simplified. Exporters should be free to choose whether to present consignment-related proof (declaration of preference on the invoice and formal certificate such as EUR.1) or a certificate of origin valid for several consignments for a certain long-term period. Nonofficial proofs of origin, such as invoice declarations, should also be allowed as they would significantly simplify handling of preferential origin. Up to a certain amount, the use of a non-official proof of origin should always be possible (e.g. €6000 as in the EU-South Korea FTA). In addition, an exporter who has been granted “approved exporter” status should be able to submit an invoice declaration at any time without being restricted by a threshold. This is already practiced in several countries such as South Korea, Mexico, and Switzerland. In order to further simplify proof of origin, the obligation to indicate origin criteria in origin declarations, as introduced in the Economic Partnership Agreement (EPA) between the EU and Japan, should not be included in future free trade agreements. The obligation to indicate origin criteria delineates a considerable additional administrative burden for companies. Calculation of origin should be based on average material or product prices. This would lead to a considerable simplification for economic operators. Goods should retain their preferential status irrespective of the mode of transport. Proof of preferential status should be deemed to have been provided as long as customs authorities to not express or assert reasonable doubts as to the unchanged condition or status of a good. This adjustment is necessary in times of global value chains. In modern logistic networks, goods are often not delivered directly from the country of origin to the country of preferential destination. Rather, they are first delivered to a regional hub which then supplies the region at short notice and usually does not fall within the scope of the preferential agreement. This type of distribution system contributes significantly to improving supply flows and enables widespread just-in-time deliveries. Challenges associated with the direct transport principle and the use of regional hubs could be addressed by innovative technologies, such as microchips placed directly on the goods or alternative evidence (for example, serial numbers and markers of batch identification). Companies could thus obtain preferential tariffs without having to use direct transport routes. Provision of Better, More Precise and Product-Specific Information on FTA BDI is committed to supporting all companies, but particularly small and medium-sized enterprises and enterprises that lack experience with dealing with free trade agreements. This can be done through a more targeted information policy on the part of competent bodies regarding the regulatory intricacies of implementing FTA. The introduction of the Access2Markets portal with a targeted application for the rules of origin applicable in the various European FTA (Rules of Origin Self-Assessment, ROSA) serves as a good step towards a low-threshold provision of information for economic operators. German industry furthermore recommends more intensive exchange between the European Commission and the business community in order to more quickly and precisely identify potential problems in the utilization of European free trade agreements, as well as to better understand the solutions offered and to close information gaps. This also entails the European Commission’s involvement of economic stakeholders more in the negotiation process. Timely dissemination of information, for example on the rules of origin, could help to avoid problems with application as well as to enable an important preparatory phase for industry.

Better Utilization of EU Free Trade Agreements

Utilization of Tariff-Rate Quotas According to both the BDI survey and the European Commission, German and European exporters only use tariff-rate quotas (TRQ) for a few products. TRQ offer the possibility that “goods are imported duty-free or at a reduced duty rate within a fixed period (quota period) up to the amount of a certain value or quantity limit (quota quantity).”1 (zoll.de) The EU and the German government should therefore increase knowledge of relevant TRQ in European FTA. Since such quotas remain unused for many products in chapters 1-24, greater utilization has the potential to reduce costs in the export of agricultural goods.

Generalzolldirektion, Zollkontingente, <https://www.zoll.de/DE/Unternehmen/Warenverkehr/Einfuhr-aus-einem-Nicht-EUStaat/Zoll-und-Steuern/Zollermaessigung-befreiung/Warenart/Kontingente/kontingente.html>.

Better Utilization of EU Free Trade Agreements

Context: Preference Utilization Rates of EU Free Trade Agreements

EU Member States, in order of preference utilization rate of their exports to 33 European FTA (2021) Diagrammtitel Preference Utilization Rate in percent 90 PUR (%) 80

Average PUR (EU27)

70 60 50 40 30 20 10 0

European exporters derive considerable benefit from EU free trade agreements. However, their potential has not been fully taken advantage of so far, evidenced by a look at the utilization rates. They represent the share of trade between partner countries that is conducted under the preferential terms of the agreement in total trade between partner countries. The average preference utilization rate (PUR) for exports from the 27 EU Member States to 33 FTA partner countries was 67 percent in 2021, with significant variance across trading partners, EU Member States and sectors. For example, the highest PUR was 90 percent in trade with Serbia and the United Kingdom and the lowest, 29 percent with Vietnam. The PUR of German companies was 60 percent on average, below the EU27 average. German companies also achieved the highest usage rate with Serbia at 83 percent and the lowest with Madagascar at only 14 percent.2 For German exports, the potential tariff saving (assuming full preferential use with 33 partner countries) was just over 6.7 billion euros in 2021. The actual tariff saving was almost 5.2 billion euros.3 A 2018 report jointly conducted by UNCTAD and the National Board of Trade Sweden concluded that European exporters and importers use the agreements to a relatively high extent, but the utilization rates of partner country exporters are consistently higher. For example, the average PUR for exports from 77 FTA partners to the EU27 in 2021 was 81 percent, with the highest PUR at 100 percent (exports from Solomon Islands).

This excludes the PUR of 86% of exports to Turkey, considering this is a customs union and not a typical free trade agreement. European Commission, EU exports under Free Trade Agreements surpass €1 trillion, 11 October 2022, <https://ec.europa.eu/commission/presscorner/detail/en/ip_22_6069>. 3

Better Utilization of EU Free Trade Agreements

Survey: Factors behind Non-Utilization of EU FTA In a survey involving a total of 70 participants, including 66 companies and four industry associations, from a total of 18 sectors (including the automotive, metal, electrical, pharmaceutical, steel, ceramic and chemical industries, among others) 4, BDI investigated the reasons behind this paradox. 5 This survey is an update of a survey of 62 participants first published in January 2020.

When you do not use an FTA, why is this?

DIAGRAMMTITEL

Very relevant

Somewhat relevant

Relevant

Not very relevant

Not relevant

INADEQUATE EXTERNAL GUIDANCE ON FTA RECEIVED

32 6 0

22 7 0

INADEQUATE INFORMATION ON FTA

24 6 0

INADEQUATE EXPERIENCE W ITH FTA SPECIFIC SECTORS ARE PERMANENTLY EXCLUDED FROM TARIFF REDUCTION IN THIS AGREEMENT

THE FTA REGULATIONS ARE NOT FULLY IMPLEMENTED FOR MY SECTOR

LEGAL UNCERTAINTY RELATED TO GOODS CLEARANCE IN THE FTA PARTNER COUNTRY

DISCRETION RELATED TO GOODS CLEARANCE IN THE FTA PARTNER COUNTRY

COMPLEX PROCESSES RELATED TO GOODS CLEARANCE IN THE FTA PARTNER COUNTRY

PROBLEMS LINKED TO POOR IMPLEMENTATION AND ENFORCEMENT OF FTA IN EU/PARTNER COUNTRY

THE COMPLIANCE RISKS ASSOCIATED W ITH THE RULES OF ORIGIN ARE TOO HIGH, ON THE BASIS OF COMPLEX SUPPLY CHAINS

VARIANCE IN THE RULES ACROSS THE EU FTA

INADEQUATE INTERNAL CAPACITY TO MANAGE THE FTA

THE TARIFF MARGIN IS TOO NARROW THE COSTS/BUREAUCRACY ASSOCIATED W ITH THE COMPLIANCE W ITH THE RULES OF ORIGIN ARE TOO HIGH

4 2 10 4 3 5

37 8

33 14

11 10

14 11

13 14

17 19

19 9

13 11

16 22

7 9

10 7

More than 80 percent of the surveyed associations and companies cited the level of costs and bureaucracy associated with determining origin and as the main stumbling blocks to utilizing preferential tariffs in trade agreements. Compared to the 2020 survey, this number increased by 20 percent. More than half of the respondents, the majority of which are companies with more than 500 employees, specified a lack of internal capacity to check compliance with agreements as the main cause. More than 70 percent of respondents also alluded to the low customs tariff margins and more

Seven survey respondents categorized their sector as “other.” The policy recommendations are the result of both the survey and further analysis. They reflect the consensus of the full membership of the Federation of German Industries. 4 5

Better Utilization of EU Free Trade Agreements

than 50 percent indicated a lack of clarity in the different regulations across European FTA as well as higher liability risks in the provision of origin due to complex value chains as reasons. According to the survey, 87 percent of the surveyed companies and associations estimated that the companies in their respective industry did not fully or only partially take advantage of the EU's free trade agreements (2020: 73 percent). Only 13 per cent alluded to take full advantage of the agreements (2020: 11 percent). Do you believe that German companies in yourUnternehmen sector fully take advantage of European free trade Glauben Sie, dass deutsche in Ihrer agreements?

Branche die Vorteile von europäischen FTAs voll ausschöpfen? 60%

70% 60% 50% 40%

27%

30% 20%

13%

10% 0% Yes

Somewhat

More than half (53 percent) of surveyed companies indicated that there are FTA they do not utilize, despite conducting trade with the partner country in question. Compared to 2020, this figure remains almost unchanged (54 percent).

A Spaghetti Bowl of Different Rules According to an Ecorys study (2018)6 rules of origin in free trade agreements differ in terms of their requirements pertaining to e.g. evidence and documentation. In addition, product-specific processing rules (PSR) vary across FTA. This leads to an increasingly complicated tangle of rules of origin also known as the „spaghetti bowl.” A large proportion of survey respondents (62 percent) cited the high variance in applicable rules across multiple agreements as an important reason behind non-utilization. Compared to the 2020 survey (47 percent), this figure has increased significantly.

Nora Plaisier, Corine Besseling, Stephanie Bouman and Henri de Groot (Ecorys), Study on the Use of Trade Agreements, 2018, <https://www.ecorys.nl/sites/default/files/study-on-the-use-of-trade-agreements%20%283%29.pdf>.

Better Utilization of EU Free Trade Agreements

When you do not use an FTA, why is this? Diagrammtitel Variance in rules across the EU FTA 70% 62% 60% 50% 38%

40% 30% 20% 10% 0% Relevant

Not relevant

Complex Rules of Origin as Decisive Factor Rules of origin for goods emerged in the survey as a decisive factor for the use of free trade agreements. Preferential tariffs are only granted to goods that are demonstrably originating goods of the partner country. Accordingly, a number of rules in FTA deal with the necessary processing steps of products, requirements for proof of origin, and practical customs clearance. According to many German companies and associations, the costs associated with providing proof of origin are too high. Particularly cost-intensive are EU-wide obtaining of various supplier declarations, adaptation and updating of IT systems and fees possibly incurred for external consultants as well as certification authorities. This is also the case in other EU members: according to a study by the National Board of Trade Sweden (2012) 7, higher administrative costs for exporters are associated with low utilization rates. The aforementioned Ecorys study (2018) on preferential use comes to a similar conclusion: many Dutch exporters do not use free trade agreements because the costs are too high. 66 percent of respondents rated the costs associated with identifying and complying with rules of origin as very high or high (2020: below 60 percent). Of these 66 percent, some found the level of costs so significant that they thus do not utilize a particular agreement. The surveyed companies stated that the administrative burden (especially implementation in IT systems and obtaining supplier declarations) does not outweigh the negligible savings from using tariff preferences. Moreover, more than half of respondents (57 percent) found there to be EU free trade agreements whose rules of origin are too complex (2020: 48 percent). Only 43 percent were convinced of the opposite. 40 percent of respondents also noted that the competent national authorities responsible for proofs of origin appeared insufficiently informed and prepared to support these formalities. Another problem is that rules of origin in European free trade agreements do not keep pace with technological progress. As a result, companies in technological transition are at a disadvantage because they are excluded from the benefits of European FTA.

National Board of Trade Sweden, The Impact of Rules of Origin on Trade – a Comparison of the EU’s and US’s Rules for the Textile and Clothing Sector, 2012, <https://www.kommers.se/Documents/dokumentarkiv/publikationer/2012/skriftserien/reportthe-impact-of-rules-of-orgin-on-trade.pdf>. 7

Better Utilization of EU Free Trade Agreements

Sind Sie der Meinung, dass es Freihandelsabkommen gibt, in denen Ursprungsregeln zu komplex sind?

Do you find that there are FTA, in which the rules of origin are too complex? 57%

60% 50%

43% 40% 30% 20% 10% 0% Yes

New Verification Procedure for Proofs of Origin According to some respondents, non-utilization is concentrated widely on two agreements: the EUJapan EPA and CETA with Canada. A report by the European Commission cited the utilization rate of CETA by European exporters at only 58 percent.8 The BDI survey suggests this to be linked to the new procedure for verifying proof of preference introduced by these two agreements. Nearly half of the 53 percent of surveyed companies that indicated not to make use of certain FTA despite trading with those countries name Japan as one of these countries, and one-third named Canada. Wie, schätzen Sie, wird sich das neue Verfahren zur Überprüfung des Ursprungsnachweises, wie in CETA und im EU-Freihandelsabkommen mit Japan implementiert, auf die Nutzung von FTAs auswirken?

How would you estimate that the new process of reviewing the proof of origin, as implemented in the EU FTA with Canada (CETA) and Japan, will affect the utilization of FTA? 70% 61% 60% 50% 40%

34%

30% 20% 10%

0% PUR will rise

PUR will remain where it is

PUR will fall

The low use of preferential duties under these two agreements was attributed by some respondents to changes in the verification of origin which began with CETA. According to the survey, as many as 34 percent of respondents believed the new verification modalities will lead to further declines in the

European Commission, EU exports under Free Trade Agreements surpass €1 trillion, 11 October 2022, <https://ec.europa.eu/commission/presscorner/detail/en/ip_22_6069>. 8

Better Utilization of EU Free Trade Agreements

utilization rate. Significantly more respondents (61 percent), however, no longer saw significant impact. Comparatively few, four percent, would imagine higher utilization rates. Compared to the 2020 study, there are clear changes – back then, 50 percent of respondents indicated that utilization rates would decrease. Only 24 percent imagined they would remain the same.

The Role of Global Value Chains According to a study by KPMG International and Thomson Reuters (2015) 9 on the increasing internationalization of value chains, rules of origin are becoming progressively difficult to comply with. In most cases, companies need declarations of origin from all relevant suppliers. With complex value networks, obtaining such documentation becomes increasingly burdensome. Several survey respondents cited the globalization of value chains within their industries as a reason behind FTA nonutilization. Other aspects of rules of origin, especially rules on value-added, were also mentioned. 52 percent of respondents identified liability risks in the origin provision process due to complex value networks as relevant for non-utilization (2020: 48 percent).

Tariff Margins According to studies from UNCTAD (2018),10 Ecorys (2018),11 the National Board of Trade Sweden (2012)12, and Hayakawa (2012)13 and (2014),14 higher tariff margins are associated with high free trade agreement utilization. Tariff margins quantify the difference between the most favored nation (MFN) bound tariff rate under the WTO and the tariff rate agreed in an FTA. 73 percent of respondents found that low tariff margins are a relevant reason for non-utilization. The high costs and additional effort for obtaining supplier declarations, adapting IT systems, indirect and direct effects of such processes on production structures, and dealing with national customs authorities act as a business deterrent. As such, low tariff margins often did not justify the additional internal costs. Compared to the survey results from 2020, this figure has increased significantly. In 2020, only 47 percent of respondents indicated non-utilization due to low customs savings.

Internal Capacity, Expertise and Information According to Plaisier et al (2018) and the European Commission, information deficits are behind nonutilization of EU free trade agreements – this is to say, companies are not aware of relevant agreements or do not know where to find relevant information on the procedures.

Thomson Reuters International and KPMG International, 2015 Global Trade Management Survey, 2015, <https://home.kpmg/content/dam/kpmg/pdf/2016/07/2015-global-trade-management-survey.pdf> 10 National Board of Trade Sweden and UNCTAD, The Use of the EU’s Free Trade Agreements: Exporter and Importer Utilization of Preferential Tariffs, 2018, <https://www.kommers.se/Documents/dokumentarkiv/publikationer/2018/Publ-The-use-of-the-eusFTA.pdf>. 11 Nora Plaisier, Corine Besseling, Stephanie Bouman and Henri de Groot (Ecorys), Study on the Use of Trade Agreements, 2018, <https://www.ecorys.nl/sites/default/files/study-on-the-use-of-trade-agreements%20%283%29.pdf>. 12 National Board of Trade Sweden, The Impact of Rules of Origin on Trade – a Comparison of the EU’s and US’s Rules for the Textile and Clothing Sector, 2012, <https://www.kommers.se/Documents/dokumentarkiv/publikationer/2012/skriftserien/reportthe-impact-of-rules-of-orgin-on-trade.pdf>. 13 Kazunobu Hayakawa, Impacts of FTA Utilization on Firm Performance, 2012, <http://hdl.handle.net/2344/1182>. 14 Kazunobu Hayakawa, Impact of Diagonal Cumulation Rule on FTA Utilization: Evidence from Bilateral and Multilateral FTA between Japan and Thailand, 2014, <https://doi.org/10.1016/j.jjie.2013.12.005>.

Better Utilization of EU Free Trade Agreements

However, this plays a subordinate role in Germany. Only 18 percent of survey respondents indicated that insufficient information on FTA played an important role in their non-utilization (2020: 16 percent). More than four-fifths of respondents said this was not relevant. However, 64 percent of surveyed companies justify their non-utilization with insufficient internal capacities in the support of FTA. In 2020, this figure was still at 55 percent. In terms of internal expertise, 17 percent of surveyed companies had more than ten experts (2020: 17 percent), 50 percent had between one and four experts (2020: 64 percent) and thirteen percent had no FTA experts (2020: 11 percent). The number of FTA experts in a company alone is nevertheless not decisive for whether an FTA is used. When asked whether there are FTA that companies do not use, even though they trade with the partner countries in question, there are no major differences in the answers, regardless of whether the companies have internal FTA expertise. For example, more companies that do not have in-house expertise answered "no" than those with, and the same number of companies that have more than 10 experts answered respectively "yes" and "no.” Are there FTA that you do not use, although you do trade with the partner country/countries with Diagrammtitel which the agreement was negotiated? 25 20 15 10 5 0 Yes

Companies with 10+ FTA experts

Companies with 5-10 FTA experts

Companies with 1-4 FTA experts

Companies with no in-house expertise

Better Utilization of EU Free Trade Agreements

Further Factors (Entry into Force, Direct Transport Principle, Separate Storage, Tariff-Rate Quotas) EU Preference Utilization Rates (export) of Free Trade Agreements by FTA Partner Country (2021) PUR (%) in chronological order, organized by date that agreement entered into force 100 90 80 70 60 50 40 30 20 10

Vietnam (2020)

United Kingdom (2021)

Japan (2019) Singapore (2019)

Canada (2017)

South Africa (2016)

Kosovo (2016) Moldova (2016)

South Korea (2015)

Bosnia-Herzegovina (2015)

Peru (2013) Serbia (2013)

Panama (2013)

Guatemala (2013)

Ecuador (2013) El Salvador (2013)

Mauritius (2012)

Colombia (2013)

Albania (2009)

Montenegro (2010) Madagascar (2012)

Dominican Republic (2008)

Algeria (2005) Lebanon (2006)

Egypt (2004)

North Macedonia (2004)

Jordan (2002) Chile (2003)

Mexico (2000)

Morocco (2000)

Turkey (1995) Israel (2000)

Norway (1994)

Switzerland (1973)

According to data from the European Commission (2022)15 and UNCTAD/National Board of Trade Sweden,16 utilization rates of older European FTA are generally slightly higher than utilization rates of newer agreements. This is to say, agreements that have been in force longer are utilized more than newer agreements. This trend could be due to more experience and expertise within companies with an agreement.

European Commission, EU exports under Free Trade Agreements surpass €1 trillion, 11 October 2022, <https://ec.europa.eu/commission/presscorner/detail/en/ip_22_6069>. 16 National Board of Trade Sweden and UNCTAD, The Use of the EU’s Free Trade Agreements: Exporter and Importer Utilization of Preferential Tariffs, 2018, <https://www.kommers.se/Documents/dokumentarkiv/publikationer/2018/Publ-The-use-of-the-eusFTA.pdf>. 15

Better Utilization of EU Free Trade Agreements

Do you use "older" FTA (e.g. with Mexico, Chile) more often than modern FTA (e.g. with South Korea, Canada)? Nutzen Sie ältere Freihandelsabkommen (z.B. mit Mexiko, Chile) mehr als moderne Freihandelsabkommen (z.B. mit Südkorea, Kanada)?

100% 87%

90% 80% 70% 60% 50% 40% 30% 20%

13%

10% 0% Yes

The results of the survey, however, call this assumption into question. 87 percent of respondents deny a greater use of older free trade agreements (for example with Switzerland, Israel or Mexico) compared to newer agreements. In 2020, the figure was still 29 percent. In contrast, only 13 percent say that more experience has made use more likely (2020: 58 percent). Respondents who use newer agreements less than older ones point to new proof-of-origin procedures, more burdensome implementation and the difficulties associated with IT adaptation, as well as fewer shipments to the "newer" trading partner and widely divergent rules of origin. Does the direct transport principle (preferences are only granted for products which have been transported directly between the contracting parties) pose a challenge to your utilization of FTA? Stellt das Direktbeförderungsprinzip – Präferenz wird nur für Ursprungserzeugnisse gewährt, die direkt zwischen den beteiligen Vertragsparteien befördert werden – ein Hindernis für die Nutzung von FTAs dar?

80% 69%

70% 60% 50% 40%

31%

30% 20% 10% 0% Yes

Free trade agreements have so far been subject to the direct transport principle: in order to receive to preferential tariffs, a good must be delivered directly from one partner country of the agreement to the other. However, many German companies use so-called hubs, i.e. central transshipment and storage centers, for long delivery routes such as to the Asian region. As a result, these companies do not receive preferential tariff duties.

Better Utilization of EU Free Trade Agreements

In the survey, almost a third of the respondents see the direct transport principle as problematic. For these 31 percent, the use of regional distribution centers represents an important component of their modern logistics structures (2020: 34 percent). FTA often require separate storage of originating and non-originating materials that are the same and interchangeable, and used in the manufacture of a product. Does this pose a challenge to your utilization of FTA? Bisher verlangen FTAs häufig eine getrennte Lagerung von Vormaterialen mit Ursprungseigenschaft und Vormaterialen ohne Ursprungseigenschaft, die gleich und untereinander austauschbar sind und in der Herstellung eines Erzeugnisses verwendet werden. Stellt

70%

60% 60% 50%

40% 40% 30% 20% 10% 0% Yes

Many EU FTA require separate storage of originating and non-originating materials that are the same and interchangeable and used in the manufacture of a product. 60 percent of respondents noted separate storage as an obstacle to greater use of FTA. This principle makes manufacturing processes significantly more complex and is usually difficult to implement. Moreover, separate storage does not reflect the functioning of modern logistics operations and leads to inefficient warehousing for companies from different sectors. Not only is this uneconomical and associated with additional costs and storage capacity, but it can also lead to companies not being able to claim the preferential tariff granted by an FTA when goods cannot be stored separately. In the 2020 survey, less than 50 percent of respondents called separate storage a barrier to FTA utilization. Do you use tariff-rate quotas in FTA? 100%

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91%

90% 80% 70% 60% 50% 40% 30% 20% 10%

0% Yes

Many modern free trade agreements include tariff-rate quotas (TRQ). TRQ allow duty-free imports of goods up to a certain quantitative threshold. Above the threshold, higher import duties apply. According

Better Utilization of EU Free Trade Agreements

to reports by the European Commission, the potential of many tariff quotas is not fully utilized. 17 This assessment is consistent with regard to the participants in the survey. A full 91 percent of respondents said they do not use TRQ in free trade agreements (2020: 81 percent). The low use by respondents probably has the following reason: in European FTA (e.g. with Switzerland, South Korea, Israel and the Western Balkan countries), most tariff-rate quotas apply to agricultural goods. The survey, on the other hand, was conducted among companies in the industrial sector. For the most part, these are not or only indirectly involved in agricultural exports.

European Commission (2022). Utilisation Rate of TRQs Opened by Third Countries to the EU. 11 October 2022. <https://circabc.europa.eu/ui/group/7fc51410-46a1-4871-8979-20cce8df0896/library/e5a7de68-1164-4670-8d502b2b07188957/details?download=true>.

Better Utilization of EU Free Trade Agreements

Imprint Bundesverband der Deutschen Industrie e.V. (BDI) Breite Straße 29, 10178 Berlin www.bdi.eu T: +49 30 2028-0 German Lobbyregister Number R000534

Editorial Anna Kantrup T: +49 30 2028-1526 a.kantrup@bdi.eu Katherine Tepper T: +49 30 2028-1499 k.tepper@bdi.eu Matthias Krämer T: +49 30 2028-1562 m.kraemer@bdi.eu

BDI Document Number: D1609

Better Utilization of EU Free Trade Agreements

Articles inside

Utilization of Tariff-Rate Quotas

Provision of Better, More Precise and Product-Specific Information on FTA