Use of free trade agreements

The State Secretariat for Economic Affairs (SECO) analyses the extent to which Swiss companies make use of Switzerland's free trade agreements (FTAs) to save on customs duties.

The FTA Monitor shows that Swiss companies saved CHF 2.3 billion in customs duties in 2020 thanks to FTAs. This corresponds to an average FTA utilisation rate of 68% for imports.

The study "Analyse zur Nutzung von Freihandelsabkommen" published in August 2020 is based on a recommendation by the National Council's Business Audit Committee (GPK-N) and was commissioned by SECO from the University of St. Gallen. The GPK-N called for an analysis of the effects of FTAs. In a further analysis, the factors that influence whether companies importing goods into Switzerland use the preferential tariffs granted under FTAs were examined. The in-depth analysis showed that smaller and larger companies use FTAs with roughly the same frequency.

Questions and answers

1. What is the objective of free trade agreements?

As a highly developed economy with a small domestic market, Switzerland is strongly integrated into international value chains and is dependent on foreign markets for both imports and exports. By concluding free trade agreements, Switzerland aims to ensure stable and easy access to foreign markets for Swiss businesses and to improve the framework conditions for trade relations with economically important partners. Currently, Switzerland has in addition to the free trade agreement with the European Union and the EFTA Convention a network of 33 free trade agreements with 43 partners worldwide.

2. How much use is made of free trade agreements?

The central element of FTAs is the reciprocal granting of tariff preferences – i.e. a complete or partial elimination of customs duties in favour of the respective contracting party. These preferential tariffs are lower than the regular import duties, so companies can profit from savings. Where companies can benefit from an FTA, the majority of them do so. This is shown by the calculations of usage rates. These measure the share of imports actually imported under the FTA, measured against all the goods that could potentially have been imported at lower cost under the FTA. Goods that were duty-free or otherwise duty-privileged owing to factors other than FTAs were not included in this calculation. Detailed information on the use of FTAs and the realised tariff savings can be found in the FTA Monitor.

3. How can free trade agreements be used?

Companies can use free trade agreements if their products meet the preferential rules of origin under the FTA. This means that a product must have been manufactured to a significant extent in Switzerland in order to benefit from preferential duty exemptions or duty reductions in Switzerland's FTA partner states. For example, if a company produces machines in Switzerland, it can only export them to China under the FTA and thereby enjoy preferential tariff treatment if a sufficiently large part of the value added has been created in Switzerland. For further information on preferential rules of origin: FCA Circulars – Free trade agreements (origin) and R-30 Free trade agreements, preferential tariffs and origin of goods

4. Which firms engage in foreign trade and how does firm size influence the use of free trade agreements?

As part of the in-depth data analysis «Determinanten der Nutzung von Freihandelsabkommen Weiterführende Auswertungen», the 2016–2019 imports of over 180,000 companies were analysed. Merging data on imports with data on firm characteristics allows the companies to be categorised according to the number of employees. Some 97,000 of the companies included in the dataset are microbusinesses (9 employees or less). A further 25,000 or so are small companies (10–49 employees), 7,000 are medium-sized companies (50–249 employees) and just over 2,600 are large companies (over 250 employees). For approximately 50,000 companies, the size of the company cannot be discerned from the data.

The analysis shows that large companies with over 250 employees use FTAs with a similar frequency as SMEs. In terms of realised customs duties savings, SMEs saved more in 2019 (CHF 1,134 million) than large companies (CHF 728 million). In addition, companies of an unknown size realised further customs duties savings of CHF 211 million.

Figure 1 shows realised and unrealised customs duties savings for different company sizes (measured by the number of employees) for all of Switzerland's FTAs. Although realised customs duties savings reached some CHF 2,063 million, a total of CHF 372 million in savings went unrealised. Of these, CHF 121 million were attributable to companies of unknown size, CHF 103 million to large companies, and a further CHF 148 million to SMEs.

The current distribution of customs duties savings by company size for Switzerland's individual FTA partner countries is presented in the FTA Monitor.

5. What role does the level of potential customs duties play in the use of FTAs?

The in-depth analysis «Determinanten der Nutzung von Freihandelsabkommen Weiterführende Auswertungen» shows that the greater the difference between the regular MFN (Most Favoured Nation) tariff and the preferential FTA tariff, the more free trade agreements are used. The MFN tariff is the basic tariff that Switzerland levies on imports from all countries. Within the framework of FTAs, lower tariff rates are agreed upon with the partner countries; these lower tariffs are referred to as FTA tariff rates. The preference margin is defined as the difference between the MFN and the FTA tariff rates.

Notably, the average usage rate is relatively high even at very low preference margins. At a preference margin of 20 percentage points or above, the average usage rate is over 90%. Based on 2019 data, Figure 2 shows the average FTA usage rate for each preference margin between 0 and 100 percentage points.

A large part of unrealised customs duties savings can be attributed to imports with low preference margins. Cumulatively, about 75% of the unrealised savings relate to imports for which the difference between the ad valorem-equivalent MFN tariff and the FTA tariff is less than ten percentage points. This suggests that the use of FTAs is associated with costs. Firms only have an incentive to use an FTA if the potential customs duties savings outweigh these costs.

6. What are the costs associated with using FTAs?

The analysis «Determinanten der Nutzung von Freihandelsabkommen Weiterführende Auswertungen» provides evidence that the use of FTAs is associated with costs. Included are both variable costs (which are incurred with each transaction) and fixed costs. Companies also have one-time costs to familiarise themselves with the formalities required to take advantage of FTAs. In addition, suitable suppliers may have to be found to fulfil the rules of origin. The analysis shows that firms which have already used an FTA once use it more frequently for future imports. This observation underlines the importance of such fixed costs in determining FTA usage.

The analysis also backs up the assumption that there are costs attached to compliance with rules of origin. The analyses conducted to date do not yet permit the exact extent of these costs to be quantified. However, various other analyses indicate that more restrictive rules of origin significantly reduce the use of FTAs.

7. Why is the use of FTAs sometimes modest?

The usage rate for FTAs varies greatly depending on trading partners, product groups, time, firm and delivery. There may be various reasons for this, for example:

The 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 is sometimes difficult for companies to fulfil the preferential origin rules.

Administrative and financial burden: companies must document the manufacturing process and, if necessary, adapt it in order to achieve preferential origin. Companies may therefore decide not to use FTAs if the costs of these adjustments exceed the potential benefits.

Other, as yet unknown reasons

8. How can the usage rate be increased in the future, and what further steps does SECO plan to take?

Based on the results of the study and the further data analysis and company surveys, SECO is examining measures to simplify the use of FTAs by economic actors.

The FTA Monitor: all relevant figures on the use of the individual FTAs are shown at a glance in the FTA Monitor.

FHA-Monitor

SECO report on the results of the company survey on the use of free trade agreements by Swiss exporters (PDF, 2 MB, 03.11.2022)The English version follows

Presentation information event SECO "Company survey on the use of free trade agreements and possible measures" (PDF, 1 MB, 03.11.2022)Exists only in German and French

'Analysis on behalf of SECO of the use of free trade agreements' study by Stefan Legge and Piotr Lukaszuk of the University of St Gallen

Study – Analysis on behalf of SECO of the use of free trade agreements (German only, PDF, 2 MB, 11.08.2020)

Executive summary – 'Determinants of the Use of Free Trade Agreements; in-depth analyses' by Stefan Legge and Piotr Lukaszuk of the University of St Gallen

Executive summary – in-depth analyses; University of St. Gallen (German only, PDF, 564 kB, 15.02.2021)