Use of free trade agreements

Free trade agreements: Do companies benefit?

The State Secretariat for Economic Affairs (SECO) has commissioned a comprehensive data analysis. It shows the extent to which Swiss companies make use of Switzerland's free trade agreements to save customs duties.

The study "Analysis on the use of free trade agreements" by Stefan Legge and Piotr Lukaszuk of the University of St. Gallen was commissioned by SECO to obtain findings on the use of and tariff savings gained through all of Switzerland’s existing free trade agreements (FTAs). The study was commissioned by the Business Audit Committee of the National Council (GPK-N) to examine the effects of FTAs.

The study shows that Swiss importers and consumers saved CHF 2.5 billion in customs duties in 2018 thanks to FTAs. The average usage rate for FTAs was 73%. For exports to FTA countries (for those that provided data), the preference utilisation rate in 2018 was 80%. This corresponds to a customs saving of CHF 1.8 billion.

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 the Swiss economy and to improve the framework conditions in economic relations with economically important partners. Currently, in addition to the Free Trade Agreement with the European Union and the EFTA Convention, Switzerland has a network of 30 free trade agreements with 40 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 and companies can thus benefit from savings. Where companies can benefit from an FTA, the majority of them do so. This is shown by the calculations of the preference utilisation rate. This rate measures the share of imports actually imported under the FTA, measured against all the goods that could potentially have been imported more cheaply under the FTA (goods that were duty-free or otherwise duty-privileged owing to factors other than FTAs were not included in this calculation).

3. How high are the tariff savings of Switzerland's free trade agreements?

On the import side:

In Switzerland, more than a third of imports are already duty-free and the remaining duties are generally low. In 2018, Swiss companies and consumers benefitted from tariff savings of CHF 2.5 billion thanks to free trade agreements. This corresponds to a preference utilisation rate of free trade agreements of 73 percent.

On the export side:

For exports to the FTA countries that have provided data, the preference utilisation rate of FTAs in 2018 was 80 percent. This corresponds to tariff savings of CHF 1.8 billion thanks to free trade agreements. This has enabled Swiss companies to improve their competitiveness in foreign markets.

Figure 1 shows in green the tariff savings (customs duties) actually achieved as a result of Switzerland's free trade agreements.

4. How high are the additional possible tariff savings of Switzerland's free trade agreements?

On the import side:

Swiss companies and consumers could have benefited in 2018 from additional tariff savings thanks to free trade agreements amounting to a maximum of CHF 447 million.

On the export side:

In the case of exports, additional tariff savings of up to CHF 443 million could have been achieved in 2018 thanks to free trade agreements.

Figure 1 shows in red the potential additional tariff savings that are theoretically possible as a result of Switzerland's free trade agreements; these are non-realised tariff savings.

5. Where do Swiss companies save most thanks to free trade agreements?

On the import side:

Swiss companies achieved the greatest savings in the import of plastics, cheese and paper products.

On the export side:

Swiss companies have achieved the greatest savings in the watch sector (over 300 million Swiss francs). Major savings were also achieved in the area of machinery and precious metals.

By country of origin:

Swiss companies achieve the greatest savings in customs duties on imports from Germany. High savings are also achieved with imports from Italy, France, China and Austria. Nevertheless, there is considerable additional savings potential for imports from China and Germany. Die grössten Zolleinsparungen realisieren Schweizer Unternehmen bei Importen aus Deutschland. Ebenfalls hohe Einsparungen finden sich bei Einfuhren aus Italien, Frankreich, China und Österreich. Trotzdem zeigt sich ein beachtliches zusätzliches Sparpotenzial bei Importen aus China und Deutschland.

6. How can free trade agreements be used?

Companies can use free trade agreements if their products meet the preferential rules of origin of an FTA. This means that a product must have been manufactured to a significant extent in Switzerland in order to benefit from preferential duty exemption 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 with preferential tariff treatment if a sufficiently large part of the value-added has been created in Switzerland. Further information on preferential rules of origin: FCA Circular free trade agreements (origin) and FCA Free trade agreements, tariff preferences and origin of goods

7. 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. This can have various reasons, e.g. :

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 achieve preferential origin.
administrative and financial burden: companies must document the production process and, if necessary, adapt it in order to achieve preferential origin. Companies can therefore decide not to use FTAs if the costs of these adjustments exceed the potential benefits.
other reasons not yet known

This study lays the foundation for a detailed analysis of the factors that can explain the variation in the use of FTAs across trading partners and product group. However, this analysis was not part of the commissioned study and will be carried out in a next step.

8. How can the utilisation rate be increased in the future?

Based on the results of the study, the State Secretariat for Economic Affairs will initiate further work to identify the factors that lead to incomplete use of free trade agreements. The aim is to identify measures to increase the use of free trade agreements, especially for products with high tariff saving potential.