Is the full potential of Europe's FTAs being realized?

Origin Calculation | | MIC Customs Solutions |

EU free trade agreements are currently failing to generate almost €72 billion in untapped commercial potential, according to a new report from UNCTAD and Sweden's National Board of Trade.

The European Union is one of the world's foremost proponents of free trade - especially in recent years, when protectionist sentiments have returned to the international sphere, leaving the EU to take on an even greater role as a champion of trade liberalization.

However, there remains evidence that the EU has more work of its own to do if it wishes to generate the maximum commercial potential of its free trade relationships with other regions. This point was recently underlined in a report from the UN Conference on Trade and Development (UNCTAD), which has suggested that significant amounts of money are currently being lost due to underuse of EU free trade agreements (FTAs).

The report, published in cooperation with Sweden's National Board of Trade, offers an important insight into the steps the EU still needs to take to ensure businesses around the world are experiencing the full benefits of its FTAs - as well as revealing the considerable financial gains that could be achieved.

What kind of gains are being missed?

UNCTAD's analysis is noteworthy for being the first to use the concept of utilization rates to systematically analyze FTAs entered into by the EU, providing visibility into how comprehensively these agreements are being used by businesses in practice, rather than simply focusing on theoretical gains that exist only on paper.

It was revealed that the full potential of EU FTAs currently remains untapped to the amount of almost €72 billion, a total calculated by examining the amount that European exporters have overpaid by failing to take full advantage of the reduced tariffs offered by the free trade deals in place with developed and developing countries.

Currently, EU importers make use of the tariff reductions provided for by these FTAs in around 90 per cent of cases, but this falls to 67 per cent among exporters. A large proportion of this underutilization comes from EU exports to major free trade partners such as Switzerland and South Korea, while a significant share of unused tariff reductions to the EU comes from imports from Turkey and Mexico.

When every free trade deal is taken into consideration, it is estimated that EU importers forfeit around €600 million in reduced tariffs every year, which can result in higher prices for the manufacturing industry and for consumers.

How can this problem be solved?

According to the report, part of the reason why this potential is not currently being tapped may be that border-related aspects of the implementation of EU FTAs may be proving more burdensome than the text of the agreements intended.

For example, a strong link was noted between complex rules of origin and low FTA utilization rates among businesses, while many of the world's least developed countries have already used the concept of utilization rates to argue for better rules of origin at a World Trade Organization meeting in 2016, with UNCTAD's support.

Study co-author Stefano Inama explained: "Many companies report that they have difficulties taking advantage of the preferential tariffs in the FTAs, which often has to do with the fact that the rules on proving a product's origin - a requirement for reduced tariffs - are complex."

Overall, the report offers potentially compelling evidence that the EU needs to make changes to its trade rules if it is to live up to its intended role as a world leader in free trade.

Another contributor, Jonas Kasteng, emphasized the importance of the EU rectifying these current issues, observing: "The EU is one of the most active negotiators of FTAs at the global level, with a variety of developing countries and most recently least-developed countries, and because EU companies have favorable trade conditions - including through reduced tariffs - thanks to these FTAs."