Trade agreements are designed to support the flow of goods for companies with reduced tariffs, smoother border processes and closer international cooperation. For firms navigating today's volatile supply chains, these agreements should be a powerful tool to strengthen competitiveness.
Yet, despite these clear advantages, free trade agreements (FTAs) and preferential trade agreements (PTAs) are chronically underutilized. A 2018 UNCTAD report estimates that EU companies left €89 billion in unrealized tariff savings on the table due to low take-up of preferential tariffs. Newer research from the World Customs Organisation (WCO) explores how PTAs remain an underutilised resource in trade.
Why utilization rates remain low
The WCO explains that there are two principal factors limiting the use of PTAs. These include:
- High administrative costs: Complying with preferential rules of origin remains one of the biggest hurdles. To qualify for tariff reductions, exporters must prove that their products meet complex origin criteria. This often requires extensive documentation, supply chain transparency and audits, raising compliance costs that, for many firms, outweigh the savings.
- Low preferential margins: In some sectors, the difference between most-favored-nation (MFN) tariffs and preferential tariffs is small. When the tariff gap is minimal, companies often calculate that the compliance burden is not worth the marginal cost savings.
Beyond tariffs: policy uncertainty and negotiation overload
The global trade policy landscape is shifting rapidly, with more countries negotiating FTAs to secure market access in a climate of geopolitical uncertainty. However, many agreements are still stuck at the discussion stage, creating a fragmented environment where businesses are unsure which benefits are truly accessible today.
The hidden cost for businesses
For firms trading internationally, underutilization of FTAs translates into billions in tariff reductions going unused, eroding competitiveness. This creates an uneven playing field where larger corporations with resources to manage compliance systems gain more, while smaller firms are left behind. Without streamlined origin management, companies face delays and risks of non-compliance in audits.
Toward better utilization: what's next?
As countries negotiate FTAs, three areas will be critical in ensuring smoother, more cooperative and competitive trade. These are:
- Digitization of origin management: Automating origin calculation, documentation and record-keeping reduces compliance costs.
- Capacity building for SMEs: Training and support to navigate rules of origin can democratize access to trade benefits.
- Policy simplification: Future FTA negotiations need to focus on usability, ensuring that rules of origin don't undermine intended benefits.
Beyond strengthening international relations, FTAs are critical business tools. To ensure their full potential, companies need better systems and policymakers need to simplify compliance frameworks. Otherwise, the promise of billions in trade benefits will remain largely untapped.