Swedish companies benefit from the EU's free trade agreement with South Korea

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Both large and small Swedish companies use the EU's free trade agreement with South Korea to a large degree. The free trade agreement is used to almost 90 percent for imports from South Korea and the total duty savings for Swedish companies is 2.7 million euro per month. This is found in a new report by the Swedish government agency National Board of Trade.

Jonas Kasteng, one of the authors of the report, why did you make this investigation?

– We wanted to understand when and why companies use the EU's free trade agreements. By improving our knowledge of this, it will be easier to target incentives towards the companies in a better way – with the aim to increase the use of the free trade agreements.

Which are the main conclusions from the report?

– The report shows that the free trade agreement is widely used by Swedish companies importing from South Korea, to almost 90 percent. Swedish importers gained 2.7 million euro in duty savings during the sample month (but they still paid duties of 370 000 million euro).

– One conclusion, therefore, is that it is more effective to focus on importers in initiatives aimed at increasing the use of free trade agreements, since they are the ones that have the most to gain from tariff reductions.

– The report also shows that the size of the company is not as important for the use of free trade agreements as previously thought. It may even be the case that small companies are the ones that use free trade agreements most effectively.

– Generally speaking, what drives the use of free trade agreements is the value of the import transaction and the level of the potential duty savings. It was interesting to find that the size of the tariff reduction is not as important as you might think. Even when the tariff reduction is small, free trade agreements tend to be used when the import transaction value is large.

Could you give an example?

– It becomes clear when you look at, for example, the imports of cars, which is one of the most important products imported from South Korea. In this product category, the duty savings amount to almost 1.9 million euro per month and the free trade agreement is used to as much as 97 percent.

In the report, you refer to a "black box"?

– How companies make up their decisions when deciding whether to use the free trade agreements or not has been something of a "black box", that is, something you do not know so much about. We wanted to lift the lid on the box in order to better understand what drives companies to use the free trade agreements.

What gave you the possibility to lift the lid?

– We obtained access to detailed transaction-level data on imports that had not been available before. Previous studies are only based on trade statistics at a more aggregate level. This new transaction-level data provided us with unique opportunities for analysis.

What precisely have you analysed in the report?

– We have analysed transaction-level data on all imports from South Korea made by Swedish companies during one month, November 2016. The reason for focusing on importers is due to the fact that importers have the greatest incentives to use free trade agreements since they benefit directly from the tariff reductions. For exporters, free trade agreements are also important, but we believe that it is mainly importers that drive the use of free trade agreements.

Why did you select the free trade agreement with South Korea for the analysis?

– The EU's free trade agreement with South Korea entered into force in 2011 and it was the first free trade agreement with an Asian country. It is also one of the EU's largest and most important free trade agreements in terms of the value of trade.

The report challenges some enduring myths on the use of free trade agreements. Is that correct?

– The most common misconception is that only large companies use free trade agreements and that small companies find the regulations too complicated and cumbersome. Our report shows that the utilisation rate is high for both large and small companies, which indicates that companies of all sizes indeed use free trade agreements when there are possibilities to make substantial duty savings. Micro companies, which have fewer than 10 employees, or a turnover of less than 2 million euro, use the free trade agreement with South Korea to 99 percent when using the customs procedure customs warehousing.

Is it possible to draw conclusions for other free trade agreements from the results in the report?

– We have only studied the use of the EU's free trade agreement with South Korea by Swedish importers because this is where we have access to data at the most detailed level. However, there are several indications that the conclusions in the report are also representative for other member states and for a longer period of time.

Who can benefit from the report?

– Anyone who wants to understand which companies uses the EU's free trade agreements and on which products would benefit from reading the report. For example, policy makers in the EU, the Swedish government, other member states and partner countries such as South Korea may identify within which product groups it is difficult to use the free trade agreement and then focus the initiatives targeted towards companies to increase the use of the free trade agreement in a corresponding way. The report might also be useful at the negotiation of new free trade agreements.

How will your work on the use of free trade agreement continue?

– The current report provides a snapshot on the use of the EU's free trade agreement with South Korea by Swedish importers during one month. Now, we also have access to the corresponding data for a ten-year period, which makes it possible to study the use of the free trade agreement before and after it entered into force. Among other things, we will be able to analyse the price development of the products that Swedish companies import from South Korea when the free trade agreement is being used in order to see how consumers benefit from the lower prices.

The report

Who Uses the EU’s Free Trade Agreements? – a transaction-level analysis of the EU–South Korea free trade agreement

Contact

Jonas Kasteng
+46 8 690 48 45

Patrik Tingvall
+46 8 690 48 35