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"The use of free trade agreements is voluntary"

Export promoter Switzerland Global Enterprise's (S-GE) advisory center responds to company inquiries regarding free trade agreements. Alfonso Orlando, head of the "Export Help" department at S-GE, reports considerable interest among these companies. Anyone seeking to use the free trade agreement to achieve a reduction in tariffs must stick to the rules of the game. One critical point is compliance with the rules of origin.

"The vast majority of Swiss SMEs are not affected by stricter protectionist measures."
"The vast majority of Swiss SMEs are not affected by stricter protectionist measures." Alfonso Orlando, head of "Export Help" at Switzerland Global Enterprise in Zurich.

Have you observed a Trump effect with Swiss exporting companies?

We are not seeing any changes for now. We continue to receive many inquiries for the US market. This has not changed since the election of Donald Trump. Several companies are perhaps even more likely to set up branch offices in the United States in order to ensure easier market access.

Are companies complaining about increasing protectionism throughout the world?

The vast majority of Swiss SMEs are not affected by new or stricter protectionist measures, nor are they concerned by future measures. This is made clear by a survey that we published last month together with Credit Suisse. In practice, an actual increase in protectionism has yet to be confirmed.

This is astonishing, considering that a WTO report for the G-20 countries in mid-2016 showed an above-average increase in applied trade barriers.

Since trade barriers in the export sector have always been a concern, individual exporters may not identify certain changes as protectionism. They often lack a macroeconomic perspective, because they deal exclusively with individual markets.

What are the concerns that companies bring to your "Export Help" department?

Most of their questions involve free trade agreements. They also frequently have questions regarding VAT and customs formalities. In short, companies want to know what they have to do to export a product.

Does it tend to be larger companies or SMEs who most frequently ask for advice?

Practically all inquiries come from SMEs. Large companies like Novartis, Roche and Nestlé already have the necessary expertise.

Free trade agreements are an important part of our foreign trade policy. Are companies becoming more interested in free trade agreements with every new agreement passed by the Federal Council?

The interest of these companies was already high, as Switzerland is one of the countries with the most free trade agreements. Companies generally study each new free trade agreement to see if they want to use it. A good example is the free trade agreement with China, which has now been in force for about three years. Some companies are deliberately waiting to apply it as some products have transitional periods, meaning that customs duties will be progressively reduced after the agreement enters into force. All of the facilitation agreed to will be effective by 2028. Depending on the company, it might make the most sense to wait two to three years before using the free trade agreement. It is currently still too early to assess the agreement's impact on the economy.

What are the kinds of questions you get, for example, from a machine manufacturer salesperson?

They want to know if their products are covered by the free trade agreement, how high the tariffs are, which certificates must be provided and which rules of origin apply. It's important to remember that the use of free trade agreements is voluntary. Anyone seeking to use them to achieve a reduction in tariffs must stick to the rules of the game.

Does this mean providing proof of origin for the product in question?

Correct. The rules of origin contain, for example, the necessary percentage increase in the value of the end product in the country of a contracting party. They also cover the extent to which primary materials must be processed. Rules of origin are also meant to prevent goods from a third country from benefiting from special treatment. They define the conditions under which a product benefits from exemption from customs duties.

Can you give us an example?

(Picking up a ball-point pen)For this pen, for example, to be exported to China – ideally duty-free or with reduced duties – it must have been assembled in Switzerland. The technical terms for this are value criterion or jumping position. Such rules of origin vary from agreement to agreement.

Aren't rules of origin that are too restrictive the same as trade barriers?

No – as I said, the application of an agreement is always voluntary. In addition, the rules tend to be liberal and business-friendly. In the agreement with China, several products have a value criterion. Thus 50% of the materials used in a coffee machine made in Switzerland may originate from a third country. While a new agreement is being negotiated, the State Secretariat for Economic Affairs actively exchanges ideas with industry associations. In some cases, certain groups of goods are deliberately excluded from the agreement if the negotiating partners so desire. These are political decisions made by the participating countries.

Can these products then be included in a free trade agreement at a later date?

It's certainly possible, but not overnight, since new negotiations are required.

You said that the rules of origin for the same product can vary from free trade agreement to free trade agreement. Wouldn't the administrative costs then often exceed customs savings?

That depends. Once the processes have been implemented, everything usually works without big expenditures. But every company has to decide for itself whether applying an agreement is worthwhile. For example, if it is determined in a review that you have not adhered to the rules of origin, you will be fined. Companies use the agreement to achieve reductions or exemptions from customs duties. Customs authorities will thus look very closely, as they are dealing with potential lost revenue.

Will the Swiss Federal Customs Administration intervene if a Swiss export company has flaws in its origin data?

A foreign customs authority submits an application to Swiss customs, which then reviews the origin of a company's product.

Do you help SMEs in deciding for or against a free trade agreement?

Ultimately, the decision lies with the company. We support companies by showing them which tariffs can be reduced or avoided. We aren't familiar with companies' individual cost structures, so they have to decide for themselves. Many inquiries concern rules of origin: companies want to make sure that they've correctly understood a criterion. Unfortunately, we cannot provide standard responses. Each product must be evaluated individually.

How are criteria of origin verified?

This can be done with a so-called movement certificate.

Which is indicated on the delivery note?

A declaration of origin can apply to almost all agreements up to a certain value and could be indicated on an invoice. A movement certificate, however, is a separate document.

Do free trade agreements offer further advantages in addition to reduced costs for customs duties?

The free trade agreement with China actually gives Swiss companies temporary competitive advantages with respect to companies from the EU, as the EU still has no such agreement. An agreement also makes it possible to import primary materials under the free trade agreement and thus benefit from tariff preferences. Lastly, the new agreements not only deal with the movement of goods, but also aspects such as intellectual property, trade in services, public procurement and technical regulations.

What are the obstacles that companies face when applying free trade agreements?

The first obstacle is in the company itself: the export manager requires the support of company management. It is helpful, for example, when free trade agreements are integrated into company strategy. A second obstacle is the necessary expertise – particularly when it comes to professional origins management: purchasing and sales have to coordinate with one another, because every new supplier or procurement source may have a potential impact on the origin. If the parts are purchased in Taiwan rather than in Germany, the requirements may no longer be fulfilled.

You've already addressed the non-tariff barriers to trade. What are the roles that barriers such as quantitative restrictions, subventions and technical requirements play in trade agreements?

Free trade agreements traditionally contribute to the elimination or reduction of tariff barriers. However, newer agreements in particular increasingly contain mutual recognition of a declaration of conformity or certificates, for example. But not all of the respective trading partner's regulations are covered. Many companies are thus surprised that they still have to provide a certificate for the Chinese market, despite the free trade agreement. Perhaps the name "free trade" is deceptive – not everything is free.

It would nonetheless be good for Swiss exporters if China recognized Suva [Swiss Accident Insurance Organisation] product testing.

Absolutely. But free trade agreements are primarily concerned with eliminating or reducing customs duties.

Do you advise companies regarding non-tariff trade barriers?

Of course. We collaborate with experts in all relevant countries who advise Swiss companies on diverse regulatory matters.

Customs formalities originate from a time before digitization. In contrast, production processes are becoming increasingly more complex. Goods cross the border several times before going to market. Are outdated customs formalities an additional obstacle?

This is something I can only partially confirm. There are of course classic truck drivers who show up at customs with papers in hand. At the same time, however, digitization has made significant advances. Deliveries are inspected electronically before they reach the border. Swiss customs authorities know exactly which trucks will pass the border with exactly which goods. Exporters are even notified in advance during electronic registration if their shipment will be inspected at the border crossing. But you are certainly right about one thing: the free trade agreement with the EU dates from 1972. The rules of origin negotiated at the time are no longer up-to-date. Fortunately, there have been several revisions since then.

Do companies benefit from the digitization of customs procedures?

Of course. For one thing, they no longer depend on the opening hours of customs authorities. At the same time, companies are well-advised to learn more about this issue – the digitization of customs processes will continue to increase.

This article was first published in Die Volkswirtschaft in May 2017.

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