Time to preference: Early preference uptake under CETA and the EU-Korea FTA

As the number of free trade agreements (FTAs) has increased worldwide, so has the interest in their implementation, including the extent to which FTAs actually are used. Preference utilisation rates (PURs) of EU FTAs regularly stand at less than 100%. The early literature pointed to that the preferential margin needed to be in the range of 4%, but later studies have showed that what matters is the potential duty savings, i.e. the value of the preference eligible trade flow times the preferential margin. Hence, even small preferential margins will lead to the use of preferences if trade flows – and thus duty savings – are large enough. One aspect that has been overlooked so far in the literature is the impact of time and, hence, of information and awareness of the benefits that FTAs bring. The use of preferences under EU FTAs are often low in early periods of the agreements’ application. For example, the PUR in first month of full application of the EU-Canada Comprehensive Economic and Trade Agreement (CETA), applied as of September 2017, stood around 25% for both EU imports and exports. Corresponding figures for EU trade with Korea, applied as of July 2011 were somewhat higher at some 35%-40%. This paper examines the uptake of trade preferences under these two relatively recent FTAs in their respective first 21 months of application. It analyses PURs of EU imports from Canada and Korea and EU exports to the same two countries by month of application. Controlling for potential duty savings, the impact of time on the use of preferences is estimated and some light is shed on how Member States perform vis-à-vis each other and if learning effects are present over the period. Finally, the paper argues that firm-pair transaction level data is necessary to arrive at conclusive answers as to questions relating to the use of trade preferences