Utilization of Free Trade Agreements
Transcrição
Utilization of Free Trade Agreements
Utilization of Free Trade Agreements (FTA’s) by Companies Trading in Goods Focusing on the Japan-Switzerland Free Trade and Economic Partnership Agreement (JSFTEPA) DISSERTATION of the University of St.Gallen, School of Management, Economics, Law, Social Sciences and International Affairs to obtain the title of Doctor of Social Sciences submitted by Matthias Schaub from Läufelfingen (Basel-Landschaft) Approved on the application of Prof. Dr. Heinz Hauser and Prof. Dr. Mun Heng Toh Dissertation no. 4041 Niedermann Druck, St.Gallen, 2012 The University of St.Gallen, School of Management, Economics, Law, Social Sciences and International Affairs hereby consents to the printing of the present dissertation, without hereby expressing any opinion on the views herein expressed. St.Gallen, May 21, 2012 The President: Prof. Dr. Thomas Bieger Acknowledgements My sincerest gratitude goes to the members of my dissertation committee, Professor Dr. Heinz Hauser and Professor Dr. Mun Heng Toh. I am very grateful to my supervisor Professor Dr. Heinz Hauser (University of St.Gallen) for guiding and advising me during my research. I am equally indebted to my co-supervisor Professor Dr. Mun Heng Toh (National University of Singapore) for his support. Professor Toh provided me with invaluable help and in-depth expertise on statistical challenges and paved the way for me to get access to human and electronic resources in Singapore and beyond during my early days in Asia. I have greatly benefited from my dissertation committee’s suggestions and helpful comments during many hours of discussions. Special thanks go to the extended faculty members and administration staff at the National University of Singapore for their kind acceptance of my attachment to NUS Business School. The participation in doctoral seminars and discussions proved to be very precious for my academic advancement. I was also very fortunate to receive help and valuable comments on my research from colleagues at University of Zurich, especially from PD Dr. Patrick Ziltener and Georg Blind. I have enjoyed our stimulating discussions which have inspired this work. My greatest thanks go to my dear wife for her continuous support, encouragement and patience during the years of my research in Singapore. Singapore, July 2012 Matthias Schaub Table of Contents ABSTRACT ........................................................................................................................III ZUSAMMENFASSUNG .................................................................................................... IV LIST OF FIGURES ............................................................................................................. V LIST OF TABLES ............................................................................................................. VI ABBREVIATIONS ........................................................................................................... VIII 1 INTRODUCTION ......................................................................................................... 1 1.1 1.2 1.3 MOTIVATION ........................................................................................................... 1 STRUCTURE OF THE THESIS..................................................................................... 2 GENERAL METHODOLOGICAL REMARKS.................................................................... 3 2 THE JAPAN-SWITZERLAND FREE TRADE AND ECONOMIC PARTNERSHIP AGREEMENT..................................................................................................................... 5 2.1 SWITZERLAND’S FREE TRADE AGREEMENTS ............................................................. 5 2.2 JAPAN’S FREE TRADE AGREEMENTS ........................................................................ 7 2.3 EXTERNAL TRADE OF JAPAN AND SWITZERLAND.......................................................10 2.4 OVERVIEW OF THE JAPAN-SWITZERLAND FREE TRADE AND ECONOMIC PARTNERSHIP AGREEMENT ....................................................................................................................11 3 UTILIZATION OF FREE TRADE AGREEMENTS AND FIRM CHARACTERISTICS: A COMPANY SURVEY .....................................................................................................15 3.1 INTRODUCTION AND LITERATURE REVIEW ................................................................15 3.2 RESEARCH DESIGN AND PROFILE OF RESPONDENTS ................................................17 3.3 DEPENDENT VARIABLE ...........................................................................................19 3.4 INDEPENDENT VARIABLES: DETERMINANTS OF THE UTILIZATION OF FREE TRADE AGREEMENTS...................................................................................................................22 3.4.1 Description of Variables and Development of Hypotheses ..........................22 3.4.2 Methodology of Analysis of Independent Variables......................................25 3.4.3 Overview of Variables, Tests and Hypotheses .............................................30 3.5 RESULTS...............................................................................................................32 3.5.1 Presentation and Discussion of Findings .....................................................32 3.5.2 Comparison with Earlier Studies ..................................................................34 3.6 CONCLUSION .........................................................................................................37 4 MANAGEMENT OF FREE TRADE AGREEMENTS: HOW DO COMPANIES UTILIZE THEM?................................................................................................................41 4.1 INTRODUCTION ......................................................................................................41 4.2 LITERATURE REVIEW ..............................................................................................41 4.3 RESEARCH DESIGN AND PROFILE OF RESPONDENTS ................................................43 4.4 COSTS AND BENEFITS OF UTILIZING FREE TRADE AGREEMENTS................................44 4.4.1 Costs ............................................................................................................44 4.4.2 Benefits ........................................................................................................46 4.5 FACTORS INFLUENCING THE MANAGEMENT OF FREE TRADE AGREEMENTS ................47 4.5.1 Trade Volume...............................................................................................47 4.5.2 Decision-Making Process .............................................................................47 4.6 CHALLENGES TO THE MANAGEMENT OF FREE TRADE AGREEMENTS ..........................50 4.6.1 Production and Distribution Networks ..........................................................50 4.6.2 Compliance Process ....................................................................................53 I 4.6.3 Responsibilities ............................................................................................56 4.6.3.1 Functional Responsibility ..........................................................................56 4.6.3.2 Geographical Responsibility .....................................................................57 4.7 CONCLUSION .........................................................................................................59 5 UTILIZATION OF FREE TRADE AGREEMENTS: ANALYSIS OF CUSTOMS DATA 63 5.1 5.2 5.3 5.4 5.5 5.6 5.7 6 INTRODUCTION ......................................................................................................63 LITERATURE REVIEW ..............................................................................................63 DATA COLLECTION AND PRESENTATION ...................................................................64 UTILIZATION RATES: CONCEPTUAL CONSTRUCTION ..................................................68 DEVELOPMENT OF HYPOTHESES AND MODEL ...........................................................74 RESULTS OF ANALYSIS ...........................................................................................77 CONCLUSION .........................................................................................................80 LOCATION CHOICE AND HOMOGENEITY OF RULES OF ORIGIN.......................83 6.1 INTRODUCTION ......................................................................................................83 6.2 THEORETICAL FOUNDATION AND FRAMEWORK DEVELOPMENT...................................84 6.2.1 Location Choice ...........................................................................................84 6.2.2 Rules of Origin and the Spaghetti Bowl........................................................85 6.2.3 Rules of Origin and Location Choice ............................................................87 6.2.4 Restrictiveness versus Homogeneity of Rules of Origin ...............................89 6.3 RESEARCH DESIGN AND METHODOLOGY .................................................................90 6.4 RESULTS AND DISCUSSION .....................................................................................92 6.4.1 Statistics .......................................................................................................92 6.4.2 Rankings of Territories according to the Homogeneity of Rules of Origin ....99 6.4.3 The Emergence of Templates ....................................................................100 6.4.4 The Clash of Templates .............................................................................104 6.5 CONCLUSION .......................................................................................................106 7 CONCLUSION .........................................................................................................109 7.1 7.2 7.3 RECOMMENDATIONS FOR POLICY MAKERS ............................................................109 COMPARISONS OF THE METHODOLOGIES ...............................................................109 CONSIDERATIONS OF THE EFFECT OF A FREE TRADE AGREEMENT ON TRADE ...........110 BIBLIOGRAPHY .............................................................................................................113 APPENDICES .................................................................................................................121 A-1: PREFERENTIAL RULES OF ORIGIN .............................................................................121 A-2: SURVEY QUESTIONS ...............................................................................................122 A-3: STRUCTURE OF THE SURVEY ...................................................................................142 A-4: TOPICS OF INTEREST TO POLICY MAKERS .................................................................143 A-5: SURVEY DIRECTORY OF SAMPLED COMPANIES..........................................................146 A-6: DISTRIBUTION OF INDEPENDENT VARIABLES ..............................................................149 A-7: DETAILED RESULTS OF MODEL 4 ..............................................................................152 A-8: BILATERAL AND REGIONAL FTAS OF TERRITORIES IDENTIFIED AS FTA HUBS ...............154 A-9: REGIONAL FREE TRADE AGREEMENTS AND MEMBER TERRITORIES .............................160 II Abstract Amidst a seemingly unstoppable proliferation of free trade agreements (FTAs) globally, both theoretical and empirical literature on regional trade integration has traditionally mostly concentrated on the effects of FTAs on trade flows and welfare. Efforts to examine the utilization of FTAs from a company perspective, by contrast, are comparatively new. This dissertation attempts to contribute to the growing body of literature which examines the mechanisms of FTAs, both from a methodological and a theoretical perspective. The utilization of FTAs is analyzed with qualitative and quantitative methods. In addition to studying the relationship between the utilization rates of FTAs and firm and industry characteristics, these methods also allow for an examination of how companies utilize FTAs in terms of the management of challenges posed by FTAs. In terms of firm-characteristics, the findings underline the importance of size-, learning-, and intra-firm effects when companies utilize FTAs. In addition, the main challenges with regard to the management of FTAs can be categorized into challenges related to the FTA compliance process, the assignment of functional and geographical responsibilities, as well as the organization of international production and distribution networks. The fact that mainly large companies are utilizing FTAs should be of concern to policy makers, especially since small and medium sized enterprises would require a more liberal trading environment in order to increase their international competitiveness. The main reason for this finding is the difference in structures between costs and benefits of utilizing FTAs. High initial fixed costs prevent smaller companies from utilizing FTAs. Therefore, an important lesson for policy makers is the fact that the entry into force of an FTA is only a first step towards trade liberalization. In order to make companies utilize the negotiated benefits, policy makers will have to ensure that these are able to take the hurdle of initial fixed costs and can get access to the world of FTAs. Keywords: Free Trade Agreement, Economic Integration, Rules of Origin, Multinational Firms, Transaction Costs JEL classification: D23, F15, F23, F53 III Zusammenfassung Die Verbreitung von bilateralen und regionalen Freihandelsabkommen hat sich insbesondere im Zuge der Probleme der Doha-Runde stark beschleunigt. Sowohl die theoretische als auch die empirische Forschung im Bereich regionaler Wirtschaftsintegration hat sich traditionell auf die Effekte von Freihandelsabkommen auf Handelsflüsse und Wohlfahrtsaspekte fokussiert. Forschung im Bereich der Nutzung von Freihandelsabkommen aus Firmenperspektive sind dagegen verhältnismässig neu. Die vorliegende Dissertation versucht deshalb einen Beitrag zu leisten zur Literatur welche sich mit den Mechanismen von Freihandelsabkommen auseinandersetzt. Dazu bedient sie sich sowohl qualitativer als auch quantitativer Methoden. Diese Methoden erlauben die Untersuchung der Beziehung zwischen der Nutzungsrate von Freihandelsabkommen und den Eigenschaften von Firmen und Industrien. Zusätzlich wird auch analysiert wie die untersuchten Firmen Freihandelsabkommen nutzen, beispielsweise wenn es um Produktionsnetzwerke oder firmeninterne Prozesse geht. Bezüglich der Firmeneigenschaften zeigen die Ergebnisse dass Charakteristiken wie die Grösse von Firmen und Lerneffekte bei der Nutzung von Freihandelsabkommen eine bedeutende Rolle spielen. Der prozentuale Anteil von unternehmensinternen Handelsflüssen am totalen Handelsvolumen spielt ebenfalls eine wichtige Rolle. Wenn Firmen Freihandelsabkommen nutzen werden sie mit zahlreichen Herausforderungen konfrontiert. Diese können kategorisiert werden in die Bereiche Compliance, Zuteilung von fachlicher und geografischer Verantwortung, sowie Organisation von internationalen Produktionsnetzwerken. Die Tatsache dass tendenziell eher grosse Firmen Freihandelsabkommen nutzen sollte die entsprechenden Entscheidungsträger und Verhandlungsführer zur Ausarbeitung von Massnahmen veranlassen. Dies umso mehr als ein liberales Handelsumfeld insbesondere kleinen und mittleren Unternehmen (KMU) helfen würde ihre internationale Wettbewerbsfähigkeit zu stärken. Der Hauptgrund für die relative Benachteiligung von KMU ist in der unterschiedlichen Struktur der Kosten und Nutzen dieser Form von Handelsliberalisierung zu finden. Verhältnismässig hohen Fixkosten des Gebrauches von Freihandelsabkommen steht ein proportionaler Nutzen gegenüber. Dies hält kleinere Firmen mit tiefem Handelsvolumen davon ab, von diesen Abkommen Gebrauch zu machen. Entscheidungsträger und Verhandlungsführer sollten sich deshalb im Klaren sein dass das Aushandeln und Inkrafttreten eines Freihandelsabkommens nur die ersten Schritte in Richtung Handelsliberalisierung sind. Damit Firmen, und insbesondere auch kleine Firmen, aus diesen Abkommen Nutzen ziehen können Bedarf es Instrumenten welche deren Gebrauch vereinfachen. Erst dann werden auch KMU freien Zugang zur Nutzung von Freihandelsabkommen erhalten. IV List of Figures FIGURE 2-1: TRADE FLOWS BETWEEN JAPAN AND SWITZERLAND .............................................11 FIGURE 4-1: COMPARISON OF A “SATISFICING” AND A PRO-ACTIVE DECISION-MAKING PROCESS ..48 FIGURE 5-1: G-UR OF THE JSFTEPA FOR ALL IMPORTS FROM JAPAN INTO SWITZERLAND ........72 FIGURE 5-2: A-UR OF THE JSFTEPA FOR ALL IMPORTS FROM JAPAN INTO SWITZERLAND ........73 V List of Tables TABLE 2-1: SWITZERLAND’S FTA PARTNER TERRITORIES ......................................................... 6 TABLE 2-2: JAPAN’S FTA PARTNER TERRITORIES .................................................................... 9 TABLE 2-3: JAPAN’S AND SWITZERLAND’S EXPORTS TO AND IMPORTS FROM THE W ORLD ...........10 TABLE 2-4: TARIFF PROFILES OF JAPAN AND SWITZERLAND .....................................................13 TABLE 2-5: TARIFFS BY IMPORT PRODUCT GROUPS .................................................................14 TABLE 3-1: NUMBER OF REPLIES BY SECTORAL DISTRIBUTION OF COMPANIES ...........................18 TABLE 3-2: NUMBER OF TFBR BY DIRECTION .........................................................................19 TABLE 3-3: UTILIZATION RATES OF THE JSFTEPA BY TFBRS ................................................19 TABLE 3-4: REASONS FOR NOT UTILIZING THE JSFTEPA ........................................................20 TABLE 3-5: ADJUSTED UTILIZATION RATES OF THE JSFTEPA .................................................21 TABLE 3-6: REASONS FOR UTILIZING THE JSFTEPA ...............................................................22 TABLE 3-7: CONSISTENCY OF UTILIZING THE JSFTEPA ..........................................................22 TABLE 3-8: EXPLANATORY VARIABLES AND HYPOTHESES ........................................................24 TABLE 3-9: SAMPLE SIZES OF INDEPENDENT VARIABLES, BY TFBR ..........................................25 TABLE 3-10: TESTS, VARIABLE’S LEVEL OF MEASUREMENT AND DISTRIBUTION ...........................26 TABLE 3-11: TESTS FOR NORMALITY OF INDEPENDENT VARIABLES ON NUMERIC LEVEL ...............28 TABLE 3-12: LEVENE’S TEST FOR THE EQUALITY OF VARIANCES ...............................................30 TABLE 3-13: TESTS, INDEPENDENT VARIABLES’ LEVEL OF MEASUREMENT AND DISTRIBUTION ......30 TABLE 3-14: NORMALLY DISTRIBUTED EXPLANATORY NUMERIC VARIABLES WITH HYPOTHESES ...31 TABLE 3-15: NON-NORMALLY DISTRIBUTED EXPLANATORY NUMERIC VAR. WITH HYPOTHESES .....31 TABLE 3-16: EXPLANATORY BINARY VARIABLES WITH HYPOTHESES ..........................................32 TABLE 3-17: VARIABLES TESTED WITH TWO SAMPLE INDEPENDENT T-TEST ...............................33 TABLE 3-18: VARIABLES TESTED WITH MANN-W HITNEY U TEST ...............................................33 TABLE 3-19: VARIABLES TESTED WITH PEARSON’S CHI-SQUARED TEST OR FISHER’S EXACT TEST ...................................................................................................................................33 TABLE 3-20: SELECTED FINDINGS OF PREVIOUS STUDIES ........................................................35 TABLE 4-1: MARGIN OF PREFERENCE DECISIVE IN UTILIZING PREFERENTIAL TARIFF RATES .........42 TABLE 4-2: NUMBER OF REPLIES BY SECTORAL DISTRIBUTION OF COMPANIES ...........................44 TABLE 4-3: ILLUSTRATION OF A “SATISFICING” AND A PRO-ACTIVE DECISION-MAKING PROCESS ...49 TABLE 4-4: COMPANIES’ OPINION ON A CHANGE OF THE PRODUCTION NETWORK, BY COMPANIES 51 TABLE 4-5: (IN)DIRECT TRANSPORTATION OF GOODS UNDER THE JSFTEPA, BY TFBRS...........51 TABLE 4-6: DESTINATION OF PRODUCTS TRADED BETWEEN JAPAN/ SWITZERLAND, BY TFBRS ...53 TABLE 4-7: TYPE OF PROCESS TO MANAGE FTAS, BY COMPANIES ............................................54 TABLE 4-8: APPROVED EXPORTER STATUS, BY COMPANIES .....................................................55 TABLE 4-9: FUNCTIONAL FTA RESPONSIBILITY, BY COMPANIES ................................................56 TABLE 4-10: GEOGRAPHICAL FTA RESPONSIBILITY, BY COMPANIES .........................................58 TABLE 4-11: CHALLENGES COMPANIES FACE, DECISION-MAKING PROCESS AND TRADE VOLUME .60 TABLE 5-1: TOTAL IMPORTS BY INDUSTRIES FROM SEPTEMBER 2009 TO DECEMBER 2010 ........65 TABLE 5-2: IMPORTS WHICH COULD HAVE, THEORETICALLY, BENEFITED FROM THE JSFTEPA, BY INDUSTRIES FROM SEPTEMBER 2009 TO DECEMBER 2010 ...............................................66 TABLE 5-3: AVERAGE MARGINS OF PREFERENCE OF THE JSFTEPA FOR IMPORTS FROM JAPAN INTO SWITZERLAND FROM SEPTEMBER 2009 TO DECEMBER 2010, BY INDUSTRIES ............67 TABLE 5-4: COMPARISON OF THE CONCEPTS OF G-UR AND A-UR ...........................................69 TABLE 5-5: IMPORTS FROM JAPAN INTO SWITZERLAND BY INDUSTRIES AND IMPORT REGIMES FROM SEPTEMBER 2009 TO DECEMBER 2010 (IN %) ................................................................70 TABLE 5-6: AVERAGE G-UR AND A-UR OF THE JSFTEPA FOR IMPORTS FROM JAPAN INTO SWITZERLAND BY INDUSTRIES FROM SEPTEMBER 2009 TO DECEMBER 2010 .....................71 TABLE 5-7: OVERVIEW OF THE ANALYTICAL FRAMEWORK .........................................................75 TABLE 5-8: DESCRIPTION OF INDUSTRIES EXAMINED ...............................................................76 VI TABLE 5-9: RESULTS OF ESTIMATIONS FOR MODELS 1 TO 4 .....................................................77 TABLE 5-10: MOP AND VIMP MARGINAL PROPENSITIES ..........................................................78 TABLE 6-1: DIFFERENCES BETWEEN THE CONCEPTS OF RESTRICTIVENESS AND HOMOGENEITY OF ROO ...........................................................................................................................89 TABLE 6-2: NUMBER OF FTAS AND FTA PARTNER TERRITORIES OF FTA HUBS .........................92 TABLE 6-3: NUMBER OF FTAS AND FTA PARTNER TERRITORIES FOR HS 300490A, BY FTA HUB94 TABLE 6-4: NUMBER OF FTAS AND FTA PARTNER TERRITORIES FOR HS 870323B, BY FTA HUB95 TABLE 6-5: COEFFICIENTS CT AND CF FOR HS 300490A, BY FTA HUB .....................................96 TABLE 6-6: COEFFICIENTS CT AND CF FOR HS 870323A, BY FTA HUB .....................................97 TABLE 6-7: VALUES AND BASES OF CALCULATIONS OF FTA HUBS, HS 300490A AND 870323B ...98 TABLE 6-8: NUMBER OF DIFFERENT F-ROO BY FTA HUB AND HS 300490 AND 870323 ...........99 TABLE 6-9: RELATIVE POSITION OF FTA HUBS REGARDING THE HOMOGENEITY OF FTAS’ ROO 100 TABLE 6-10: TEMPLATES OF FTA HUBS FOR ROO OF HS 300490 AND 870323 .....................101 TABLE 6-11: EXPORT OF GOODS AND SERVICES IN % OF GDP, 2008 AND 2009, BY FTA HUB .103 TABLE 6-12: GROSS DOMESTIC PRODUCT OF FTA HUBS IN 2010, BY FTA HUB .......................103 TABLE 6-13: FTA ACTIVITIES AMONG FTA HUBS USING A ROO TEMPLATE FOR HS 300490A AND 870323B ....................................................................................................................105 TABLE 6-14: ADOPTED ROO TEMPLATES AMONG FTA HUBS .................................................105 VII Abbreviations A-UR AANZFTA ACFTA AIFTA AJCEP AKFTA APTA Asean ATIGA CAFTA-DR CHF COO CTC EEA EFTA EPA EU F-ROO FOB FTA G-UR GCC GDP H0 HS ITA JBIC JETRO JSFTEPA KS LAIA M Mercosur MFN MOP NAFTA OECD PR ROO S-ROO SACU Adjusted Utilization Rate Asean-Australia-New Zealand FTA Asean-China FTA Asean-India FTA Asean-Japan Comprehensive Economic Partnership Agreement Asean-Korea FTA Asia-Pacific Trade Agreement Association of Southeast Asian Nations Asean Trade in Goods Agreement Dominican Republic - Central America – U.S. FTA Swiss Franc Certificate of Preferential Origin Change in Tariff Classification European Economic Area European Free Trade Association Economic Partnership Agreement European Union Full Rules of Origin Free On Board Free Trade Agreement General Utilization Rate Gulf Cooperation Council Gross Domestic Product Null Hypothesis Harmonized System Information Technology Agreement Japan Bank for International Cooperation Japan External Trade Organization Japan-Switzerland Free Trade and Economic Partnership Agreement Kolmogorov-Smirnov test Latin American Integration Association Million Southern Common Market Most-Favored-Nation Margin of Preference North American Free Trade Agreement Organization for Economic Co-operation and Development Process Rule Preferential Rules of Origin Single Rule of Origin Southern African Customs Union VIII SAFTA Sig. SMEs SPARTECA SW TFBRs TPSEP UNESCAP UR U.S. USD VA VIMP WTO South Asian Free Trade Agreement Statistical Significance Small and Medium Sized Enterprises South Pacific Regional Trade and Economic Cooperation Agreement Shapiro-Wilk Test Trade Flow Based Responses Trans-Pacific Strategic Economic Partnership UN Economic and Social Commission for Asia and the Pacific Utilization Rate United States of America United States dollars Value Added Rule Value of Imports World Trade Organization IX X 1 Introduction 1.1 Motivation The theory of economic integration suggests that a reduction in transaction costs resulting from economic integration leads to an increase in trade and welfare. Static effects from trade liberalization include trade creation and trade diversion (Viner, 1950). In addition, Meade (1955) suggested a consumption effect, resulting from the reduction or elimination of import tariffs and the subsequent reduction in prices for the final consumers. The magnitude of this effect depends on the elasticity of demand. Apart from static effects, Balassa (1965) found trade integration to show dynamic effects with regard to the growth rates of members to a trade agreement. Dynamic effects include investment creation and diversion, economies of scale and technology spillovers. One of the most remarkable occurrences over the last two decades in the area of economic integration was the sharp increase in bilateral and regional trading arrangements since the end of the Uruguay Round in 1994. With the exception of Mongolia, all WTO members are party to at least one FTA. The number of FTAs notified to the GATT/ WTO reached close to 500 by the end of 2011, of which close to 300 were in force1. An important reason for this development was the growing awareness among WTO members that liberalization going beyond the Uruguay Round would be difficult to achieve on a multilateral level. The current Doha Development Agenda was initiated in 2001, but has since missed several deadlines while negotiations remain stalled. Against the background of a strong proliferation of FTAs, literature suggests various approaches to analyze the effects of FTAs, most notably in the fields of trade flows and welfare analysis. One of the most widely used approaches to study the effects of FTAs on trade flows is the gravity model. While some studies do not provide convincing evidence for an increase in trade flows after trade liberalization 2, a recent comprehensive study surveying past results from gravity models found that trade agreements predominantly increase members’ trade (Baier and Bergstrand, 2007). However, even if a trade effect coincides with the entry into force of an FTA, a meaningful counterfactual analysis seems to be a challenge. While most gravity models assume trade policy to be exogenous, a study by Baier and Bergstrand (2002) suggests that pairs of territories which negotiate FTAs would have traded more, even without an FTA, pointing to reverse causality. However, the discussion on trade creation versus trade diversion has lost some of its importance since FTAs do no longer focus on tariff reduction exclusively, but deal with regulatory obstacles, administrative procedures and non-tariff barriers in addition. Adams et al. (2003) find that recent FTAs are often non-discriminatory in nature. Therefore, the liberalization in trade applies to all trade, not only to the one between the territories party to an FTA. 1 WTO Secretariat (www.wto.org/english/tratop_e/region_e/regfac_e.htm; accessed September 15, 2011); the WTO counts goods and services notifications separately. 2 See for example Trefler (1993). 1 With regard to effects of FTAs on welfare, computable equilibrium models, and specifically computable general equilibrium models (CGE) have received much attention (Hertel et al., 2004). CGE models are helpful when simulating and comparing welfare effects with various policy alternatives. However, criticism has arisen with regard to the empirical validity of these models and the parameter selection criteria (McKitrick, 1998). Rather than focusing on effects on welfare and trade flows, this dissertation will follow a relatively recent strand of literature which is concerned about the actual utilization of preferential tariffs which FTAs offer. Methods to examine whether or not companies are actually claiming preferential origin when trading goods include analyses of data on preferential imports provided by Customs as well as company surveys (Kohpaiboon, 2010; Pomfret et al., 2010; Kawai and Wignaraja, 2009). These methods allow for a direct study of an FTA’s utilization rates, and thus provide more accurate insight into the relevance of trade policies. In addition, a researcher who is examining the relationship between utilization rates and firm and industry characteristics may also provide valuable insights to policy makers with regard to a review of an FTA3. While this is an advantage over other methodologies, the examination of utilization rates does not allow for an analysis of the effects of FTAs on trade flows or welfare. As will be discussed during the course of this dissertation, it is important to note that a trade or welfare effect of an FTA is a result of the utilization of FTAs by companies. By contrast, the non-existence of a trade or welfare effect does not necessarily imply that an FTA has not been utilized. As the analysis of the effects of FTAs on firm- and industry-level is relatively new, the present dissertation contributes to both the development of methodology and theory. In addition, it attempts to explore not only if but also how companies are utilizing or managing FTAs within firms. The sources of data for this study are, firstly, a company survey conducted from October 2010 to February 2011, and secondly, highly disaggregated customs data on preferential imports4. Both the company survey and the customs trade data are focusing on the Japan-Switzerland Free Trade and Economic Partnership Agreement (JSFTEPA) which entered into force on September 1, 2009. To my knowledge, this is the first study which qualitatively and quantitatively examines an FTA between two developed countries. Although some findings of this study will be specific to the JSFTEPA, the majority of results found will be of general nature and thus applicable to other FTAs as well. Restrictions to either only the JSFTEPA or to FTAs between developed countries will be highlighted. 1.2 Structure of the Thesis Since both the company survey and the analysis of customs trade data are based on the JSFTEPA, the second chapter will provide an overview of the trade policies and FTAs of Japan and Switzerland. In addition, provisions of the JSFTEPA which are considered 3 Specifically, CGE models usually assume that companies would utilize FTAs once they are in force. However, this is not necessarily the case. Surveys will then shed light on the reasons for which companies do not utilize FTAs. 4 Details of the company survey and the trade data analysis are discussed in the respective chapters. 2 essential for the subsequent analysis are introduced, specifically with regard to the preferential rules of origin (ROO) and the tariff rates of Japan and Switzerland. The third chapter presents firm- and industry-level results based on a company survey on the JSFTEPA. The analysis of the survey is of quantitative nature and contributes to theory building with regard to the relationship between firm and industry characteristics and the utilization rate of FTAs. While the third chapter is mainly concerned with the question of whether or not companies are utilizing the JSFTEPA, the fourth chapter is looking into how companies utilize or manage the JSFTEPA and FTAs in general. Since fewer companies could be surveyed with regard to the management of FTAs, the analysis is of qualitative nature. Management challenges addressed include the FTA compliance process, the assignment of functional and geographical responsibilities, as well as the organization of international production and distribution networks. In this sense, chapter four aims at linking macro-level concerns of the global economy with micro-organizational issues of production and distribution. The fifth chapter examines the utilization of the JSFTEPA by analyzing highly disaggregated data on preferential imports provided by the Swiss Federal Customs Administration. Although the fluctuations of the trade volumes on a highly disaggregated level are quite substantial, the actual share of imports which benefits from the JSFTEPA is much more stable. Since import tariffs are also defined on a highly disaggregated level, the data provided by Customs suits this study very well. Customs data cover trade flows from Japan to Switzerland and indicate both the total trade value and the trade value under different import regimes. It is examined in how far benefits provided by the JSFTEPA are related to the utilization rate of the JSFTEPA. From a methodological point of view, this chapter will address shortcomings of the analyses in chapters three and four, namely the limited sample size, the potential sample selection bias, and uncertainties with regard to the accuracy of a respondent’s reply. While chapters three to five explain companies’ utilization of FTAs by company and trade characteristics, chapter six takes the impact of territories’ policies into consideration. Drawing on findings from chapter four as well as from anecdotal evidence from existing literature, multiple ROO seem to add to business costs of companies exporting to several markets. Therefore, this chapter studies the location choice of companies with regard to territories’ homogeneity of ROO. A theoretical foundation is presented to explain the behavior of companies and territories in an environment of multiple set of trading rules created by bilateral and regional FTAs. Thereafter, an empirical analysis of WTO members with regard to their business friendliness in terms of the homogeneity of the ROO is carried out. Finally, chapter seven subsumes recommendations for policy makers, provides a comparison of the various data collection methods employed, and describes the theoretical effects of FTAs on trade as found in this study. 1.3 General Methodological Remarks Units of analysis: The units of analysis of this study are companies, territories, or trade flows between territories, as specified in the respective chapters. Throughout the whole 3 study the term “territory” is used for reasons of accuracy as trade policy is usually decided on the level of customs territories, rather than on the level of a “country”. As an example, FTAs involving members of the European Union (EU) are entering into force between a third territory and the EU as a territory. Individual members of the EU are not in a position to negotiate FTAs independently. Similarly, the customs territory of FTAs concluded by Switzerland includes the territory of Liechtenstein with regard to trade in goods due to the Customs Union Treaty of 1923 between Switzerland and Liechtenstein. Scope of companies examined: The content of FTAs differs in terms of both coverage and depth. Most of the contemporary FTAs go far beyond the reduction or elimination in tariff and non-tariff barriers, with some even exceeding the so called “Singapore Issues”5 of investment, government procurement, competition policy and trade facilitation. The subsequent studies, however, focus only on companies trading in goods. There are two reasons for this limitation. Firstly, only companies which are trading in goods face costs in order to benefit from FTAs. These costs can be interpreted as an entry barrier to the world of FTAs. By contrast, benefits in areas such as trade in services or protection of intellectual property rights are accessible to all companies as soon as an FTA enters into force, without incurring additional FTA-related costs6. When trading in goods, however, companies receive benefits only once they have complied with the respective rules and requirements7. Companies trading in goods are therefore well suited for an analysis of both the mechanisms of FTAs and the behavior of companies towards the utilization of FTAs. Secondly, specifically the survey methodology has proven inadequate to capture the impact of FTAs on companies trading in services. This is mostly due to the fact that companies are unaware of FTAs as they do not face costs when benefiting from FTAs and as such do not need to know that they enjoy preferential market access due to an FTA. Classification of goods and industries: Throughout the study, the Harmonized System (HS) nomenclature is used to classify goods and industries. The HS Nomenclature assigns each product a code, referred to as the HS Code. The HS Codes are classified into chapters (2-digit level), headings (4-digit level), subheadings (6-digit level) and splitsubheadings (8-digits and more). HS Codes are internationally standardized on the HS 6digit level. Split-subheadings are used by individual territories for individual purposes. 5 Compare www.wto.org/english/thewto_e/whatis_e/tif_e/bey3_e.htm; accessed September 15, 2011. In the area of trade in services, once the barriers to market access have been removed, a company in the FTA partner territory does not face additional FTA-related costs to enter the market. Similarly, once additional intellectual property protection has been implemented in local law, companies do not face FTArelated costs to benefit from enhanced protection. In both cases a company does not even need to know that the liberalization took place because of an FTA. 7 “Benefits” in the area of trade in goods refer to tariff benefits. Other benefits, such as simplified customs procedures or avoidance of duplicative testing, would incur no costs either. 6 4 2 The Japan-Switzerland Free Trade and Economic Partnership Agreement 2.1 Switzerland’s Free Trade Agreements Switzerland is a medium-sized nation which is highly dependent on trade. The prime objective of Switzerland’s foreign economic policy is therefore to ensure an open and predictable market access to other economies worldwide in order to maintain and improve the competitiveness of the Swiss economy. For a medium-sized nation, the multilateral approach within the framework of the WTO is best suited to improve access to foreign markets. The other two pillars of Swiss trade policy with regard to market access are bilateral agreements with the EU, and FTAs with territories outside of the EU (Deiss, 2006). Switzerland usually negotiates FTAs within the framework of the European Free Trade Association (EFTA)8 which results in both more negotiation power and more resources. Disadvantages of the EFTA-approach include the different priorities of EFTA member countries due to the structure of their economies. Switzerland, however, can also negotiate FTAs outside of EFTA – the JSFTEPA for example was negotiated between Japan and Switzerland only. Switzerland’s motivations to negotiate bilateral FTAs include the creation of a stable, levelplaying market access compared with foreign competitors and the achievement of liberalization beyond the WTO. In addition, FTAs are seen as a second best solution amidst the uncertainty regarding the conclusion of the WTO Doha Round. Furthermore, they promote domestic reforms aiming at increasing Switzerland’s competitiveness and position as a business location (Deiss, 2006; The Foreign Economic Policy Report, 2007; The Foreign Economic Policy Report, 2010). Specific FTA partners are selected according to a number of criteria. These include the economic importance, existing or potential discrimination resulting from FTAs with Switzerland’s competitors, and Switzerland’s foreign-policy objectives (The Foreign Economic Policy Report, 2009). In order to improve market access for service sector branches and to protect investors abroad, Switzerland’s recent FTAs do no longer only cover trade in goods, but also trade in services, investment, government procurement, and protection of intellectual property rights. The JSFTEPA is an example of such a “second generation agreement” 9. Due to Switzerland’s character as an agglomeration in the center of Europe and its economic and migrational integration via bilateral treaties with the European Union, FTA partner territories outside Europe may perceive FTAs with Switzerland as a bridge to Europe. It is therefore not surprising that Switzerland was able to negotiate a number of FTAs. Table 2-1 lists the territories with which Switzerland is negotiating or has already negotiated FTAs. 8 EFTA member states are Iceland, Liechtenstein, Norway and Switzerland. Compare www.seco.admin.ch/themen/00513/00515/01330/index.html?lang=en; accessed September 15, 2011. 9 5 Table 2-1: Switzerland’s FTA partner territories FTA Partner Territory Status Albania* Algeria* In force since 2010 Under negotiation 37 571 0.02 0.33 Bosnia-Herzegovina* Canada* Under negotiation In force since 2009 58 2,318 0.03 1.34 Chile* China In force since 2004 Under negotiation 207 5,075 0.12 2.94 Colombia* Croatia* In force since 2011 In force since 2002 269 235 0.16 0.14 EFTA Egypt* In force since 1960 In force since 2008 722 605 0.42 0.35 EU Faeroe Islands In force since 1973 In force since 1995 102,984 1 59.71 0.00 Gulf Cooperation Council (GCC)*10 Hong Kong* Signed Signed 5,003 4,999 2.90 2.90 India* Indonesia* Under negotiation Under negotiation 1,987 342 1.15 0.20 Israel* Japan In force since 1993 In force since 2009 854 6,580 0.50 3.82 Jordan* Korea, Republic of* In force since 2002 In force since 2006 182 1,746 0.11 1.01 Lebanon* Macedonia* In force since 2007 In force since 2002 355 49 0.21 0.03 Mexico* In force since 2001 1,091 0.63 Morocco* In force since 1999 283 0.16 Palestinian Authority* Peru* In force since 1999 In force since 2011 26 87 0.01 0.05 Russia-Belarus-Kazakhstan (Customs Union)* Southern African Customs Union (SACU)*11 Under negotiation 2,221 1.29 In force since 2008 624 0.36 Serbia and Montenegro* In force since 201012 243 0.14 10 11 Exports to Partner Territory (2009, in M USD) Percentage of Total Exports (2009) GCC member states are Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates. Members are: South Africa, Botswana, Lesotho, Namibia and Swaziland. 6 Singapore* In force since 2003 1,917 1.11 Thailand* Tunisia* Under negotiation In force since 2006 855 193 0.50 0.11 Turkey* Ukraine* In force since 1992 Signed 1,661 336 0.96 0.19 515 123,267 0.30 71.47 21,956 12.73 27,251 15.80 Vietnam* Planned** Exports to territories with which an FTA is in force Exports to territories with which an FTA is planned**, signed or under negotiations, but not yet in force Exports to other territories Total Exports 172,474 100.00 Notes: (*) Concluded within the framework of EFTA. (**) Includes consultations, feasibility studies, joint working groups and negotiations in preparation. Source: OECD (http://stats.oecd.org/Index.aspx; accessed September 15, 2011), SECO (www.seco.admin.ch/themen/00513/00515/01330/04619/index.html?lang=en; accessed September 15, 2011). According to table 2-1, in 2009 Switzerland exported goods worth 172 billion USD, of which almost three quarters were exported to one of Switzerland’s FTA partner territories. EFTA’s FTAs with the transition economies in central and Eastern Europe13 and later with territories in the Mediterranean region became possible after EFTA adopted the third country policy following the end of the Cold War. Beginning with Singapore in 2003, Switzerland and EFTA continuously extended their network of FTAs overseas to include territories in Africa, the Americas and Asia, with the JSFTEPA being Switzerland’s third FTA in Asia after FTAs with Singapore and Korea. In order to further grow the FTA network and to get preferential market access to important trading partners such as the member states of Mercosur14, Switzerland will have to implement domestic reforms, specifically in challenging fields such as agricultural policy (The Foreign Economic Policy Report, 2010). 2.2 Japan’s Free Trade Agreements Japan’s FTA strategy has to be seen against the background of a stagnant domestic economy with a declining population, which is in sharp contrast to Switzerland’s growing economy and population. In addition, high labor costs and a strong yen create competitive disadvantages for Japanese companies when exporting out of Japan. Japanese 12 The EFTA-Serbia FTA is already in force since 2010, while the EFTA-Montenegro FTA is still under negotiations. For reasons of availability of data, the FTAs are combined in this table and assumed to have been entered into force. 13 These FTAs are not listed in table 7-1 as they have been replaced by the agreement with the EU after these countries joined the EU. 14 Member states of Mercosur are Argentina, Brazil, Paraguay and Uruguay. 7 companies are therefore increasingly shifting their production bases to other territories in East and Southeast Asia, from where they either export back to Japan, to other territories, or serve the respective domestic market15. While achieving economic growth under these circumstances is difficult, growth is vital to finance public expenditures. Therefore, in December 2009, Japan has announced a “New Growth Strategy” (On the New Growth Strategy, 2009) to revitalize Japan and strengthen the Japanese economy. The strategy basically aims at creating new employment and demand-led growth. In January 2011, a report was issued about the extent to which the “New Growth Strategy” has been implemented and what the next steps would be (Realizing the New Growth Strategy 2011, 2011). Apart from initiatives covering topics such as the promotion of Japan as an Asian industrial center and the acceptance of highly-skilled foreign labor, these documents also refer to liberalization of trade and investment, specifically also within the framework of FTAs. As part of the New Growth Strategy, the “Basic Policy on Comprehensive Economic Partnership” was announced in November 2010 16 . The document reinforces Japan’s commitment to the WTO Doha Development Agenda. In addition, several reasons are offered as to why Japan would pursue bilateral and regional trade agreements. Specifically, Japan refers to the uncertainty regarding the conclusion of the WTO Doha Round, other territories’ efforts in concluding FTAs17, the inclusion of topics which are not covered by the WTO, as well as political and diplomatic advantages 18. In terms of specific FTA partners, the documents outline the importance of deeper economic relationships with both Asian and Western, and both emerging and resource-rich territories 19 . In addition, the trade volume and the potential reduction in tariff rates and non-tariff barriers are of importance when selecting potential FTA partner territories. Consequently, Japan initially focused on territories in East Asia which accounted for a high percentage of its trade and at the same time maintained relatively high tariffs. Apart from the FTAs which East Asian territories that are already in force, Japan therefore puts much emphasize on negotiations towards regional FTAs such as a China-Japan-Korea FTA, an East Asian FTA, or even a Free Trade Area of the Asia-Pacific. The latter is a target under the New Growth Strategy to be reached by 2020. Negotiations on these FTAs are currently either 15 In a survey conducted by the Japan Bank for International Cooperation (JBIC) in 2009, 66 percent of the responding Japanese companies indicated that they intended to strengthen overseas operations, while only 27 percent wanted to strengthen domestic operations (JBIC, 2009). Already in a 2002 survey, 80 percent of Japanese companies responded that they are expanding their overseas production to strengthen price competitiveness (JBIC, 2002). 16 ‘Basic Policy on Comprehensive Economic Partnerships’, November 6th, 2010, Ministerial Committee on Comprehensive Economic Partnerships (www.mofa.go.jp/policy/economy/fta/policy20101106.html; accessed September 15, 2011). 17 In this regard, the Japanese industry is urging officials to conclude new FTAs. Especially the car manufacturers which are struggling with a strong yen and low profit margins feel threatened by FTAs involving their neighbors, e.g. the Korea-EU and the planned Korea-US FTA. Toshiyuki Shiga, chairman of the Japan Automobile Manufacturers Association was quoted as saying 'We are asking the government to sign FTAs as it's a problem that concerns the entire Japanese economy.' (Singapore Business Times, November 19, 2010, “Japan car body seeks FTAs to bolster industry”). 18 ‘Japan’s FTA Strategy (Summary, 2002)’, October 2002, Economic Affairs Bureau, Ministry of Foreign Affairs (www.mofa.go.jp/policy/economy/fta/strategy0210.html; accessed September 15, 2011) and ‘Basic Policy on Comprehensive Economic Partnerships’ (compare footnote 16). 19 Japan is currently negotiating an FTA with Australia, and is the first territory to prepare negotiations with resource-rich Mongolia. 8 ongoing or suspended for various reasons. Urata (2007) points out that Japan became interested in FTAs as one of the policy options to promote structural domestic reform, especially since trade-related pressure from the U.S. on Japan weakened after the establishment of the WTO. Similar to Switzerland, an extension of Japan’s FTA network will have to be accompanied by a review of domestic regulations with the objective to open up the country, specifically in areas such as agriculture or movement of natural persons. Table 2-2 lists territories with which Japan is negotiating or has already negotiated FTAs. Table 2-2: Japan’s FTA partner territories FTA Partner Status Territory Exports to Partner Territory (2009, in M USD) Australia Bilateral (under negotiation) Brunei Percentage of Total Exports (2009) 12,168 2.10 Bilateral (in force since 2008); AJCEP* (in force since 2009) 162 0.03 Cambodia Canada AJCEP* (in force since 2009) Bilateral (planned**) 112 7,748 0.02 1.33 Chile China Bilateral (in force since 2007) Bilateral (planned**) 1,339 109,727 0.23 18.90 EU GCC Bilateral (planned**) Bilateral (planned**) 72,441 18,001 12.47 3.10 India Indonesia Bilateral (in force since 2011) Bilateral (in force since 2008); AJCEP* (signed) 6,338 9,323 1.09 1.61 Korea, Republic of Lao PDR Bilateral (under negotiation) 47,273 8.14 AJCEP* (in force since 2008) 76 0.01 Malaysia 12,865 2.22 Mexico Bilateral (in force since 2006); AJCEP* (in force since 2009) Bilateral (in force since 2005) 6,824 1.18 Mongolia Myanmar Bilateral (planned**) AJCEP* (in force since 2008) 107 202 0.02 0.03 New Zealand Peru Bilateral (planned**) Bilateral (signed) 1,506 573 0.26 0.10 Philippines Bilateral (in force since 2008); AJCEP* (in force since 2010) 8,224 1.42 Singapore Bilateral (in force since 2002); AJCEP* (in force since 2008) 20,724 3.57 9 Switzerland Bilateral (in force since 2009) 6,286 1.08 Taiwan Thailand Bilateral (planned**) Bilateral (in force since 2007); AJCEP* (in force since 2009) 36,434 22,188 6.27 3.82 6,516 1.12 101,169 17.42 305,973 52.69 173,577 29.89 Vietnam AJCEP* (in force since 2008); bilateral (in force since 2009) Exports to territories with which an FTA is in force Exports to territories with which an FTA is planned**, signed or under negotiations, but not yet in force Exports to other territories Total Exports 580,719 100.00 Notes: (*) The entry into force of the Asean-Japan Comprehension Economic Partnership Agreement (AJCEP) depends on the respective territory’s ratification process. (**) Includes consultations, feasibility studies, joint working groups and negotiations in preparation. Source: OECD (http://stats.oecd.org/Index.aspx; accessed September 15, 2011), Japanese Ministry of Foreign Affairs (www.mofa.go.jp/policy/economy/fta/index.html; accessed September 15, 2011). In 2009, Japan exported goods worth 581 billion USD, of which 17 percent were exported to one of Japan’s FTA partner territories. This compares to 71 percent in the case of Switzerland. 2.3 External Trade of Japan and Switzerland In spite of the fact that both Japan and Switzerland experienced a significant appreciation of their currencies following the global financial crisis, both territories’ exports to the world exceeded imports from the world in 2009 (table 2-3). Table 2-3: Japan’s and Switzerland’s exports to and imports from the World Exports to the World (2009, in M USD) Japan Switzerland 580,719 172,474 Imports from the World (2009, in M USD) Balance (2009, in M USD) 551,981 28,738 155,378 17,096 Source: OECD (http://stats.oecd.org/Index.aspx; accessed September 15, 2011). There is, however, a marked difference between Japan and Switzerland with regard to the importance of foreign trade to their national economies. While the relation of exports of goods and services to the gross domestic product in 2009 amounted to 52 percent in Switzerland, it was only 13 percent for Japan 20. Switzerland is therefore more dependent 20 Source: World Bank (http://data.worldbank.org/; accessed September 15, 2011: World Bank national accounts data and OECD National Accounts data files). 10 on foreign trade for its economic welfare than is Japan, also due to its relatively small domestic market. Figure 2-1 shows the trade activities between Japan and Switzerland from 1988 to 2010. The trade flow from Switzerland to Japan has more than doubled over this period of time and experienced a strong increase even before the entry into force of the JSFTEPA. Switzerland may have tried to negotiate an FTA with Japan because of the already strong increase in trade (compare Baier and Bergstrand, 2002)21. The trade flow from Japan to Switzerland has remained stable, resulting in a significant trade deficit for Japan with regard to Switzerland. The development of the Japanese exports can be explained by both the slow-down of the Japanese economy following the stock market and real estate bubble, and the fact that Japanese companies have outsourced substantial parts of their production to other territories in Asia or Eastern Europe due to comparative advantages22. Figure 2-1: Trade Flows between Japan and Switzerland Trade Flows between Japan and Switzerland, 1988-2010 (million CHF) 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 20 20 20 20 20 Trade Flow from Japan to Switzerland Trade Flow from Switzerland to Japan Source: Swiss-Impex Database, Swiss Federal Customs Administration. 2.4 Overview of the Japan-Switzerland Free Trade and Economic Partnership Agreement The Japan-Switzerland Free Trade and Economic Partnership Agreement (JSFTEPA) is Switzerland’s third FTA with a territory in Asia, after the FTAs with Singapore and Korea. In terms of export value, the JSFTEPA is Switzerland’s most important FTA after the one 21 This assumption is supported by an analysis of the Swiss State Secretariat for Economic Affairs (SECO), stating that it would be worthwhile for Switzerland to focus more on dynamic emerging countries, especially in Asia, and that it would be advantageous for Switzerland “to continue to align its free trade policy towards partners in regions experiencing dynamic growth” (The Foreign Economic Policy Report, 2010: 13). 22 Compare footnote 15. 11 with the European Communities which entered into force in 1972. For Japan, the JSFTEPA is the first FTA with a European territory. Separate and joint feasibility studies on a JSFTEPA were conducted in 2003-2004 and 2005-2006, respectively. The negotiations for the JSFTEPA were officially launched in January 2007, and the first round took place in May 2007. The JSFTEPA was signed after eight rounds in February 2009, and entered into force on September 1, 2009. While most of Switzerland’s FTAs are concluded in the framework of EFTA, the JSFTEPA is a bilateral FTA between Japan and Switzerland. The trade structures between Japan and the EFTA States did not allow for an inclusion of other EFTA members into the negotiations. However, provisions on trade in goods do apply to the territory of Liechtenstein due to the Customs Union Treaty of 1923 between Switzerland and Liechtenstein. The content of the JSFTEPA covers trade in goods, trade in services, investment, protection of intellectual property rights, movement of natural persons, government procurement, competition and e-commerce. The legal text of the JSFTEPA consists of the basic agreement and ten annexes23. Since the focus of the subsequent chapters is on trade in goods, the following paragraphs provide an overview of the JSFTEPA’s content on trade in goods, including the rules of origin (ROO), the provisions on evidence of origin, and tariff reductions. Appendix A-1 contains a general overview on the technical aspects of ROO. The ROO are defined in Annex II of the JSFTEPA. To qualify for preferential treatment under the JSFTEPA, products either have to be wholly obtained or have to undergo sufficient working or processing in the customs territory of the Parties (Article 2, Annex II). A product is sufficiently worked or processed if it satisfies one of the following criteria: (a) the value of the non-originating materials used in the production does not exceed 60 percent of the ex-works price of the product, (b) all non-originating materials used in the production have undergone a change in tariff classification (CTC) on the level of tariff headings, or (c) a product satisfies the product specific ROO as set out in Appendix 1 to Annex II (Article IV, Annex II). The ROO allow for bilateral accumulation (Article V, Annex II). In order to receive preferential treatment, an originating product has to meet the consignment criteria which state that a product has to be transported directly from the customs territory of the exporting party to the importing party. The product can also be transported through one or more non-Parties for the purpose of transit or temporary storage in warehouses, provided that it does not undergo operations other than splitting up of the consignment, unloading, reloading and any other operation designed to preserve it in good condition (Article XIV, Annex II). If a product is transported via a third territory, it has to be stored under customs surveillance. A company can provide evidence of preferential origin in either of two ways: (a) a certificate of preferential origin (COO) or (b) an origin declaration (Article XV, Annex II). The origin declaration, which does not require a signature, may be produced only by an exporter who is authorized by the competent governmental authority (“approved exporter”). 23 The legal text can be found at www.seco.admin.ch/themen/00513/02655/02731/02970/index.html?lang=de; accessed September 15, 2011. 12 The text of an origin declaration is provided in Appendix 3 to Annex II of the JSFTEPA and can be typed, stamped or printed on the invoice, the delivery note or any other commercial document which describes the product concerned in sufficient detail to enable it to be identified. The text provides information on the authorization number of the approved exporter and the origin of the products. In order to register as an “approved exporter” with the respective authorities, a company has to satisfy certain requirements defined by the FTA. The JSFTEPA for example requires “approved exporters” to make frequent shipments of originating products of a party, among others (JSFTEPA, Annex II, Article XIX). A preferential origin declaration is not required for consignments below a specified value. While the JSFTEPA is Japan’s first FTA to allow for the status of the “approved exporter”, this status is very common in FTAs negotiated by Switzerland or EFTA. Tables2-4 and 2-5 report data on the most-favored-nation (MFN) tariffs for both Japan and Switzerland24. Table 2-4: Tariff profiles of Japan and Switzerland Japan Simple average of final bound duties excluding unbound tariff lines (in %) Simple average of MFN applied duties (2009, in %) HS six-digit MFN tariff averages weighted with HS six-digit import flows (2008, in %) Switzerland Agricultural NonTotal Agricultural NonTotal Products Agricultural Products Agricultural Products Products 22.2 2.5 5.1 48.0 2.0 8.0 21.0 2.5 4.9 36.9 1.9 6.5 12.5 1.2 2.0 37.3 1.3 3.4 Source: WTO Trade Profiles. Both Japan and Switzerland impose significant tariffs on agricultural products. The tradeweighted average ad-valorem MFN tariffs for agricultural products are 12.5 and 37.3 percent for Japan and Switzerland, respectively. The tariffs on industrial goods, by contrast, are comparatively low, with trade-weighted averages of 1.2 and 1.3 percent for Japan and Switzerland, respectively. The differences between the bound and applied MFN tariff rates for industrial goods are negligible for both Japan and Switzerland. 24 Swiss import duties are converted into ad valorem equivalents. The units of Swiss import duties are CHF per 100kg, per piece, per unit, per liter, per meter and per MWh, depending on the respective products. 13 Table 2-5: Tariffs by import product groups Maximum ad valorem applied MFN duty More than 95% of total imports of the following product groups are imported already duty-free under MFN Japan Switzerland 641% (agricultural products) Cotton, petroleum, electric and nonelectric machinery, transport equipment >1000% (agricultural products Cotton, petroleum Less than 5% of total imports of the Animal products, fish Animal products, dairy following product groups are and fish products, products, sugars and imported already duty-free under clothing confectionery, textiles, MFN clothing, leather, footwear Note: The product groups do not correspond with the chapters of the HS Nomenclature. Source: WTO Trade Profiles. The applied MFN tariff rate of Japan is zero already for more than 95 percent of imports of the following product groups: cotton, petroleum, electric and non-electric machinery and transport equipment. By contrast, less than 5 percent of animal products, fish and clothing can be imported duty free into Japan under MFN. The applied MFN tariff rate of Switzerland is zero already for more than 95 percent of imports of the following product groups: cotton and petroleum. By contrast, less than 5 percent of animal products, dairy products, sugars and confectionary, textiles and clothing, leather and footwear can be imported duty free into Switzerland under MFN. Under the JSFTEPA, Switzerland eliminated all customs duties for industrial goods upon the entry into force of the JSFTEPA25. Similarly, Japan abolished most customs duties immediately. The remainder will be eliminated after a transitional period. With regard to agricultural products, Japan grants preferential market access for cheese, dried meat, chocolate, wine and cigarettes, while Switzerland does so for ornamental plants, high quality gift fruits, rice wine and cigarettes. 25 With the exceptions of casein, albumins and dextrin of HS 35 and miscellaneous chemical goods of HS Chapter 38. 14 3 Utilization of Free Trade Agreements and Firm Characteristics: A Company Survey26 3.1 Introduction and Literature Review With the increasing proliferation of FTAs in Asia over the last ten years, company surveys have become a popular method to examine Asian FTAs. In Japan, surveys examining companies’ utilization of FTAs are being conducted on a regular basis by JETRO 27 and JBIC28. While the main focus of these surveys is the business environment in general, they contain questions related to FTAs since around 2002 29 . While these surveys do usually not go beyond the presentation of the collected data, other studies use their data to perform analyses 30 . However, not all questions are asked each year, making comparisons rather difficult. Focusing on the utilization of Japan’s major FTAs, these surveys find the number of companies utilizing or planning to utilize FTAs on the increase. JETRO’s surveys on the International Operations of Japanese Firms, for example, report an increase in the utilization rate from 13 percent to 38 percent between 2006 and 2010 (JETRO, 2011). The utilization rates provided by such surveys typically depend on the sample of companies, the FTAs and industries covered, whether or not “plan to utilize FTAs” is counted as “utilization”, and whether or not a company which is included in the sample is required to have trade relations with a specific FTA partner territory at all. In spite of these limitations, most surveys show a strong increase in the utilization of FTAs in Asia over the past couple of years, reflecting not only the strong proliferation of FTAs but also increasing margin pressure, as well as increasing public awareness of FTAs. With regard to surveys inquiring the JSFTEPA, JETRO has collected data in 2009 and 2010 (JETRO, 2010 and JETRO, 2011). Looking at trade flows from Japan to Switzerland for specific industries, the highest utilization rate is enjoyed by the automobile industry with 67 percent, followed by textiles and clothing with 33 percent and general machinery with 25 percent. These numbers are comparable to utilization rates of other FTAs negotiated by Japan. However, due to the very small number of companies in some of the subsamples by industry, one should exercise caution when interpreting the percentages. Unlike Japan, Switzerland does not have a tradition of conducting surveys to measure utilization rates of FTAs. To my knowledge, there is only one recent survey which measures the utilization rate of Switzerland’s FTAs. This survey was conducted by economiesuisse and revealed that, depending on the respective FTA, 50 to 70 percent of 26 I presented extracts of this chapter at the occasions of a seminar on the evaluation of the JSFTEPA at JETRO headquarters and at a Business Luncheon with the Swiss Chamber of Commerce and Industry in Japan in September 2011 in Tokyo. 27 Annual surveys on the International Operations of Japanese Firms and on Japanese-Affiliated Firms in Asia and Oceania. The first surveys which contained questions on FTAs were JETRO (2003) and JETRO (2006). 28 Annual Surveys on Overseas Business Operations by Japanese Manufacturing Companies: Outlook for Japanese Foreign Direct Investment. The first survey containing questions on FTAs is JBIC (2002). 29 Japan’s first FTA, the Agreement between Japan and the Republic of Singapore for a New-Age Economic Partnership Agreement, entered into force in 2002. 30 Examples of a more detailed analysis of these survey data include studies by Hayakawa et al. (2009), and Kajita (2004). 15 companies in Switzerland utilize Switzerland’s FTAs, with the JSFTEPA having a utilization rate of about 60 percent (economiesuisse, 2010). Apart from pure surveys, there are increasingly studies which look at the effects of FTAs on specific companies. These studies can be split into two generations. Studies of the first generation approach the topic from a qualitative perspective and are helpful in understanding the mechanisms of FTAs. The second generation of studies go further to examine the relationship between firm characteristics and the utilization of FTAs, either by qualitatively comparing essential characteristics of FTA-users and non-users, or by employing multivariate statistics. Examples of studies of the first generation include the study by Hiratsuka et al. (2009) which apply a small sample survey to examine the Japanese automobile, electronics and textile industry with regard to the impact of FTAs. Positive effects such as increase in sales are contrasted with ensuing documentation cost. While these studies are rather qualitative in nature, studies of the second generation are more quantitatively oriented. One of the first studies to examine the relationship between firm characteristics and utilization of FTAs are Takahashi and Urata (2008)31 who employ a probit model. Kawai and Wignaraja (2009) 32 use a two-sample independent t-test with equal variances to compare the central tendencies of firm characteristics and find statistically significant differences between FTA-users and non-users. Wignaraja et al. (2010) utilize a probit model to demonstrate that there is a relationship between firm characteristics and the use of the Asean FTA. The present study follows the tradition of the second generation firm-level research. However, since this study focuses on only one FTA, a more in-depth examination is possible. With regard to quantitative analysis, the inclusion of new explanatory variables allows for inductive theory building. Methodologically, the individual variables are tested for normality and categorized according to the level of measurement to perform the appropriate tests. To my knowledge, this is the first second generation study including data from companies located in Switzerland, and the first of its kind between two developed countries. Unlike developing countries, developed countries have more often reduced their MFN tariff rates unilaterally to zero across many tariff lines. Therefore, when explaining the utilization rate of the JSFTEPA, particular attention will have to be paid when examining the reasons for which companies find it unnecessary to utilize the JSFTEPA. The following section presents the research design and the profile of companies which responded to the JSFTEPA survey. Section three and four introduce the dependent and independent variables, respectively, develop the hypotheses and present the methodology. Section five discusses the results of the study, and section six provides some concluding remarks. 31 “Using the same research design, Takahashi and Urata replicated their effort in 2010 with a larger sample (Takahashi and Urata, 2010). 32 Findings of this study are based on data originally collected for individual country papers: Japan (Hiratsuka et al., 2009), Philippines (Wignaraja et al., 2010) and China (Zhang, 2010). 16 3.2 Research Design and Profile of Respondents Units of analysis: Rather than examining individual firms, the units of analysis of this study are directional trade flows. Consequently, trade flows originating from a single company exporting goods from Switzerland to Japan and importing goods from Japan into Switzerland will be analyzed separately. This procedure was chosen to make the result of the analysis more meaningful. The study focuses on companies trading in goods as this necessarily guarantees a company’s awareness of the JSFTEPA when utilizing it. In other fields, such as trade in services, investment protection, protection of intellectual property rights, or movement of natural persons, companies need not necessarily be aware of the fact that they are utilizing an FTA, as benefits accrue automatically once the FTA has entered into force33. When trading goods, however, companies receive benefits only once they have proven that the goods satisfy the respective rules and requirements, and are thus necessarily aware of the FTA34. When conducting a survey on the utilization of FTAs, awareness is of utmost importance to achieve a meaningful result. Data collection: Data was collected by way of an online survey. Companies surveyed consisted of 300 members of the Swiss Japanese Chamber of Commerce in Switzerland and 90 members of the Swiss Chamber of Commerce and Industry in Japan. An email containing an internet link (URL) to an online questionnaire form was sent to all companies. A follow-up by phone was made if a company did not reply or if a respondent indicated to be open for more in-depth questions. In order to cross-validate and complement the survey, annual reports and websites of specific companies as well as company databases were consulted35. Online questionnaire: The online questionnaire contained a total of 92 questions (compare appendix A-2). The questionnaire contained both open-ended questions and questions with pre-determined answer choices. Due to the use of a conditional tree structure, however, only a fraction of these questions had to be answered by individual survey participants, with the exact number depending on the area of business and whether or not a company was utilizing FTAs. The structure of the survey is shown in appendix A-3. Apart from questions related to the utilization of the JSFTEPA, the survey also contained questions on the management of FTAs (compare chapter 4), and such which are relevant for policy makers. The questions which are relevant for policy makers will not be further dealt with here; however, the respective responses of companies are listed in appendix A4. The survey could be completed anonymously. Answers were collected from October 3, 2010 until February 21, 2011. The survey was sent to companies in both Switzerland and 33 In the area of trade in services, once the barriers to market access have been removed, a company in the FTA partner territory does not face additional FTA-related costs to enter the market. Similarly, once additional intellectual property protection has been implemented in local law, companies do not face FTArelated costs to benefit from enhanced protection. In the area of movement of natural persons, intracorporate transferees would not need to know that their stay is only possible because of the FTA. 34 “Benefits from FTAs in trade in goods” refer only to tariff benefits. Other benefits, such as simplified customs procedures, would also apply to all companies. 35 Databases consulted were OneSource, Corporate Information, AG für Wirtschafts-Publikationen, and Swiss Firms. In order to obtain information on the international presence of companies, annual reports and websites were consulted. Compare also section 3.4.1 on the description of the independent variables. 17 Japan36 and designed such that respondents located in Switzerland and Japan received the same set of questions, while at the same time accounting for their respective location 37. Respondents were only required to answer questions which used skip logic. The survey questions related to the study of firm characteristics were designed in order to test hypotheses which were developed in either of two ways: a) Hypotheses were derived and adapted from previous studies in order to allow for a comparison of outcomes b) New hypotheses were either derived from anecdotal evidence which resulted from an earlier pilot study conducted by the author, or were developed to bridge gaps in incumbent explanations. In total 79 out of 390 companies replied to the survey, resulting in a response rate of 20.3 percent. Table 3-1 provides an overview on the sectoral distribution of the companies. Table 3-1: Number of replies by sectoral distribution of companies Sectors Number of Replies Logistics provider Service provider 5 15 Other company without trading activities Importer, distributor or manufacturer with trading activities 3 56 Total Source: Survey Data. 79 Appendix A-5 contains a list of the companies, the respondents, and the respondents’ positions and functions. Out of the 79 companies which replied to the survey, 56 are trading in goods and are thus relevant for this study. Of the 56 companies, 8 companies indicated that they trade both from Switzerland to Japan and vice versa, resulting in a sample size of 64 based on the count of unidirectional trade flows, henceforth referred to as trade flow based responses (TFBRs). Table 3-2 shows the number of TFBRs by direction of trade and manufacturer/ importer. Due to the fact that there were no responses from manufacturers located in Japan, trade flows from Japan to Switzerland are only represented by importers and distributors located in Switzerland. By contrast, 23 out of 33 trade flows from Switzerland to Japan stem from manufacturers located in Switzerland. While importers/ distributors are likely to indicate correctly whether or not they utilize the JSFTEPA, manufacturers are not able to know with absolute certainty whether or not the importer/ distributor or the manufacturer’s own importing entity would show the certificate of origin to customs and 36 Theoretically it would have been possible that one or both of a specific company’s trade flows were covered by two different datasets, one each from Japan and Switzerland. However, this has not occurred as far as the companies are concerned which identified themselves (only three companies chose to complete the survey anonymously). 37 In general, the different wording accounted for the different perspectives with regard to “exporting”/ “importing” “from”/”to” and “Japan”/”Switzerland”. For general questions about FTAs, the Swiss version of the survey referred to “FTAs” while the Japanese version used the terminology “Economic Partnership Agreement (EPA)” which is more common in Japan. 18 claim the duty back. As a result, the utilization rate of the JSFTEPA for trade flows from Switzerland to Japan may be overestimated. However, no impact is expected on the empirical results with regard to the characteristics of companies utilizing or not utilizing the JSFTEPA. In terms of TFBRs – 33 TFBRs from Switzerland to Japan and 31 from Japan to Switzerland – the sample is well balanced. Table 3-2: Number of TFBR by direction Direction of Trade Total Number of Flows Datasets Manufacturer Importer/ Distributor Switzerland to Japan 33 23 10 Japan to Switzerland 31 0 31 Total Source: Survey Data. 64 23 41 3.3 Dependent Variable The dependent variable measures whether or not companies are utilizing the JSFTEPA. “Utilizing the JSFTEPA” refers here, as defined in the introduction, to companies trading in goods. As an exporter, a company is utilizing the JSFTEPA by either applying for a COO or printing a declaration as to preferential origin on the invoice if it is an approved exporter. An importer is utilizing the JSFTEPA when presenting proof of origin to the customs. Table 3-3 lists the replies of the companies. Table 3-3: Utilization Rates of the JSFTEPA by TFBRs Question: Do you use the JSFTEPA when exporting/ importing goods to/ from Japan/ Switzerland? 1. Utilizing the JSFTEPA 2. Not currently utilizing the JSFTEPA, but maybe in future TFBRs from TFBRs from Switzerland to Japan to Japan Switzerland Number of cases (%) [90% confidence interval in %] 18 (54.5) [39.1; 69.3] 5 (15.2) [6.6; 29.8] 14 (45.2) [30.0;61.2] 1 (3.2) [0.2;15.5] 32 (50.0) [40.0; 60.1] 6 (9.4) [4.4; 18.1] 5 (15.2) [6.6; 29.8] 3 (9.1) [2.8; 22.6] 12 (38.7) [24.4; 55.0] 0 (0) [0; 10.8] 17 (26.6) [17.9; 37.3] 3 (4.7) [1.5; 12.2] 2 (6.1) [13.0; 18.8] 4 (12.9) [4.9; 27.7] 6 (9.4) [4.4; 18.1] 33 31 64 3. Not currently and no plans to utilize the JSFTEPA in future 4. I do not know as our logistics provider/ freight forwarder decides/ takes care of the use of FTAs 5. I do not know Total Total Source: Survey data. 19 Of a total of 64 TFBRs, 32 (50 percent) were covered by the JSFTEPA, while 23 (36 percent) were not covered. 9 TFBRs (14 percent) checked one of either “Don’t know” answer options 4 and 5. Examining TFBRs separately by direction of trade, 18 (55 percent) TFBRs from Switzerland to Japan benefited from the JSFTEPA, and 14 (45 percent) TFBRs from Japan to Switzerland. The average utilization rate of 50 percent is slightly higher than findings reported in previous studies. However, looking at the 90 percent confidence interval for this binary variable [40.0; 60.1], the lower boundary is well within the range of previous studies. The subsequent analysis counts TFBRs in answer options 2 and 3 as “not utilizing” and eliminates TFBRs in answer options 4 and 5. In order to maximize explanatory power between utilization of the JSFTEPA and firm characteristics, the sample only includes TFBRs which could have, theoretically, benefited from the JSFTEPA. TFBRs were eliminated from the sample for tariff lines which were not covered by the JSFTEPA 38, or where MFN tariffs were already zero prior to the JSFTEPA’s entry into force39. Thus, the analysis of the relation between utilization of the JSFTEPA and firm characteristics is more accurate as potential biases with regard to factors that are not subject to respondents’ control are avoided. Reasons as to why answer options 2 or 3 were selected are stated in table 3-4. Table 3-4: Reasons for not utilizing the JSFTEPA TFBRs from Switzerland to Japan TFBRs from Japan to Switzerland Total Difficulties to satisfy the requirements of the ROO/ too difficult to apply for a COO Not aware of the JSFTEPA 2 3 5 3 3 6 No answer Adjusted non-utilization 1 6 6 1 12 MFN tariffs zero 3 4 7 Product not covered by the JSFTEPA 1 Completely manufactured outside of Japan/ Switzerland Total non-utilization 10 1 3 3 13 23 Source: Survey data. Out of 23 TFBRs which did not utilize the JSFTEPA, 12 could have, theoretically, utilized it. They did not do so because of a lack of awareness or because the utilization of the JSFTEPA would have been too cumbersome with regard to complying with the ROO or 38 39 In this case it would have been impossible for a company to utilize the JSFTEPA. In this case it would have been unnecessary for a company to utilize the JSFTEPA. 20 applying for a COO 40 . In addition, transfer pricing policies of countries may prevent companies from satisfying ROO by simply adding the profit margin of a manufacturing process which takes place outside of the free trade area. Another 11 TFBRs were not able to utilize the JSFTEPA because MFN tariffs were already zero, the respective goods were not covered by the JSFTEPA, or the products were manufactured outside of Japan or Switzerland41. After adjusting the data accordingly, 44 TFBRs remain in the sample (table 3-5)42. The adjusted utilization rates are as follows: 75 percent of trade flows from Switzerland to Japan were covered by the JSFTEPA, while 70 percent of trade flows from Japan to Switzerland were covered. The combined utilization rate of both trade flows was 73 percent. Table 3-5: Adjusted Utilization Rates of the JSFTEPA Question: Do you use the JSFTEPA TFBRs from TFBRs from when exporting/ importing goods to/ Switzerland to Japan to from Japan/ Switzerland? (Adjusted Japan Switzerland utilization rate) Number of Cases (%) Utilizing the JSFTEPA [90% Confidence Interval in %] 18 (75.0) 14 (70.0) [56.3; 88.0] [49.1; 85.5.] Not utilizing the JSFTEPA 6 (25.0) [12.0; 43.7] 24 Total 6 (30.0) [14.5; 50.9] 20 Total 32 (72.7) [59.4; 83.1] 12 (27.3) [16.9; 40.6] 44 Source: Survey data. Reasons for utilizing the JSFTEPA are reported in table 3-6 (multiple responses possible). 40 One respondent specifically mentioned that all imports of finished goods from Japan into Switzerland benefit from the JSFTEPA. Spare parts, by contrast, do not, as costs of utilizing the JSFTEPA for spare parts are higher than benefits, partially due to Switzerland’s weight-based tariff system. 41 Some Japanese companies from the electronics and automotive industries replied that they outsourced their production to territories in Southeast Asia or Europe, and were therefore not in a position to utilize the JSFTEPA. 42 Of the 64 TFBR, 9 TFBR were eliminated under answer options 4 and 5 (I do not know), and 11 under answer options 2 and 3 (not utilizing the JSFTEPA because it was not possible or not necessary). 21 Table 3-6: Reasons for utilizing the JSFTEPA Question: Why does your company use the JSFTEPA for exports/ imports to/ from Japan/ Switzerland? Number of TFBRs In % To avoid paying Swiss/ Japanese import tariffs/ reduce landed costs Because our customer(s) in Japan/ Switzerland wish to claim back import tariffs 6 5 28.6 23.8 Expected increase in sales to customer through enhanced price competitiveness of our goods Higher profit-margin when selling goods to our subsidiaries in Japan/ Switzerland 4 19.0 3 14.3 To make use of cumulation possibilities when re-exporting the goods Note: Multiple replies possible. Source: Survey data. 3 14.3 With regard to the consistency of utilizing the JSFTEPA, 22 TFBRs provided information on how regularly they were utilizing the JSFTEPA (table 3-7). The majority of the trade flows was consistently accompanied by a proof of preferential origin. Table 3-7: Consistency of utilizing the JSFTEPA Question: When exporting/ importing goods from/ to Japan/ Switzerland that fulfill the preferential rules of origin stated in the JSFTEPA, we provide proof of origin…/ We ask our supplier(s) for proof of origin... Always We ask our supplier(s) only when we see savings potential in form of lower/no import duties under the JSFTEPA Only if a customer/ final buyer asks Randomly Total Number In % of TFBRs 13 59.1 4 18.2 3 13.6 2 9.1 22 100.0 Source: Survey data. 3.4 Independent Variables: Determinants of the Utilization of Free Trade Agreements 3.4.1 Description of Variables and Development of Hypotheses In order to examine the impact of the size of a firm on the utilization of the JSFTEPA, the number of permanent staff the company is employing globally as a fulltime equivalent (EMP) is used as a proxy. Other firm characteristics such as the turnover of a company could have been chosen as well. However, the turnover was quite unstable during the economic downturn in the wake of the financial crisis of 2008/ 2009 and was therefore not considered. Since companies require human, financial and other resources to deal with FTAs and also face considerable fix costs for example in the area of training and 22 education, it is assumed that larger companies are more likely to utilize FTAs than smaller ones. In addition, due to economies of scale, it is assumed that larger companies are more likely to have specialized staff to deal with FTAs. International exposure increases a company’s awareness of international trade practices. Therefore, it is hypothesized that companies with a higher international exposure are more likely to utilize the JSFTEPA than companies with a lower international exposure. This study utilizes several variables to examine the effect of international exposure. Firstly, the trade intensity (TIN) measures the approximate relation of exports/ imports (overseas sales/ procurement) to total sales/ procurement for the operations in Switzerland/ Japan as indicated by the respondents. Secondly, it is assumed that international representations have a positive impact on the utilization of FTAs43. Therefore, the study examines whether or not a company has at least one international representation (IRP), regardless of whether the representation is majority owned or not (including agents). The study also examines how many countries a company is represented in (CRP)44, and how many countries a company is represented in by a majority owned entity (CRO). CRO is similar to CRP but excludes minority owned entities, 3rd party agents and distributors. Thirdly, and related to CRO, since the exporter has the burden of proving preferential origin while the importer gets the benefits in terms of lower tariffs, it is assumed that intrafirm trade flows are more likely to utilize FTAs as the savings stay within the company45. The study examines the total intra-firm intensity of trade (IIN) as the share of intra-firm exports/ imports to total exports/ imports. In addition and more specific to the JSFTEPA, it is assumed that trade flows are more likely to utilize the JSFTEPA if a company has majority owned business entities in both Japan and Switzerland (OBE)46. Lastly, a learning effect is assumed where a company already utilizes other FTAs. The study examines how many other FTAs a company already utilizes apart from the JSFTEPA (UOF)47. Prior to FTA negotiations, policy makers usually invite companies to provide input. Companies participating in such consultations are already interested in utilizing FTAs. In addition, such companies may address problems they foresee, thus increasing the likelihood of being able to utilize the respective FTA. Hence, it is assumed that companies which participated in consultations with the government or respective agencies (CON) are more likely to utilize the JSFTEPA. When companies are trading goods via third territories, goods may lose preferential origin if they are not stored under customs supervision. It is thus assumed that companies which transport goods directly (DIR) between Japan and Switzerland are more likely to utilize the JSFTEPA. The study also examines whether the direction of trade flows (TFL) or the location of the global headquarters (GHQ) have an impact on the utilization of the JSFTEPA. Whether or not there is also an industry effect is 43 Data on international representations of companies were collected via annual reports and websites of companies, as these were considered to be more reliable sources than the survey. 44 For this variable, companies with more than 10,000 employees were not considered, as such companies are assumed to be represented globally. 45 Intra-firm trade flows are exports/ imports to/ from an affiliated company or subsidiary. The exporter would only have an interest in utilizing FTAs for non intra-firm trade if export competitiveness is crucial. 46 This question was asked in the survey and verified via annual reports and websites of companies. 47 UOF measures the number of FTAs, not the number of countries with FTA relations. Therefore, FTAs with Asean, EFTA, the EU and SACU were each counted as one FTA. 23 analyzed qualitatively due to insufficient data. Table 3-8 provides an overview of the independent variables and a preliminary formulation of the respective hypotheses. Table 3-8: Explanatory variables and hypotheses Var. Definition Null Hypothesis EMP Number of permanent employees TIN Trade Intensity (Exportand Import Intensity) CRP There is no statistically significant difference in the number of employees working in companies which (do not) utilize the JSFTEPA There is no statistically significant difference in the export/import intensity between companies which (do not) utilize the JSFTEPA Number of countries a company is represented in CRO Number of countries a company is represented in with an own business unit There is no statistically significant difference in the number of representations abroad between companies which (do not) utilize the JSFTEPA There is no statistically significant difference in the number of own business units abroad between companies which (do not) utilize the JSFTEPA IIN There is no statistically significant difference in the intrafirm intensity of trade between companies which (do not) utilize the JSFTEPA There is no statistically significant difference in the number of other FTAs used between companies which (do not) utilize the JSFTEPA UOF Intra-firm intensity of trade (exports or imports) Number of other FTAs utilized CON Consultations with the Government OBE Own business entities in both Japan and Switzerland IRP International Representation DIR Direct Transportation TFL Trade flows from Switzerland to Japan GHQ Location of global headquarters in Switzerland There is no statistically significant association between participation in government consultations and utilization of the JSFTEPA There is no statistically significant association between having own business entities in both Japan and Switzerland and utilization of the JSFTEPA There is no statistically significant association between being internationally represented and utilization of the JSFTEPA There is no statistically significant association between goods being transported directly and utilization of the JSFTEPA There is no statistically significant association between the direction of trade flows and utilization of the JSFTEPA. There is no statistically significant association between the location of the global headquarters and utilization of the JSFTEPA. 24 3.4.2 Methodology of Analysis of Independent Variables Table 3-9 provides an overview of the independent variables’ sample sizes by TFBR which utilize and which do not utilize the JSFTEPA. Trade flows which were not able to utilize the JSFTEPA, because it was impossible or unnecessary, were eliminated from the sample (compare section 3.3). The total number of TFBRs varies considerably depending on the respective independent variable. This is due to the fact that respondents were only required to answer questions with skip logic. The maximum number of TFBRs is 44 which takes into account eliminated responses. Table 3-9: Sample sizes of independent variables, by TFBR Variables TFBRs Utilizing the JSFTEPA TFBRs not Utilizing the JSFTEPA Total TFBRs CON CRO 27 15 8 10 35 25 CRP 15 10 25 DIR 28 10 38 EMP GHQ 32 29 12 12 44 44 IIN 14 5 19 IRP 31 12 43 OBE TFL 32 32 12 12 44 44 TIN UOF 16 25 6 6 22 31 The aim of the present study is to establish differences in firm characteristics between TFBRs which do and do not, respectively, utilize the JSFTEPA. In order to examine these differences, either parametric or non-parametric tests can be used. Parametric tests are more powerful than non-parametric tests with regard to their ability to detect a difference between two groups when a difference actually exists. A parametric test may thus find a statistically significant difference between two groups which a non-parametric test may not find. Therefore, independent variables were analyzed by employing the two sample independent t-test with equal variances whenever the assumptions were met. The t-test assesses whether the means of two groups (here JSFTEPA users and non users) are statistically significantly different from each other. The assumptions of the t-test include, firstly, that the data is sampled independently. Secondly, the dependent variable is a twolevel categorical variable while the independent variables are measured on numeric level. Thirdly, the two populations compared need to follow a normal distribution. And fourthly, the two populations compared need to have equal variances. 25 If one or several of these assumptions are not met, comparable non-parametric tests are used. Numeric variables which are non-normally distributed will be examined by employing the Mann-Whitney U test, a rank-order test which compares the group medians instead of the group means. Variables on categorical level are examined by using the Pearson’s Chi Square test, or Fisher’s Exact test, respectively, if there is one or more value with an expected count of less than five48. The Chi Square test tests whether or not there is an association between two variables. The strength of the association between the independent and the dependent variable is not examined in this study. The various tests are performed with SPSS 18.0. Table 3-10 provides an overview of the tests used depending on the independent variables’ level of measurement and distribution. Table 3-10: Tests, variable’s level of measurement and distribution Level of Distribution Applicable Test Measurement Statistics Numeric Normal Parametric Numeric Non-normal Non-parametric Two sample independent t-test with equal variances Mann-Whitney U test Categorical n.a. Non-parametric Pearson’s Chi Square test Note: (n.a.) not applicable. Since parametric tests are more powerful, the independent variables are examined with regard to them satisfying the assumptions of the t-test. The first assumption of the two sample independent t-test, that data is sampled independently, is satisfied for all variables, as there is no overlap between TFBRs which do and which do not utilize the JSFTEPA. With regard to the second assumption, the independent variables EMP, TIN, CRP, CRO, IIN and UOF are measured on numeric level, while CON, OBE, IRP, DIR, TFL and GHQ are measured on categorical level. Therefore, only the first six variables satisfy the second assumption. Thirdly, the two groups being compared for each variable are to follow a normal distribution. Generally, statistical test are robust to mild violations of the assumption of normal distribution. However, when the departure from normality is considerable and the sample size is small, parametric tests may not work well 49. Since more than half of the sample sizes are smaller than 20 and the maximum sample size is 32 (table 3-9), normality will be examined50. In order to reach a more substantive conclusion, the distribution of the independent variables is examined by employing both graphical and numeric methods. Graphically, the 48 When the expected cell frequencies fall, the Chi Square test estimates the probabilities in each cell with insufficient precision. Therefore, literature suggested a minimum expected cell count of five (Siegel, 1956). 49 For large data sets, by contrast, the central limit theorem would provide reason to assume normality. 50 However, small samples have little power to determine whether or not the sample originates from a normal distribution. 26 study examines histograms in order to understand the distribution of the data. Numerically, several indicators are examined51. The skewness indicates the level of symmetry of the distribution of the data. If the distribution is symmetric, skewness is zero or close to zero. A positive value indicates a skew to the right, a negative value a skew to the left. With regard to whether or not a skew is a matter of concern, literature suggests that a skewness of greater than |1| points to a highly skewed distribution, a Skewness between |0.5| and |1| to a moderately skewed distribution, and a skewness between 0 and |0.5| to an approximately symmetric distribution (Bulmer, 1979). Apart from the skewness, the Shapiro-Wilk test (SW) and the Kolmogorov-Smirnov test (KS) were used to assess normality. These tests differ in how they quantify the deviation of the actual distribution from a normal distribution. The null hypothesis (H0) of these tests states that data are sampled from a normal distribution, i.e. that there is no difference between the distribution of the data set and a normal one. If the p-value is above the determined significance level, H0 cannot be rejected. If the p-value is below the determined significance level, H0 is to be rejected, i.e. data significantly deviate from a normal distribution. The SW test works better for small sample sizes and is therefore suitable for the present study. A potential problem with this test is the fact that there are some ties in the data which makes the test work less well. The KS test can be modified to serve as a goodness of fit test to test for normality. Disadvantages of this test include the fact that even in the corrected form52 the test is less powerful for testing normality than the SW test53. Other tests are not considered due to various shortcomings54. Whenever the graphical and numerical methods gave reason to assume that the sampled data were likely to stem from a severely non-normally distributed population, a non-linear transformation technique was used and the effect on normality compared with the original values 55 . Since most of the non-normally distributed data were skewed to the right, logarithm and square root transformation was chosen since these transformations reduce large values proportionally more than smaller values. When taking the logarithm, this study used the natural logarithms – although the basis of the logarithms does not have an impact with regard to the achievement of normality. In cases of zero or negative values, a constant was added to each value, making them positive and non-zero. The testing of the hypotheses was only performed after the respective data were transformed. Section 3.5.1 will present the means assessed by the t-test in two ways. The means of the transformed data which were used for hypotheses testing are presented in their transformed form. Since the means of the transformed data do not show the actual magnitude, the means of the original data are presented as well. 51 The kurtosis is not considered here as it is of little use when comparing distributions of different degrees of symmetry (Bulmer, 1979), although recent attempts show that it may be possible to remove the effect of skewness when measuring the kurtosis - see for example Blest (2003). 52 SPSS 18.0 reports the Dallal-Wilkinson-Lilliefors corrected p-value. 53 See for example Stephens (1974). 54 The D’Agostino-Pearson test, for example, is only powerful for samples above 50. Below this threshold it has the tendency to be unable to reject normality. Similarly, the Jacque-Bera and Chi-Square tests are not very powerful for small samples below 20. 55 For an introduction to data transformation, see for example Aron and Aron (2002). 27 Table 3-11 reports the outcome of the tests for normality of the numeric independent variables. The respective histograms are plotted in appendix A-6. Table 3-11: Tests for normality of independent variables on numeric level Variable Data Graphic Numeric Histogram (user/ non-user) EMP CRP CRO Sample Skewness (user/ non-user) KolmogorovSmirnov including Lilliefors Significance Correction [Sig.] (user/ non-user) ShapiroWilk [Sig.] (user/ nonuser) Original data Right skewed/ right skewed 1.77 / 2.26 0.000 / 0.000 0.000/ 0.000 Logarithm transformation Square root transformation Left skewed/ symmetric Right skewed/ right skewed -0.92 / -0.32 1.09 / 1.67 0.200* / 0.200* 0.001 / 0.034 0.028/ 0.594 0.000/ 0.004 Original data Right skewed/ right skewed Logarithm Left skewed/ transformation left skewed 1.53 / 1.31 -0.61 / -1.36 0.015 / 0.113 0.129 / 0.005 0.005/ 0.142 0.086/ 0.008 Square root symmetric/ transformation symmetric Original data Right skewed/ right skewed 0.36 / -0.38 0.85 / 0.97 0.200* / 0.200* 0.040 / 0.031 0.414/ 0.368 0.080/ 0.005 Logarithm transformation Square root transformation Left skewed/ right skewed symmetric/ right skewed -0.82 / 0.29 -0.23 / 0.49 0.052 / 0.005 0.200* / 0.008 0.025/ 0.007 0.246/ 0.011 UOF Original data Not identifiable/ right skewed 0.13 / 0.97 0.000 / 0.002 0.001/ 0.001 IIN Original data Not identifiable/ right skewed 0.07 / 2.24 0.035 / 0.001 0.017/ 0.000 TIN Original data Not identifiable/ right skewed -0.43 / 0.97 0.005 / 0.002 0.001/ 0.001 Notes: The upper entry refers to TFBRs utilizing the JSFTEPA, the lower entry to TFBRs not utilizing the JSFTEPA. (*) This is a lower bound of the true significance. None of the numeric variables’ original data seemed to be distributed normally. However, when transforming the data, the variables EMP, CRP and CRO were close to normality. 28 For the original data of EMP, the histograms suggest a clear skew of the distribution to the right. This finding is supported by the numeric values of skewness which are 1.77 and 2.26 for TFBRs utilizing and not utilizing the JSFTEPA, respectively, pointing to a highly skewed distribution. Similarly, both the SW and the KS test suggest that H0 can be rejected at the 1 percent significance level. While a square root transformation did not lead to a more normal distribution, the log transformation resulted in distributions which were only slightly skewed to the left (TFBRs utilizing the JSFTEPA) or even approximately symmetric (TFBRs not utilizing the JSFTEPA). The KS test suggests that H0 cannot be rejected. Looking at the SW test, H0 can be rejected at the 5 percent significance level for TFBRs utilizing JSFTEPA, but not for TFBR not utilizing the JSFTEPA. Taking both the graphic and numeric methods into consideration, data on employees seem to come from a lognormal distribution since they are approximately normally distributed after being log transformed. The highly skewed distribution of the size of companies has received much attention in the literature, leading researchers to conclude that firm sizes are lognormal or even power-law distributed56. Similar to EMP, the histograms, the skewness and both the SW and KS test suggest that the original data of CRP are highly skewed. A square root transformation of the data leads to an approximately symmetric distribution. The skewness of the transformed data amounts to 0.36 and -0.38 for TFBRs utilizing and not utilizing the JSFTEPA, respectively. With regard to both the SW and KS test, H0 cannot be rejected. These findings suggest that the square root transformed data of CRP are approximately normally distributed. While CRP measures the number of countries a company is represented in, CRO limits the number of countries to those in which a company is represented with own business units. Similar to CRP, the findings suggest that the square root transformed data of CRO are approximately normally distributed. As a conclusion, EMP, CRP and CRO seem much more likely to have come from a population with a normal distribution after the transformation took place. The square root transformation seems to fit better when the original data differ only moderately from normality, while the log transformation fits better when the original data deviate substantially from normality. For the variables UOF, IIN and TIN, a normal distribution could not be achieved by transforming the data. Looking at the numeric analysis, it is not clear as to whether or not the variables are normally distributed. However, when examining the respective histograms, U- and W-shaped distributions point to a severely skewed distribution. The last assumption of the two sample independent t-test is that the two groups should have equal variances. Generally, the t-test is highly robust to the presence of unequal variances if the sample sizes are roughly equal. However, since the sample sizes in this study are quite unequal (compare table 3-9), homoscedasticity will have to be tested for. 56 Literature suggests that economic phenomena often follow a lognormal or a power-law distribution rather than a normal distribution. For a discussion on power-law versus lognormal distributions in general see for example Mitzenmacher (2003). Clarke (1979) provides evidence for the appropriateness of the assumption of log normality for firm size distributions based on employment. Log normality can also be observed when taking sales or paid-in capital as a proxy for size. Later studies have found that the size distribution of firms are right-skewed and generally follow a lognormal distribution, but behave more like a power law distribution between certain parts of the curve – see for example D’Hulst and Rodgers (2001) or Growiec et al. (2008). 29 Homoscedasticity is tested by employing Levene’s test for equality of variances, with H0 stating that variances are equal. If the p-value is above the defined level of significance, H0 cannot be rejected. Table 3-12 reports the respective values. Table 3-12: Levene’s test for the equality of variances Variable Data F-statistics Sig. EMP CRP Log transformed data Square root transformed data 0.038 0.192 0.846 0.665 CRO Square root transformed data 0.675 0.420 Levene’s test for the equality of variances indicates that H0 cannot be rejected since the p-value is very large and the F-statistics comparatively small. Variances are therefore assumed to be equal for EMP, CRP and CRO. These three independent variables thus satisfy the assumptions which are necessary to employ a two sample independent t-test. In order to identify the main explanatory variables and to deal with possible multicollinearity, the applicability of principle components analysis was examined. However, given that 36 out of 44 observations contained missing values for one or more variables, such an analysis was not performed. 3.4.3 Overview of Variables, Tests and Hypotheses Table 3-13 provides an overview of all independent variables and the respective tests which can be performed. Table 3-13: Tests, independent variables’ level of measurement and distribution Variables - EMP (log transformed) - CRP (square root transformed) - CRO (square root transformed) - TIN - IIN - UOF - DIR - TFL - GHQ - IRP - OBE - CON Level of Measurement Numeric Distribution Numeric Categorical Note: (n.a.) not applicable. 30 Applicable Statistics Parametric Test Non-normal Nonparametric n.a. Nonparametric MannWhitney U test Pearson’s Chi Square test Normal Two sample independent t-test with equal variances Three independent variables on numeric measurement level were found to satisfy the assumptions of the two sample independent t-test with equal variances. Another three numeric variables were found to be heavily skewed, and are therefore analyzed with the Mann-Whitney U test. The remaining six variables are measured on categorical level and are thus analyzed with the Pearson’s Chi Square test. Tables 3-14 – 3-16 are extensions of table 3-8, providing the substantiated hypotheses and expected relations between TFBRs which utilize the JSFTEPA, and such which do not. Table 3-14: Normally distributed explanatory numeric variables with hypotheses Var. Definition Null Hypothesis Expected Relation EMP Number of permanent employees CRP There is no statistically significant difference between the mean number of employees working in companies which (do not) utilize the JSFTEPA Number of countries a There is no statistically significant company is difference in the mean number of represented in representations abroad between firms which (do not) utilize the JSFTEPA CRO Number of countries a company is represented in with an own business unit There is no statistically significant difference in the mean number of own business units abroad between companies which (do not) utilize the JSFTEPA Mean (User) > Mean (NonUser) Mean (User) > Mean (NonUser) Mean (User) > Mean (NonUser) Table 3-15: Non-normally distributed explanatory numeric var. with hypotheses Var. Definition Null Hypothesis TIN Trade Intensity (Export- and Import Intensity)57 There is no statistically significant difference in the median export/import intensity between companies which (do not) utilize the JSFTEPA Expected Relation Median (User) > Median (NonUser) IIN Intra-firm intensity of trade (exports or imports)58 There is no statistically significant difference in the median intra-firm intensity of trade between companies which (do not) utilize the JSFTEPA There is no statistically significant difference in the median number of other FTAs used between companies which (do not) utilize the JSFTEPA Median (User) > Median (NonUser) Median (User) > Median (NonUser) UOF Number of other FTAs utilized 57 58 The categories 0-25%, 26-50%, 51-75% and 76-100% are recoded to 1, 2, 3 and 4. The categories 0-25%, 26-50%, 51-75% and 76-100% are recoded to 1, 2, 3 and 4. 31 Table 3-16: Explanatory binary variables with hypotheses Var. Definition Null Hypothesis Expected Relation CON Consultations with the There is no statistically significant Government association between participation in government consultations and utilization of the JSFTEPA OBE Own business entities There is no statistically significant in both Japan and association between having own business Switzerland entities in both Japan and Switzerland and utilization of the JSFTEPA Yes:No (User) > Yes:No (NonUser) Yes:No (User) > Yes:No (NonUser) IRP International Representation There is no statistically significant association between being internationally represented and utilization of the JSFTEPA DIR Direct Transportation There is no statistically significant association between goods being transported directly and utilization of the JSFTEPA Yes:No (User) > Yes:No (NonUser) Yes:No (User) > Yes:No (NonUser) TFL Trade flows from Switzerland to Japan There is no statistically significant association between the direction of trade flows and utilization of the JSFTEPA. There is no statistically significant association between the location of the global headquarters and utilization of the JSFTEPA. GHQ Location of global headquarters in Switzerland ? ? 3.5 Results 3.5.1 Presentation and Discussion of Findings Tables 3-17 – 3-19 provide an overview of the results of the analyses. Table 3-17 reports the results of the variables which were analyzed using the two sample independent t-test with equal variances; table 3-18 those employing the Mann-Whitney U test, and table 3-19 the ones using the Pearson’s chi-square test or Fisher’s Exact test, respectively59. 59 Additional tests performed by the author have shown that for the hypotheses tested in this study the statistical significance of the respective relationships did not change in the following cases: When nonnormally distributed variables were tested with the t-test instead of the Mann-Whitney U test; when equal variances were not assumed; and when variables with at least one expected frequency below five were analyzed with the Chi-squared test instead of Fisher’s exact test. 32 Table 3-17: Variables tested with two sample independent t-test Variable Transformed Data Mean User t-value Original Data EMP a 3.65 Mean Mean NonUser User 2.72 2.297** 30,941 5,117 b 4.72 3.26 5.27 2.10 CRP CRO b Mean Non-User -0.383 1.256 34.3 14.9 37.7 9.7 Notes: Sig. Codes: *** 1%, ** 5%, * 10%. (a) In order to achieve a normal distribution to test the hypothesis, this variable was log transformed. (b) In order to achieve a normal distribution to test the hypothesis, this variable was square root transformed. The t-value refers to the transformed data. The means of the original data are indicated for reasons of interpretation. Table 3-18: Variables tested with Mann-Whitney U test Variable Median User Median Non-User Mann-Whitney U UOF IIN 10 2.5 TIN 3 Note: Sig. Codes: *** 1%, ** 5%, * 10%. z-value 1 1 28.000 19.500 -2.383** 0.122 1 35.000 0.302 Table 3-19: Variables tested with Pearson’s chi-squared test or Fisher’s exact test Variable CON User Non Number of Cells with an Expected Chi-squared User Count of less than Five value 0.8 0.0 1 0.032** (Fisher) OBE IRP 7.0 9.3 1.0 5.0 1 2 0.015*** (Fisher) 0.608 (Fisher) DIR TFL 1.8 1.3 1.5 1.0 1 0 1.000 (Fisher) 0.138 1 1.000 (Fisher) GHQ 3.8 3.0 Note: Sig. Codes: *** 1%, ** 5%, * 10%. Company Size: Looking at EMP as a proxy for the size of a company, the average number of employees of JSFTEPA-users is 30,941, whereas the same value for JSFTEPA-non users is 5,117. At the 5 percent significance level, H0 (that there is no difference in means between FTA users and non-users) can be rejected. The average number of employees of a company is therefore statistically different between JSFTEPA-users and non-users. The statistical significance refers to the transformed data. 33 International Exposure: With regard to own business entities, OBE shows that a JSFTEPA-user is seven times more likely to be represented with own entities in both Japan and Switzerland than not, while a JSFTEPA-non user is as likely to be represented in both countries as not. In addition, at the 1 percent significance level, H0 can be rejected. The number of FTAs a company is already utilizing (UOF) shows a median of 10 for JSFTEPA-users, and only 1 for JSFTEPA-non users. At a 5 percent significance level, H0 can be rejected. The median of the number of FTAs a company is utilizing is therefore statistically different between JSFTEPA-users and non-users. There is no statistical evidence for the following relationships: IRP suggests that JSFTEPA-users are nine times more likely to be represented abroad than not, while JSFTEPA-non users are only five times more likely. When comparing the number of countries a company is represented in, CRP suggests that the average number of countries a company is represented in is higher for JSFTEPA-non users. However, when looking at the average number of countries a company is represented in excluding third party agents and distributors (CRO), the figure is higher for JSFTEPA-users. Both the trade intensity (TIN) and the intra-firm trade intensity (IIN) show a higher median for JSFTEPA-user than non-user with about 25 to 75 percent and 0 to 25 percent, respectively. Further determinants: A JSFTEPA-user is more likely to have participated in consultations with the government to provide input for the JSFTPA negotiations (CON) than a non user. H0 can be rejected at the 5 percent significance level. There is no statistical evidence for the following relationships: JSFTEPA-users seem to be more likely to trade their goods directly (DIR) than JSFTEPA-non users. Trade flows from Switzerland to Japan (TFL) seem to be more likely to benefit from the JSFTEPA than trade flows from Japan to Switzerland. Finally, companies which have their global headquarters in Switzerland (GHQ) seem to be more likely to benefit from the JSFTEPA than companies which have it in Japan. TFL and GHQ may be related to the fact that Switzerland has a longer tradition of FTAs. In addition, self-certification in the form of the “approved exporter” is more established in Switzerland – self-certification makes it considerably more straightforward for a company to provide evidence of preferential origin. However, none of these relationships are statistically significant. The utilization of the JSFTEPA with regard to industries is discussed against the background of existing literature in the following paragraph. 3.5.2 Comparison with Earlier Studies Looking at existing literature, a major conclusion is that size and international exposure help explain whether or not a specific company is utilizing FTAs. Table 3-20 provides an overview of selected findings from previous studies. The reported effects (+/-) is a simplification to show the direction of the effect. 34 Table 3-20: Selected findings of previous studies Takahashi and Urata (2010) Takahashi Wignaraja et and Urata al. (2010) (2008) Kawai and Wignaraja (2009) Method Probit Model Probit Model Probit Model FTAs examined Japan-Mexico/ Japan-Malaysia JapanSingapore Asean FTA Two sample independent t-test FTAs of Japan Utilization Rate 32.9%/ 12.2% 3.6% 45.2% 29.0% Number of Employees +***/ +*** +*** + +** Owning business bases in respective FTA partner territory Ratio of overseas sales to total sales +***/ +*** +*** Participated in consultations Transportation Machinery + +*** +***/ +*** Machinery/ Electronics -/ - Chemical -/ - +*** Notes: The actual values were replaced by the direction of the effects. Sig. Codes: *** 1%, ** 5%, * 10%. The unadjusted utilization rate found in the present study on the JSFTEPA is 55 percent for trade flows from Switzerland to Japan and 45 percent from Japan to Switzerland (compare table 3-3) and thus higher than in previous studies60. However, when looking at the lower boundaries of the 90 percent confidence intervals for this variable (39 for trade flows from Switzerland to Japan and 30 for trade flows from Japan to Switzerland – compare table 3-3), the utilization rate is in the range of previous studies 61 . That the utilization rate for trade flows from Switzerland to Japan was higher may be due to the fact that Switzerland has a longer tradition of FTAs, and thus companies are more familiar with them. In addition, the system of the “approved exporter”, which simplifies the utilization of FTAs considerably, is more established in Switzerland and may contribute to a more consistent utilization of FTAs. The JSFTEPA is Japan’s first FTA which provides for the “approved exporter” status. With regard to reasons as to why companies did not utilize the JSFTEPA, the present study found that close to 50 percent of TFBRs indicated that it was impossible or 60 The unadjusted utilization rate is reported here in order to allow for a comparison with previous studies. Substantially lower utilization rates may be explained by the fact that some territories have almost no tariff lines which are dutiable under MFN (Singapore), or that FTAs involving developing countries usually have a low coverage of goods. 61 35 unnecessary to utilize the JSFTEPA (compare table 3-4). Around 21 percent mentioned a lack of awareness and 26 percent reported difficulties related to the ROO or the application for a COO. A comparison with other studies is rather difficult, as these usually allow for multiple replies. However, a comparison of the approximate importance is still possible. Takahashi and Urata (2010) report that across Japan’s FTAs with Mexico and Malaysia 21 to 24 percent of respondents did not utilize the respective FTAs due to difficulties related to the ROO or the COO – this is within the range of the findings of the present study. Similarly, 26 to 28 percent of companies indicated a lack of information or knowledge. 30 percent of TFBR of the present study did not utilize the JSFTEPA as MFN tariffs were already zero. This is a marked difference to previous studies examining Japan’s FTAs. In the case of Japan’s FTAs with Malaysia and Mexico, Takahashi and Urata (2010) report that only 6 to 11 percent of companies indicated that tariff preferences by FTAs were too small or that the MFN rate was lower than the FTA rate. A possible explanation of this difference is that most of Japan’s other FTA partner territories are developing countries, which maintain higher MFN tariff rates on average. This explanation is supported by Kawai and Wignaraja (2009) who report that small margins of preference were indicated as a reason not to utilize FTAs by only 17 percent and 13 percent of companies in Thailand and the Philippines, respectively. When explaining the utilization rate of developing countries’ FTAs, rather than low MFN tariff rates, other preferential schemes such as export processing zones seem to be more relevant – 27 percent of companies in the Philippines mentioned such schemes as a reason for not utilizing the Asean FTA (Kawai and Wignaraja, 2009). With regard to the number of employees, the results of previous studies correspond with the findings of the present study. Larger companies are more likely to utilize FTAs. Improving the utilization rate among small and medium sized companies is therefore a challenge that policy makers have to deal with in order to create a level playing field for smaller companies. International exposure in terms of trade intensity (or ratio of overseas sales) and having own business bases in the respective FTA partner territory is positively related with the utilization of FTAs, although only the latter relationship is statistically significant. These findings are consistent across previous literature and the present study. Participations in government consultations prior to FTA-negotiations, too, have a significantly positive effect on utilization of FTAs, both in the present and existing studies. With regard to the different industries, all previous studies found that companies operating in the transportation machinery industry62 are more likely to utilize FTAs. This may be due to generally higher MFN tariff rates, as well as a comparatively competitive environment. However, previous studies did not examine if the high utilization rate is related to the fact that companies in this industry are generally comparatively large, and therefore a size rather than an industry effect exists. With regard to the present study, all four TFBRs from Japan to Switzerland in the transportation machinery industry were covered by the 62 This industry includes vehicles (both rail mounted and non-rail mounted), ships, boats, aircraft, spacecrafts and parts thereof. 36 JSFTEPA, although Switzerland maintains relatively low import tariffs. A possible explanation for the high utilization rate may be the fact that the Japanese companies in this industry are experienced in utilizing FTAs since most of Japan’s other FTA partners have relatively high MFN tariffs. Thus, utilizing FTAs may be a standard procedure for these companies. Previous studies found that the utilization rate of companies in the machinery and electronics industry is comparatively low. A possible explanation may be the fact that this industry faces above average compliance costs with regard to the ROO due to relatively complex bills of material63. Another explanation is put forward by the present study: Trade flows which were not covered by the JSFTEPA often benefited already from the Information Technology Agreement (ITA), to which both Japan and Switzerland are signatories. Under the ITA, signatories are required to eliminate tariffs on most information technology-related products unilaterally. After deducting the trade flows which fall under the ITA (adjusted utilization rate), the present study finds that a small majority of seven trade flows were covered by the JSFTEPA, while six were not. It would be interesting to know if previous studies had a higher utilization rate if they had deducted trade flows which were not able to utilize FTAs because of the ITA64. With regard to the chemical and allied industries, previous studies found that such companies are unlikely to utilize FTAs. The study on the JSFTEPA, by contrast, found that nine TFBRs in the chemical and allied industries were covered by the JSFTEPA, while only two were not. After having eliminated trade flows which were not able to utilize the JSFTEPA (adjusted utilization rate) 65 , no TFBRs were left which did not utilize the JSFTEPA. The present study thus results in a 100 percent utilization rate for the chemical industry. Possible reasons include the fact that chemical companies often produce only relatively few different products which are exported in large volumes, thus benefiting from economies of scale. In addition and contrary to the machinery industry, chemicals are often standardized products which usually contain a relatively small number of different materials, making the examination of ROO less complex and costly. 3.6 Conclusion Findings of the study When deducting the responses of companies which could not utilize the JSFTEPA as it was unnecessary or impossible, this study finds a substantially higher utilization rate compared with previous surveys. The adjusted utilization rate has the advantage of allowing for a more accurate comparison of different FTAs. Especially when comparing territories with very different tariff profiles, for example with regard to the number of tariff lines liberalized under MFN, the adjusted utilization rate reports the share of trade which 63 The longer the bill of material, the more time is needed to examine the individual positions with regard to compliance with the ROO. This is an even bigger problem when sources of suppliers and prices change frequently. 64 Malaysia, for example, is also a signatory to the ITA. 65 Similar to the ITA in the electronics industry, Japan and Switzerland are both signatories to the Pharmaceutical Tariff Elimination Agreement. 37 could have, theoretically, utilized an FTA (i.e., tariff lines liberalized under MFN would be excluded from the total imports). With regard to firm characteristics, the company size measured by the number of permanent employees is statistically significantly different between companies which utilize the JSFTEPA and such which do not. In terms of international exposure, companies which utilize the JSFTEPA are seven times more likely to be represented in Japan and Switzerland with own business entities, while companies which do not utilize the JSFTEPA are as likely to be represented in both countries as not. In addition, companies which utilize the JSFTEPA are utilizing significantly more other FTAs than companies which do not. These findings suggest that a size effect, an intra-firm effect and a learning effect can impact the utilization rate of the JSFTEPA. By contrast, the international exposure is not statistically significantly related to the utilization of the JSFTEPA. In combination with the size effect, this finding suggests that absolute numbers are more decisive when it comes to the utilization of the JSFTEPA than relative ones. Future studies may have a closer look at the absolute export values of companies, rather than the export intensity. When looking at the industry level, a qualitative analysis showed that industry characteristics such as relatively standardized products, bulk shipments, as well as comparatively low profit margins generally lead to a higher utilization of the JSFTEPA. Most of above findings suggest that large companies are more likely to utilize FTAs than smaller ones. Recommendations for Policy Makers Large companies usually enjoy a substantial international exposure. The study finds that exactly such companies are utilizing FTAs relatively often, while smaller companies seem to be at a disadvantage. Improving the utilization rate among small and medium sized enterprises (SMEs) is therefore a challenge for policy makers. Especially if FTAs are understood as an instrument to help SMEs internationalize, they have to be designed in a way to create a level playing field for SMEs. When reviewing or negotiating FTAs, policy makers should be aware of the difference between the adjusted and the non-adjusted utilization rates. Policy makers should aim at increasing the adjusted utilization rate of FTAs by designing the ROO to make them fit international production and distribution networks. In addition, the provision of information and resources to companies is important when aiming at a higher utilization rate. Except for the agricultural sector, the JSFTEPA is very inclusive in terms of product coverage. Tackling the remaining agricultural products may be a key challenge in future reviews of the JSFTEPA. Limitations of the Methodology While surveys provide insight on a level of detail which pure trade data cannot, surveys suffer from several shortcomings. 38 Firstly, respondents might wrongly state that their company is “not utilizing” an FTA when it actually does66, or “utilizing” an FTA when it actually does not67. While both cases may distort the survey results, the latter case is less severe as the researcher will most likely realize that the answer is wrong when looking at the replies given to the subsequent questions. However, the first case will most likely not be identified as a mistake. Consequently, there will be a bias towards a lower utilization rate. Secondly, surveys with voluntary participation may suffer from a sample selection bias towards a higher utilization rate. Surveys are more likely to be filled in if respondents are knowledgeable about the topic or if it is of concern to them. Therefore, respondents which are familiar with FTAs, for example because FTAs are already utilized by their respective companies, are assumed to be more likely to reply to a survey than respondents which are not familiar with FTAs. Thirdly, surveys themselves may influence the response of a respondent. This can happen by asking suggestive questions or by providing a choice of pre-determined reply options. A concern of the present study was related to the very central question of whether or not a company utilizes the JSFTEPA. A respondent’s answer to this question could have been “not yet utilizing but planning to do so”. It could well be that the respective company indeed had plans to utilize FTAs. However, it is also conceivable that the respective respondent was unaware of FTAs prior to the survey, and only learned about FTAs through the survey. From this point of view, a survey is not adequate when trying to establish how a company will be acting in the future68. Finally, this specific survey may suffer from an additional bias since responses for trade flows from Japan to Switzerland were provided exclusively from importers and distributors located in Switzerland, while 23 out of 33 trade flows from Switzerland to Japan were collected from manufacturers located in Switzerland. While importers/ distributors are likely to indicate correctly whether or not they utilize the JSFTEPA, manufacturers are not able to know with absolute certainty whether or not the importer/ distributor or the manufacturer’s own importing entity would show the certificate of origin to customs and claim the duty back. As a result, the utilization rate of the JSFTEPA for trade flows from Switzerland to Japan may have been overestimated. However, no impact is expected on the empirical results with regard to the characteristics of companies utilizing or not utilizing the JSFTEPA. Future research This study has not dealt with possible correlations between the independent variables. As an example, a prerequisite for companies which are utilizing many other FTAs in addition to the JSFTEPA is that they export to all of these markets and are thus also comparatively large. Similarly, companies in the chemical and transportation industry are also rather 66 Respondents who do not know whether or not their company is utilizing an FTA may tick “no” instead of “I do not know”. 67 Respondents may have other preferential schemes in mind, such as free trade zones or export processing zones. 68 Therefore, this survey merged the two categories of “not utilizing FTAs currently but plans to do so in future” with “not utilizing FTAs currently and no plans to do so in the future” into “not utilizing”. 39 large compared with companies in the machinery and electrical industries. Therefore, future research might have a closer look into the correlations of the independent variables. 40 4 Management of Free Trade Agreements: How do Companies Utilize Them? 4.1 Introduction The theory of comparative advantages suggests that companies base their decisions of location choice on factor endowments and factor prices. Likewise, the fragmentation theory explains the occurrence of cross-border production and distribution networks by the fact that companies distribute their production across different territories to save costs. A buyer driven approach to explain international production and distribution networks is the Global Commodity Chain approach which suggests that buyers may require their suppliers to have production facilities in different host countries (Yeung, 2001). Once a company maintains an international production and distribution network, it will try to minimize related transaction costs and may therefore consider the utilization of FTAs. However, the utilization of FTAs does not only lead to lower costs in the form of reduced or eliminated import tariffs, but also to new costs in various forms. Whether or not companies are utilizing FTAs is therefore largely determined by the relation of benefits and costs of utilizing FTAs. In a first step, this study tries to categorize costs and obstacles which companies face when utilizing FTAs, or which make them not utilizing FTAs at all. The respective categories of costs and obstacles are drawn from existing literature as well as from a pilot study conducted by the author. In a second step, the study focuses on companies surveyed for the JSFTEPA and examines how companies which have utilized the JSFTEPA manage these costs and obstacles. Thus, the focus of this paper is how, rather than if, companies are utilizing FTAs. The study attempts to draw general conclusions on the management of FTAs by understanding their mechanisms. The following section presents an overview of the existing literature with regard to obstacles companies face when utilizing FTAs. Section three presents the research design and the profile of companies which responded to the JSFTEPA survey. Section four discusses the costs and benefits of utilizing FTAs, while sections five and six look into factors which influence the management of FTAs, or create challenges to managing them, respectively. Finally, section seven provides some concluding remarks. 4.2 Literature Review Existing studies which examine the costs of utilizing FTAs usually focus on the compliance costs related to the ROO. Often, such studies find it to be quite expensive to satisfy and to document the ROO69 and point to the fact that ROO can reduce the overall benefit of trade agreements70. One of the earliest studies to estimate the costs of ROO is Herin (1986) 69 See for example Breton and Manchin (2002) who examine the Generalized System of Preferences of the EU. 70 See for example Mattoo et al. (2002) who argue that the medium term benefits of the Africa Growth and Opportunity Act enacted by the U.S. would have been almost five times greater without restrictions on market access. 41 who suggests that the documentation and administration costs of ROO amount to about 3 percent of the value of the goods traded. In addition, costs of around 3 to 5 percent of the value of the goods incur due to the fact that companies are not able to use a costminimizing input or to benefit from economies of scale when trying to satisfy the ROO. Anson et al. (2005) examine the utilization rate of NAFTA and find that average compliance costs of FTAs amount to approximately 6 percent of the value of goods traded, while the average tariff preference is only 4 percent. Carrère and de Melo (2004) find that preference margins of about 10 percent are needed to compensate for a regional value content rule, while the change in tariff classification rule is less restrictive. Studying the Asean FTA, Kohpaiboon (2010) finds costs of utilizing FTAs in the range of 10 percent for exporters of the Thai manufacturing sector to Indonesia. Manchin and Pelkmans-Balaoing (2008) find that compliance costs of the Asean FTA can reach up to 10 to 25 percent. A relatively new method to estimate the costs of the utilization of FTAs is to survey companies directly. In its 2008 company survey, JETRO asked companies about the margin of preference which is decisive for them to utilize FTAs (JETRO, 2009). Table 4-1 reports the margins of preference and the respective percentage of companies as reported in the JETRO survey. Table 4-1: Margin of preference decisive in utilizing preferential tariff rates Margin of preference <1% 1% to 5% to 9% and No <5% <9% above answer Percentage of respondents 10.6% Note: N = 208. Source: Adapted from JETRO (2009). 36.6% 20.6% 13.5% 18.8% The survey shows that more than 10 percent of companies are willing to utilize FTAs even if the margin of preference is less than 1 percent. 37 and 21 percent of respondents would utilize FTAs if the margin is between 1 and 5, or 5 and 9 percent, respectively. 13.5 percent of respondents would utilize FTAs only if the margin of preference is 9 percent or above. These percentages can be interpreted as tariff savings needed to compensate a company for all costs incurred by utilizing FTAs. As a conclusion, existing studies suggest that companies face costs of utilizing FTAs in the range of around 1 to 10 percent of the value of the goods traded. However, studies examining concrete threshold margins are usually based on either indirect measures or on surveys with a potential sample selection bias (Pomfret et al., 2010). An additional problem when studying individual companies’ utilization of FTAs is the fact that the utilization of FTAs varies greatly depending on firm characteristics such as size or export volume. Therefore, general information on costs of utilizing FTAs is of limited value for this study. A method which would allow for a very detailed insight into a company’s costs and benefits is the case study method. However, the insight offered by a case study is very much limited to the company examined. Therefore, the present study does not attempt to estimate the concrete costs and benefits of utilizing FTAs. Rather, an attempt is made to understand the mechanisms of FTAs from 42 a company perspective by studying how companies are utilizing or managing FTAs. Two factors are assumed to influence the management of FTAs by companies. Firstly, the size or trade volume of a company seems decisive against the background of the different structures of costs and benefits of utilizing FTAs, and secondly, the decision-making process which led to the decision to utilize FTAs in the first place. The specific challenges with regard to the management of FTAs are developed during the course of the chapter. 4.3 Research Design and Profile of Respondents Units of analysis: Depending on the respective question examined, the units of analysis of this study are either companies or unidirectional trade flows, henceforth referred to as trade flow based responses (TFBRs). Data collection: Data was collected by way of an online survey. Companies surveyed consisted of 300 members of the Swiss Japanese Chamber of Commerce in Switzerland and 90 members of the Swiss Chamber of Commerce and Industry in Japan. An email containing an internet link to an online questionnaire form was sent to all companies. A follow-up by phone was made if a company did not reply or if a respondent indicated to be open for more in-depth questions. Online questionnaire: The online questionnaire contained a total of 92 questions (compare appendix A-2). The questionnaire contained both open-ended questions and questions with pre-determined answer choices. Due to the use of a conditional tree structure, however, only a fraction of these questions had to be answered by individual survey participants, with the exact number depending on the area of business and whether or not a company was utilizing FTAs. The structure of the survey is shown in appendix A-3. The questions related to the management of FTAs were referring either to the JSFTEPA itself or to FTAs in general71. Apart from questions related to the management of FTAs and the JSFTEPA, the survey also contained questions on the firm characteristics (compare chapter 3), and such which are relevant for policy makers. The questions which are relevant for policy makers will not be further dealt with here; however, the respective responses of companies are listed in appendix A-4. The survey could be completed anonymously. Answers were collected from October 3, 2010 until February 21, 2011. Respondents were only required to answer questions which used skip logic. The survey questions for this chapter were designed based on both existing literature and a pilot study conducted by the author in the form of a survey. The findings of the existing literature and the pilot study led to the identification of reasons for which companies did not utilize FTAs in the past. Companies which utilized the JSFTEPA were then asked how they overcame and managed these challenges. In total 79 companies replied to the survey, of which three replied anonymously. Table 4-2 provides an overview on the sectoral distribution of the companies. 71 Questions on the assignment of FTA responsibilities or the FTA compliance process were general in nature, while questions on the production and distribution network were JSFTEPA-specific. 43 Table 4-2: Number of replies by sectoral distribution of companies Sectors Number of Replies Logistics provider Service provider 5 15 Other company without trading activities Importer, distributor or manufacturer with trading activities 3 56 Total Source: Survey Data. 79 Appendix A-5 contains a list of the companies, the respondents, and the respondents’ positions and functions. This study only examines companies and TFBRs in the area of trade in goods which utilized the JSFTEPA. Therefore, 26 companies with 32 TFBRs are relevant for this study (compare table 3-5 in chapter 3). 4.4 Costs and Benefits of Utilizing Free Trade Agreements In order to decide whether or not to utilize FTAs, a company will have to evaluate the costs and benefits of utilizing FTAs. If the net benefit is negative, a company will keep on paying the MFN tariff rate. If the net benefit is positive, a company may consider utilizing an FTA and complying with the respective requirements. The following two sections will identify and categorize some costs and benefits of utilizing FTAs. 4.4.1 Costs Several existing studies72 report reasons as to why companies did not utilize FTAs at all, or at least not to the full extent possible. This section combines these reasons with findings of a pilot study conducted by the author, and divides them into (i) challenges which make it impossible or unnecessary for a company to utilize FTAs, (ii) challenges which are not directly cost-related, and (iii) challenges which are either cost- or timerelated. Subsequently, only the challenges under (iii) will be further analyzed. (i) Challenges which make it impossible or unnecessary for a company to utilize FTAs Companies are not utilizing FTAs if it is impossible or unnecessary. This is the case if FTAs do not cover the products a company is trading with, or if the tariffs of the respective tariff lines have already been eliminated unilaterally, for example due to a sectoral agreement such as the Pharmaceutical Tariff Elimination Agreement or the ITA. Further reasons in this category include cases where companies already make use of other preferential schemes, such as free trade zones or export processing zones. (ii) Challenges which are not directly cost-related Challenges which do not make the utilization of FTAs impossible or unnecessary and which are not directly cost-related are mainly related to authorities and suppliers. 72 See for example Takahashi and Urata (2010), Wignaraja et al. (2010) or Kawai and Wignaraja (2009). 44 With regard to authorities, companies may not utilize FTAs due to fear of government exposure. Specifically, the fear of a lack of confidentiality of customs when sensitive data are concerned on costing, procurement sources or production processes may prevent a company from utilizing an FTA. Further challenges include differing interpretations of HS Codes by the authorities of the exporting and importing territory, respectively. Finally, authorities of the importing territory may show a lack of tolerance accepting COO with discrepancies, for example due to spelling errors. Supplier-related problems include suppliers which do not want to or do not know how to confirm preferential origin of their parts. Companies may also face difficulties validating a supplier’s confirmation of preferential origin. (iii) Challenges which are either cost- or time-related The present study found challenges which are either cost- or time-related to be quite diverse in nature. Therefore, these challenges are further categorized into costs related to (a) the production and distribution network of a company, (b) the FTA compliance process, and (c) the allocation of responsibilities. (a) Challenges related to the production and distribution network refer to goods which do not satisfy the ROO of a specific FTA, unless the production and distribution network is adapted. Such adaptation may relate to the procurement of parts or raw materials, the export destinations of final products, and the direct transportation rule 73. If the production and distribution network has to be changed in order to utilize an FTA, additional constraints have to be dealt with which may increase the unit costs of goods. (b) In most studies, the majority of reasons for which companies do not utilize FTAs are related to the process of FTA compliance. This process starts with the costs of information, which accrue whenever a new FTA enters into force or an existing one is reviewed. Thereafter, the MFN and FTA tariff rates have to be compared for every product concerned, including possible staging processes. A company also has to check if its products satisfy the ROO of the respective FTAs. Depending on the ROO, companies may have to check the preferential origin of the parts with their suppliers as well as the respective values and HS Codes. This is especially cumbersome and time-consuming when the bills of material are long, the prices and origin of the parts are subject to frequent changes, and when many different products have to be checked as ROO are often product specific (HS Code 6-digit level). Depending on the provisions in the respective FTA, a company may have to apply for an authorized COO with customs prior to the exportation of a specific good. Such a COO needs to be issued for each type of good on HS Code 6-digit level 74 and each shipment. An authorized COO has to be signed or 73 The direct transportation rule in FTAs stipulates that goods have to be transported directly from the territory of export to the territory of destination. If goods are transported via a third territory, for example a distribution hub, they might not receive preferential treatment upon importation into the FTA partner territory, unless it is stored under (costly) customs supervision and accompanied by a non-manipulation certificate from the customs of the third territory. 74 If goods are different on HS Code 6-digit level (e.g. with regard to color or flavor), companies may be required to apply for a separate COO for each type. 45 stamped by both a company representative and a customs official 75 . In addition, a company may be required to hand in a cost statement for each type of good on HS Code 6-digit level on a yearly basis. FTAs which allow for self-certification by the exporter, by contrast, do not require an authorized COO, and thus make the utilization of FTAs considerably more straightforward. Both procedures, however, require companies to keep all records and documents related to the proof of origin and utilization of an FTA for a specified number of years in view of a possible customs inspection. Finally, a change of the parts’ origin or a change of the production process may lead to the final good no longer satisfying the ROO. Therefore, a company needs to make sure that goods which are found to satisfy the ROO are doing so consistently. (c) The allocation of responsibilities seems to have an impact on the utilization of FTAs on two levels: On the geographical level, companies mention management-related issues as reasons for not utilizing FTAs, for example a lack of implementation by local subsidiaries, or a lack of management support. The functional responsibility is closely linked to the FTA compliance process. Staff has to be educated and trained in order to understand and comply with the regulatory requirements. While education and training of staff is costly, it will prevent cases where preferential treatment is claimed although it does not apply – which may incur severe penalties. Not claiming preferences where it would be possible out of ignorance or fear of doing something wrong, by contrast, would incur unnecessary costs in form of tariffs. 4.4.2 Benefits This study only considers benefits from trading in goods which do not accrue automatically to all companies when an FTA enters into force. Benefits such as a simplified customs procedures or elimination of duplicative testing are thus not examined here as a company does not face any of above-mentioned costs and does not even have to be aware of the existence of an FTA to reap such benefits. The benefit of utilizing an FTA is therefore the tariff difference between the applied MFN and FTA tariff rate, or, where there is no difference between the applied MFN and FTA tariff rate, the assertion that the applied MFN tariff rate would not be increased to the level of the bound rate. Both importers and exporters benefit from FTAs in form of lower transaction costs. Specifically, an importer benefits from FTAs by enjoying lower landed costs of the imports. Whether the duties saved are being passed on to customers or used to increase the profit margin depends on the competitive environment. An exporter who utilizes FTAs is more export competitive. In the case of intra company trade, the utilization of an FTA can result in either a higher profit margin or an increase in competitiveness. With regard to the development of the business performance among the respondents to the JSFTEPA survey, five companies found an increase in sales, while another five an increase in profits but not in sales. An increase in profits but not in sales could point to a 75 Respondents to the survey indicated that the costs of the certificates of origin as such were negligible compared with the time used to administer them. 46 diversion of financial transfers from the government (tariffs) to the importers (profit margin). Consequently, in an environment which is not very competitive, FTAs may not create what Meade (1955) called a consumption effect. 4.5 Factors Influencing the Management of Free Trade Agreements 4.5.1 Trade Volume While the benefit of utilizing FTAs in the form of tariff savings is proportional to the value of goods traded, the costs of utilizing FTAs are often independent of the value of the goods traded. Costs which are independent of the number of FTAs used, and the value and frequency of the goods traded include basic education and training of staff with regard to FTA compliance. Costs which are independent of the value and frequency of shipments, but vary with the number of different FTAs used include information costs, the time spent to compare MFN and FTA tariff rates, the examination of the ROO and the management of the preferential status in general. Costs which are independent of the value of the goods traded, but vary with the frequency of the shipments include costs and time related to the application for an authorized COO as well as the maintenance of records and documents for customs inspection. All of above-mentioned costs are independent of the value of the goods traded, and only relatively few are dependent on the frequency of shipments. By contrast, costs seem to vary with the number of FTAs a company utilizes 76, although a learning effect can certainly be expected. Costs of utilizing FTAs therefore seem to be characterized by economies of scale. Provided companies trade the same goods, those with comparatively large and frequent shipments will have the costs of utilizing FTAs compensated much sooner than companies with relatively small and infrequent shipments. With regard to the terminology, the subsequent analysis assumes that a “large company” has on average a higher export volume than a “small company”. 4.5.2 Decision-Making Process The first models to explain decision-making processes were based on a rational choice perspective. The theory of expected utility (Savage, 1954) assumes that individuals maximize a target function and organizations perform comprehensive analyses of the internal resources, the environment and alternatives before taking a decision. These assumptions are questions by behavioral researchers who argue that it is very unlikely for an organism to be aware of all alternatives and consequences and thus to have perfect and complete information. In order to account for cognitive limitations, theories of bounded rationality therefore relaxed assumptions of the expected utility theory and suggested that decisions were made by heuristics and satisficing. Simon describes the search for a 76 Kawai and Wignaraja (2009) find that large companies which export under many FTAs with different ROO are more likely to complain about multiple ROO than smaller companies. 47 satisfactory rather than an optimal solution in that organisms usually adapt well enough to “satisfice”, not to “optimize” (Simon, 1956: 129). Similarly, business decisions are based on satisficing behavior by an organism of limited knowledge and ability (Simon, 1955, and Simon, 1979). From a behavioral perspective, a decision-making process thus comes to an end as soon as a satisfactory solution is found. This approach has been criticized by Boer et al. (2006) as being too re-active. In order to tackle the “satisficing”, they suggest a model according to which solutions would be taken in a more pro-active way by suggesting several alternatives of which the optimal solution is chosen. Their suggestion is therefore not as radical as the rational choice perspective, but allows for a more comprehensive evaluation of alternatives than pure “satisficing”. In the following, the pro-active model by Boer et al. (2006) is contrasted with a “satisficing” model used by Mintzberg et al. (1976) which fits the situation of companies deciding on whether or not and how to utilize FTAs. Mintzberg et al. (1976) use empirical research to suggest a general model which describes strategic, unstructured decision-making processes. “Unstructured” is understood as a contrast to a routine operation decision which “has not been encountered in quite the same form and for which no predetermined and explicit set of ordered responses exists in the organization” (Mintzberg et al., 1976: 246). “Strategic” means important, in terms of the actions taken and the resources committed (Mintzberg et al., 1976: 246). According to this model, the process of decision-making is evoked by stimuli, followed by solutions and process. In contrast to many behavioral researchers which use processes with feedback loops or even chaotic processes77, Mintzberg et al. (1976) suggest a process based on sequential phases. The individual phases are “identification” of an opportunity, problem or crisis, “development” of one or more solutions, and “selection” (Mintzberg et al., 1976: 252). The “decision process” is defined as a “set of actions and dynamic factors that begins with the identification of a stimulus for action and ends with the specific commitment to action” (Mintzberg et al., 1976: 246). The combination of the models by Mintzberg et al. (1976) and Boer et al. (2006) is presented in figure 4-1. Figure 4-1: Comparison of a “satisficing” and a pro-active decision-making process Decision-Making Process Identification of opportunity, problem or crisis Stimulus: Proliferation of FTAs perceived as opportunity or threat to a company Development of Selection one or more solutions Satisficing: The first solution is the final selection Pro-Active Evaluation of Approach: alternatives and Creation of choice of optimal alternatives solution Source: Own illustration, following Mintzberg et al. (1976) and Boer et al. (2006). 77 See for example the garbage can model of Cohen et al. (1972). 48 The decision of whether or not and how to utilize FTAs can be called “unstructured” as it is not a routine operation and in addition characterized by a certain level of uncertainty as the costs are relatively difficult to estimate and may sometimes even appear as intangibles. The decision is certainly also “strategic” as a tariff reduction can lead to a potentially decisive competitive advantage, especially for companies which are facing low profit margins. In addition, the stimulus of the decision-making process – the proliferation of FTAs – is perceived by companies as either an opportunity or a threat to business. Whether or not a company perceives FTAs as opportunities or as threats depends largely on whether or not its competitors utilize the respective FTA(s). Since the two approaches towards decision-making – “satisficing” (Mintzberg et al., 1976) and pro-active (Boer et al., 2006) – reflect the behavior of the companies surveyed well, they are used in this study to guide the research. The following example serves as an illustration to contrast a “satisficing” with a pro-active decision-making process with regard to whether or not to adapt the production and distribution network in order to utilize an FTA (table 4-3). Table 4-3: Illustration of a “satisficing” and a pro-active decision-making process Export of beta hydroxy napthoic acid (HS Code 29182920) from Singapore to India Trade Regime Rules of Origin Import Tariff MFN No ROO India-Asean FTA India-Singapore FTA 35% regional value added and change in tariff classification on HS Code 6-digits 40% bilateral value added and change in tariff classification on HS Code 4-digits 10% 6% 0% A company which is exporting beta hydroxy napthoic acid from Singapore to India can do so under three different trade regimes. Under MFN, the company pays 10 percent import tariffs in India. Under the India-Asean FTA the company pays only 6 percent import tariffs, however, it has to comply with a 35 percent regional value added and a change in tariff classification (CTC) on the HS Code 6-digit level. Under the India-Singapore FTA, the company does not need to pay any import duty upon importation into India, but has to satisfy the ROO which stipulate a 40 percent bilateral value added and a CTC on the HS Code 4-digit level. The company would save most import tariffs by utilizing the IndiaSingapore FTA. The ROO under this FTA, however, are also the most restrictive ones. Assuming the current production and distribution network of the company allows it to satisfy only the ROO under the India-Asean FTA (for example because it only reaches a value added of 40 percent if inputs sourced from Malaysia are counted as originating), a “satisficing” decision-making process would stop as soon as the company realizes that a net-benefit results by utilizing the India-Asean FTA. A pro-active approach, by contrast, would evaluate other alternatives in addition. To illustrate a pro-active decision-making process, the company could consider a change of the production and distribution network 49 and compare the costs incurred by the change with the additional tariff savings. Instead of sourcing inputs from Malaysia, the company could source them from Singapore or India (which are both part of the bilateral cumulation area under the India-Singapore FTA) to reach the 40 percent bilateral value added. A pro-active decision-making process would evaluate such alternatives and compare the costs of changing the production and distribution network (most likely higher input costs when sourcing from Singapore) with the additional benefit (4 percent tariff savings). 4.6 Challenges to the Management of Free Trade Agreements The question of how FTAs are utilized or managed is well suited to be analyzed by the decision-making approach which was used to decide if FTAs should be used at all, and a company’s trade volume. The following sections examine the three categories of challenges which were identified in section 4.4.1 to be either cost- or time-related. These are (a) the production and distribution network, (b) the FTA compliance process, and (c) the allocation of functional and geographical responsibilities. 4.6.1 Production and Distribution Networks The design of the production and distribution network can be decisive when it comes to the utilization of FTAs. ROO may require a company to change the sourcing pattern of parts or raw materials in order to allow the finished products to receive preferential treatment in FTA markets. In addition, the direct transportation rule may require a company to transport goods directly or to pay higher fees for storage under customs supervision in the third territory. Dense international production and distribution networks are quite prevalent in Asia – described by Baldwin (2008: 449) as the “Factory Asia”. With regard to Japanese companies, a survey by JBIC (2009) found that Japanese companies were much more likely to strengthen their overseas operation than their operations in Japan itself 78. This situation was reflected in the replies to the JSFTEPA survey. Quite some companies mentioned that they were not able to utilize the JSFTEPA due to the fact that they had outsourced their complete production to other Asian territories or Eastern Europe. Against this background, the JSFTEPA survey asked companies whether or not they did or would consider changing and optimizing their production network or their manufacturing strategy as a response to FTAs in general (table 4-4). Half of the companies which replied to this question did or would consider such changes. 78 Compare footnote 15. 50 Table 4-4: Companies’ opinion on a change of the production network, by companies Question: Did or would your company consider changing Number of Companies and optimizing the production network/ manufacturing which Utilized the strategy as a response to FTAs? JSFTEPA Yes No 4 4 No answer Total 18 26 Source: Survey data. In-depth interviews revealed, however, that an evaluation of the production and distribution network would not be based solely on FTA considerations. Rather, such an evaluation would include other aspects of a tax efficient supply chain management, too. In addition, transportation and storage costs would also be taken into consideration when calculating the net benefit of an adaptation of the network. With regard to the production as such, tax advantages are generally not seen as a reason to relocate production sites. Rather, FTAs aim at optimizing existing structures. Apart from changing the sourcing of parts to reach a certain local value added, companies may also need to review the production and distribution network with regard to the direct transportation rule. A company may need to compare the costs and benefits of transporting goods directly versus transporting them via a distribution center or a hub in a third territory. A cost-benefit analysis would compare benefits from utilizing an FTA with either the costs of storing the goods under customs supervision in the third territory79 or the efficiency loss resulting from abandoning a hub strategy. Table 4-5 shows that 18 out of 32 TFBR indicated that goods were transported directly between Japan and Switzerland, while ten replied that they passed through a third territory. Table 4-5: (In)Direct transportation of goods under the JSFTEPA, by TFBRs Question: When exporting goods from Switzerland/ Japan to Japan/ Switzerland, do you transport the goods directly or via third countries? Number of TFBRs which Utilized the JSFTEPA All our goods are being transported directly Some or all of our goods are being transshipped via one or several third countries 18 No answer Total 4 32 10 Source: Survey Data. 79 Some companies replied that they rather pay the MFN tariff than to store the goods in the customs transit zone as it is too costly. 51 Since Switzerland does not have sea access, the survey respondents’ goods which were not flown by air were transported via third territories such as Belgium, France, Germany or the Netherlands80. In addition, two companies replied that they were operating hubs in Malaysia and Singapore. Respondents of the survey mentioned that the direct transportation rules in earlier FTAs were much more restrictive than in recent FTAs. Recent FTAs reflect the architecture of production and distribution networks in a much better way – partially due to the feedback provided by companies to customs officials. The JSFTEPA, for example, allows for a split-up of consignments in bonded warehouses of third territories. If such goods are accompanied by a certificate of non-manipulation upon importation into the FTA partner territory, they do not lose preference. Another aspect of the production and distribution network with regard to the utilization of the JSFTEPA is the subsequent re-export of products imported from either Switzerland into Japan or Japan into Switzerland. Products which are imported into Japan or Switzerland under the JSFTEPA can generally not utilize other FTAs when being reexported81. Two examples illustrate how Japanese re-exports from Switzerland can still benefit from the JSFTEPA. Firstly, the production of goods which face high tariffs when imported from Japan into the EU may be (partially) shifted to Switzerland. After a substantial transformation has taken place, the final products may benefit from the preferential treatment granted by the EU. Secondly, Japanese companies may ease their cash flow situation by utilizing the JSFTEPA for goods bound to the EU. Upon importation into Switzerland, the goods are stored there and only re-exported to the EU when required by the buyer. Using this approach, Japanese companies may defer payment of EU import tariffs until the goods are actually sold, while at the same time still having a short lead time to supply their customers. Table 4-6 reports the TFBRs with regard to the final destination of products traded between Japan and Switzerland. Goods exported from Switzerland to Japan seem to be bound predominantly for the Japanese domestic market. Goods which are traded from Japan to Switzerland, by contrast, are more likely to be re-exported to the EU later, partially by utilizing the EU-Switzerland FTA after substantial transformation has taken place82. 80 Switzerland is Japan’s only FTA partner territory so far which does not have sea access. The fact that most products are therefore transported via third territories seemed to have created some confusion at the Japanese customs. At the time the survey took place, however, most of the problems in this regard were solved. 81 Some of Switzerland’s FTAs are part of the Pan-Euro-Med cumulation of origin system which allows for diagonal cumulation. The JSFTEPA, however, does not belong to this system and therefore only allows for bilateral cumulation between Japan and Switzerland. 82 The companies which re-export to the EU utilizing the EU-Switzerland FTA belong to the chemical, the dental and the precision industries. Rather than combining the JSFTEPA and the EU-Switzerland FTA strategically, however, these companies seem to import raw materials from all over the world (including Japan) for further manufacture in Switzerland and subsequent exportation of the final products globally (including the EU). 52 Table 4-6: Destination of products traded between Japan/ Switzerland, by TFBRs Question: What happens to the goods you import from Japan/ Switzerland into Switzerland/ Japan? All the goods we export to/ import into Japan/ Switzerland are sold in the domestic market All or some of the goods we export to Japan/ Switzerland are later re-exported to other countries in Asia/ the European Union All or some of the goods we import into/ export to Switzerland/ Japan are further processed in Switzerland/ Japan and then exported to the European Union/ to other countries in Asia Number of TFBRs which Utilized the JSFTEPA Trade flows from Switzerland to Japan 13 1 … by utilizing the EU-Switzerland free trade agreement (i.e. claiming Swiss preferential origin)/ by using the respective FTAs (i.e. claiming Japanese preferential origin) No answer Trade flows from Japan to Switzerland Total Number of TFBRs 4 17 5 6 2 2 3 3 4 Total Source: Survey Data. 18 4 14 32 Conclusion: How a company manages the production and distribution network seems to be primarily a question of the decision-making process. A satisficing approach to decisionmaking may simply look at benefits which can be extracted from utilizing FTAs for existing trade flows. With regard to the direct transportation rule, a satisficing decision-making process may find that there is a net benefit utilizing an FTA and storing the goods in a bonded warehouse, without even looking into the possibility of transporting the goods directly. A pro-active approach, by contrast, may look into the costs and benefits of redesigning and optimizing the production network in order to maximize the benefits which FTAs can provide. With regard to re-exports, a pro-active approach may come up with creative ideas on how to combine several FTAs. 4.6.2 Compliance Process The majority of reasons for which companies do not utilize FTAs are related to the FTA compliance process – from collecting information on FTAs to ensuring that goods which are found to satisfy the ROO are doing so on a consistent basis (compare section 4.4.1). Such a process needs to satisfy two requirements. Firstly, the process should ensure that a company complies with the rules and regulations governing the respective FTAs, and secondly, it should be as cost-efficient as possible. 53 Table 4-7 shows how the companies surveyed manage FTAs from a process point of view. Of the nine companies which replied to this question, seven replied to have automated the FTA process with either an internally developed or commercially available software. Two companies replied to employ a manual process. Table 4-7: Type of process to manage FTAs, by companies Question: How does your company manage FTAs? Number of Companies which Utilized the JSFTEPA Manually With an internally developed software 2 1 With a commercial software 6 No answer 17 Total Source: Survey Data. 26 Companies which reported utilizing a manual FTA process utilized the FTAs only for a few different products and exported these products to relatively few FTA partner territories. Disadvantages of this method include the possibility of (human) errors and inconsistencies, the time-consuming administration (including examination of the ROO) and documentation, and risks with regard to compliance. Companies which exported a substantial number of products to several FTA partner territories often used an automated system. The advantages of automated systems include the reliability regarding a consistent utilization of FTAs, the fact that automated systems are less error-prone, and the time saving, especially when many different products have to be administered. Disadvantages include challenges regarding the interfaces with the ERP and the complex programming of ROO, especially when the software is internally developed. In addition, some software does not allow for the programming of more than one ROO per product, and therefore cannot cope with multiple ROO across different FTAs. Furthermore, software is quite expensive – especially for smaller companies an obstacle to employ an automated FTA process. Whether or not automated solutions work depends on how preferential origin can be proven. When companies’ signatures on cost statements and customs’ stamps on authorized COO are required, the FTA process may not be made fully automated. A fully automated process is only possible when FTAs allow for self-declaration, for example by providing for an “authorized exporter” status as in the JSFTEPA. Companies which are registered as “approved exporters” may print a declaration as to the preferential origin of the goods on the invoice instead of applying for a COO with customs. While Switzerland’s FTAs usually allow for self-declaration in the form of the “approved exporter”, the JSFTEPA is Japan’s first FTA which contains this provision 83 . In the survey this is reflected by the fact that only companies located in Switzerland indicated that they were 83 Self-declaration of origin is very common in Europe (“approved exporter”) and North America. Crossregional FTAs such as the U.S.-Singapore FTA or the EFTA-Korea FTA provide for self-declaration of origin, too. Intra-Asian FTAs, however, usually require an authorized COO, signed or stamped by customs officials and a company representative. 54 approved exporters84. Table 4-8 shows that five out of eight companies which replied to this question are “approved exporters”. Table 4-8: Approved exporter status, by companies Question: Does your company export goods to Japan/ Switzerland under the "approved exporter" status? Yes, we export under the "approved exporter" status No, but we plan to apply for the "approved exporter" status No, and we do not plan to apply for the "approved exporter" status as we are fine with applying for preferential certificates of origin No, our company was not able to get the "approved exporter" status No answer Total Companies which Utilized the JSFTEPA 5 1 1 1 18 26 Source: Survey data. The advantage of a company being an approved exporter and thus able to automate the FTA compliance process becomes clear when looking at the time needed to comply with the rules and requirements. Companies were asked to indicate the time they needed to (a) check if the ROO are satisfied, (b) prepare the cost statement, and (c) demonstrate the proof of origin per product on HS Code 6-digit level. Companies which exported under the “approved exporter” status required on average less than 5 minutes for each (a), (b) and (c). By contrast, an exporter which was not able to get the “approved exporter” status required between one to three hours to check if the ROO were satisfied, and 31 to 59 minutes to prepare the cost statement. It seems that utilizing FTAs can be very timeintensive. Companies which are “approved exporters” and therefore able to automate the FTA process save a significant amount of time and thus costs when utilizing FTAs. Conclusion: Whether or not a company employs an automated FTA process is primarily a question of the trade volume of a company. Firstly, the fix costs of software which allows for an automated process are reported to be quite substantial, which is why predominantly companies with a high export volume will be able to justify these expenditures. Secondly, a fully automated FTA process is only possible when self-certification is possible. In the case of the JSFTEPA, however, only companies which make frequent shipments will be able to get the “approved exporter” status. Small companies with a comparatively low export volume and infrequent shipments will therefore have to employ a manual process with all the disadvantages reported above. 84 Some companies in Japan mentioned the cumbersome process of applying for an authorized COO as an obstacle. This may be an indication that the status of the “approved exporter” is not yet well known and established in Japan. 55 4.6.3 Responsibilities 4.6.3.1 Functional Responsibility Whether or not an FTA can be utilized depends on where the raw materials are procured from, how the manufacturing process looks like, and where the final products are sold to. Therefore, from a functional perspective, the whole supply chain is involved. This section examines the companies surveyed with regard to the functions they assign the primary FTA responsibility to. The primary FTA responsibility refers to the general overview of the FTA process, the responsibility for compliance, and/ or the signing of the COO (if applicable). When examining the supply chain of a company it is important to define where the supply chain begins and where it ends. According to Hesse and Rodrigue (2004) two components are of utmost importance: Firstly, the physical distribution which includes transportation, transshipment, warehousing and trade; and secondly, the management of the materials, including production, production planning and purchasing. Increasingly, parts of the supply chain are being outsourced, with purchase and order agents such as shipping companies or freight forwarders having the actual “supply chain power” (Hesse and Rodrigue, 2004: 181). The reasons for outsourcing parts of the supply chain to logistics services or third party logistics providers usually include cost savings and improved services (Bhatnagar et al., 1999). Table 4-9 shows the replies of companies surveyed with regard to the primary functional responsibility for FTAs. While there is certainly not only one approach, a majority of six out of eight companies which replied to this question assigned the primary functional FTA responsibility to some part of the supply chain. The remainder assigned the responsibility to staff dealing with foreign trade and customs relations or finance, respectively. Table 4-9: Functional FTA responsibility, by companies Question: Who is primarily responsible for certifying Number of Respondents which origin and FTA-compliance in your company? Utilized the JSFTEPA Supply Chain (excluding sales) Sales 4 2 Foreign Trade/ Customs Relation Finance 1 1 No answer Total 18 26 Source: Survey data. Some companies which were utilizing FTAs on a consistent basis mentioned that they have assigned FTA responsibility to a staff which is employed specifically to deal with compliance issues such as the FTA process or export control. The advantage of having such FTA experts or FTA coordinators is that they oversee the whole FTA process along the supply chain and can thus easily identify further opportunities and improvements with regard to the FTA process or the utilization of FTAs. 56 Other companies added the FTA responsibility to an existing job profile. In such cases, the respective staff could only dedicate 5 to 10 percent of time to FTAs. During periods of heavy workload, such companies were facing problems when the respective staff could not perform FTA-related duties. Of the companies surveyed which did not know whether or not they were utilizing the JSFTEPA, a third indicated that external resources such as logistics providers or freight forwarders take care of international trade, including FTAs. Since the FTA responsibility is always with the company, an outsourcing of such services may create compliance-related problems. Conclusion: How a company manages functional FTA responsibility seems to be a question of both the decision-making process and the trade volume of a company. Firstly, a satisficing approach to decision-making may assign the functional FTA responsibility to staff that already has a full-time job. Such staff may perceive their FTA-related duties as a side job which does not need particular attention. Apart from potentially not utilizing FTAs to the full extent possible, such an approach may result in considerable compliancerelated risks. Similarly, assigning FTA responsibility to external resources dealing with international trade may incur compliance-related problems. A pro-active approach, by contrast, may result in a specific FTA or compliance position, thus reducing the compliance related risks and ensuring that FTAs are utilized to their full potential. Secondly, the assignment of functional responsibility also depends on the size of a firm. A company with only few products and few exports may find that the expenditures of having staff specifically responsible for FTAs may not be justified by the expected additional tariff savings or the increased level of compliance. Such companies may opt to add FTA responsibility to an existing job profile. 4.6.3.2 Geographical Responsibility Apart from the functional FTA responsibility, geographical FTA responsibility is of crucial importance when examining the management of FTAs. From a geographical point of view, the responsibility related to the utilization of FTAs can be assigned to either the global headquarters or the local subsidiaries solely, or shared by both the global headquarters and the local subsidiaries. To what extent a company can utilize FTAs depends, among other factors, on whether and how a company develops an FTA strategy. In order to design an FTA strategy, information on the local trading environment is required. In addition, to implement the FTA strategy, a company has to rely on local staff. Therefore, the survey asked companies how they decided on an FTA strategy. Table 4-10 shows that four out of nine companies which replied to this question involved the global headquarters and local subsidiaries in the FTA strategy making, while three and two companies left the FTA responsibility with either the global headquarters or the local subsidiaries, respectively. 57 Table 4-10: Geographical FTA responsibility, by companies Question: How is your company's strategy regarding use of FTAs decided? Number of Companies which Utilized the JSFTEPA Global headquarters and overseas subsidiaries/ affiliates Global headquarters decides alone 4 3 Overseas subsidiaries/ affiliates decide by themselves No answer 2 17 Total Source: Survey data. 26 Some companies which were utilizing FTAs on a consistent basis mentioned that the FTA responsibility was shared between the global headquarters and the local subsidiaries. The responsibility of the headquarters included the alignment of the global supply chain with the FTA strategy and the management of information technology systems, especially the interfaces, to ensure that classification codes are standardized globally and that the origin of goods is set up in the master data. The responsibility of local subsidiaries included the provision of information to headquarters regarding the development of the local trading environment, the implementation of procedures according to the situation in the respective territories, and the compliance with the local rules and regulations. Such an arrangement of responsibilities guarantees an effective utilization of FTAs globally. By contrast, companies which tried to manage FTAs out of the global headquarters or the local subsidiaries alone were less successful with regard to a consistent utilization because either the local implementation was difficult, or the global or regional perspectives were missing85. In addition, without support from headquarters, subsidiaries found it difficult to introduce an organization which could handle FTAs. Companies which were sharing the responsibility for FTAs between the global headquarters and the local subsidiaries had dedicated staff at both headquarters and the local subsidiaries to ensure global strategy making and local implementation. Nevertheless, some of these companies reported problems with regard to moral hazard as described by the agency theory. When headquarters depends on information provided by the local subsidiaries, headquarters (the principal) cannot be sure if the local subsidiaries (the agents) are acting in its interest. A study by O’Donnell (2000) found that a subsidiary of a multinational company which is located geographically far away from headquarters poses difficulties to manage, both when it comes to getting information and when supervising the subsidiary’s management. This is specifically the case if goal incongruence exists between headquarters and subsidiary. O’Donnell finds that monitoring mechanisms such as direct supervision and financial incentives do not work for subsidiaries abroad due to the absence of close proximity and difficulties with regard to 85 Since the burden of proving origin is with the exporter while the importer gets all the benefits in form of tariff savings, FTAs may not even be utilized for intra-firm trade if the local exporting subsidiaries do not see a benefit for themselves. The global headquarters, by contrast, can more easily establish the net-benefits across exporting and importing subsidiaries. In the case of third-party exports, a respondent to the survey indicated that his company applies for a COO by request of the importer – against a nominal fee to compensate for the burden of proving origin. 58 the measurement of the financial performance in an interdependent world. Rather, O’Donnell suggests approaching the agency problem with social control methods as suggested by the social identity theory. He found that cooperative behavior of the managers can be raised through increased identification with the company. Identification can be strengthened through vertical integrating mechanisms such as contacts between managers of foreign subsidiaries and headquarters, or through lateral integrating mechanisms such as personal interactions among managers of different foreign subsidiaries. Both the setting of and the action taken by the companies surveyed are comparable to the findings by O’Donnell (2000). As suggested by the agency theory, respondents’ replies indicated that goal incongruence between headquarters and subsidiaries with regard to the utilization of FTAs indeed exist. For example, although headquarters instructed a local subsidiary to utilize certain FTAs, the local subsidiary did not do so. The subsidiary argued that the utilization of FTAs would lead to an increase in the work load, while there were no benefits. The fact that lower landed costs of other subsidiaries would lead to an increase in the company’s competitiveness was of no immediate relevance to the subsidiary supposed to certify origin. To prevent such incidents from happening, the respective company’s headquarters used social control methods – both vertical and lateral. Vertical integration mechanisms included visits by staff responsible for FTAs at headquarters to local subsidiaries in order to establish and maintain personal relations with local staff. With regard to vertical integration, regional education and training seminars were organized for staff responsible for FTAs at local subsidiaries. In addition, and specifically aiming at an increased identification among members of distributed virtual FTA teams, regular phone conferences among local FTA staff in the respective countries were held. Conclusion: How a company manages the geographical FTA responsibility is a question of both the decision-making process and the trade volume of a company. Firstly, a satisficing approach to decision-making may leave the geographical responsibility to either the global headquarters or the local subsidiaries, risking that FTAs are not utilized to the full extent possible. A pro-active approach, by contrast, would consider the assignment of the geographical responsibility to both the global headquarters and the local subsidiaries. Such a solution may require considerable resources to ensure local implementation and coordination between global headquarters and local subsidiaries. Nevertheless, the increase in tariff savings may justify the additional costs. Secondly, the management of the geographical responsibility also depends on the size of a company. A firm with smaller subsidiaries abroad may find that the expenditures of having staff responsible for FTAs abroad – even if only partially dedicated to FTAs – are not justified by the expected additional tariff savings. 4.7 Conclusion Findings of the study While chapter 3 examined the firm-characteristics of companies utilizing or not utilizing the JSFTEPA, this chapter studies how companies are utilizing the JSFTEPA and draws general conclusions on the management of FTAs. 59 Drawing on previous literature and a pilot study conducted by the author, three categories of challenges with regard to the management of FTAs are identified, namely the production and distribution network, the FTA compliance process, and the allocation of responsibilities. The study finds that the management of these three categories of challenges is well suited to be analyzed with regard to the decision-making approach which was used to decide if FTAs should be used at all, and a company’s size or trade volume. Table 4-11 reports the findings by category of challenge. Table 4-11: Challenges companies face, decision-making process and trade volume Category of Decision-Making Process Trade Volume of the Company Challenge “Satisficing” Pro-active Companies with Companies with small trade volumes large trade volumes No impact Coverage of the production and distribution network Benefits from utilizing existing trade flows Assessing costs and benefits of optimizing production network No impact FTA Compliance Process No impact No impact Manual approach as -fixed costs related to automation of process comparatively high - “approved exporter” status requires frequent shipments (specific to JSFTEPA) Assigned to existing job profile due to high costs of additional staff and low benefits from low trade volumes Automated process since fix costs of software can be compensated by tariff savings created by high export volume Assigned to global headquarters or local subsidiaries as low trade volumes do not justify coordinated approach Considering to assign to both global headquarters and local subsidiaries as export volumes justify coordinated approach Assignment of Assigned to functional FTA existing responsibility internal or external job description Considering to assign to FTA coordinator Assignment of geographical FTA responsibility Considering to assign to global headquarters and local subsidiaries Assigned to global headquarters or local subsidiaries 60 Considering to assign to FTA coordinator as export volumes may justify additional costs How a company manages the production and distribution network seems to be primarily a question of the decision-making process. The FTA compliance process, by contrast, depends mostly on the trade volume of a company. Finally, the assignment of functional and geographical responsibilities depends on both the decision-making process and the trade volume. With regard to the decision-making process, a “satisficing” solution has several disadvantages across the categories of challenges. The two most important ones are compliance issues and inconsistencies when utilizing FTAs. Compliance issues can arise when the functional responsibility is assigned to an existing job profile and thus perceived as just some other task, or when there is no coordination between the global headquarters and the local subsidiary. Inconsistencies of utilizing FTAs can occur for the same reasons. A pro-active approach, by contrast, would ensure a consistent utilization of FTAs, for example by optimizing the production network, or by assigning the functional responsibility to a dedicated staff. In addition, a pro-active approach may consider sharing the geographical responsibility between the global headquarters and the local subsidiaries, thus ensuring that a strategy and systems are available for a consistent utilization of FTAs. Furthermore, a company will find compliance with FTAs easier when a dedicated staff is dealing with FTAs. The two approaches to management of FTAs with regard to the trade volume of a company can be compared, to some degree, with the two approaches towards the decision-making process. Regarding both the compliance and the consistency of utilizing FTAs, companies with small trade volumes seem to be at a disadvantage. Firstly, since small companies will find it difficult to automate the FTA process, they would have to resort to a manual process which is more error-prone and less reliable in terms of covering all FTAs and trade flows. Secondly, assigning the functional FTA responsibility to a dedicated staff may not be feasible for small companies out of considerations of costs. Thirdly, the costs of coordinating geographical FTA responsibility between the global headquarters and the local subsidiaries may not be justified by the low trade volumes. By contrast, companies with comparatively large trade volumes may find these efforts worthwhile because they are justified by relatively large tariff savings. The assumption of perfect competition would lead to the expectation that all tariff savings should be passed on to the customers. Consequently, an increase in sales and not more than a proportional increase in profits should be the result in terms of business performance. However, a number of companies surveyed reported that there was no change in sales, but an increase in profit, which could hint at the possibility of companies keeping the difference between the MFN and JSFTEPA tariff rates in the form of a higher profit margin. Instead of being passed on to the customers, the reduction in tariff savings was therefore simply diverted from the government to the respective companies. Recommendations for Policy Makers The findings of chapter 3 with regard to the fact that larger rather than smaller companies benefit from FTAs is supported by this study. It appears that fixed costs mainly related to 61 the FTA compliance process, but also with regard to education and training of staff, act as entry barriers for SMEs which prevent them from utilizing FTAs. If SMEs are expected to utilize FTAs, policy makers would need to address their concerns when negotiating FTAs. However, even after an FTA has entered into force, SMEs require support to utilize FTAs, especially with regard to the initial fixed costs. Governments increasingly offer FTA information sessions and to some degree also training seminars. While this is a positive development, even more important is the offer of solutions regarding the implementation of an FTA process which suits the needs of SMEs. Such a process could start by offering an FTA tariff calculator on the respective Customs’ website, but should be continued offline inside the company in the form of a simple program to guide through the steps of the FTA utilization. Support and coordination may be provided by a centralized agency, either publicly or privately run, with regard to assisting companies to utilize FTAs. Finally, against the background of increasingly international production and distribution networks, bilateral FTAs require companies to re-design and optimize their networks if they want to make use of FTAs. Policy makers may therefore aim at negotiating regional instead of bilateral FTAs, or at least FTAs with ROO which allow for regional cumulation, such as the Pan-European-Mediterranean FTAs which allow for diagonal cumulation. Limitations of the methodology and future research Most of above findings are based on the replies of a relatively small number of companies which took part in the JSFTEPA survey. Although the theoretical conclusions are largely generalizable, it may be argued that some of the individual findings are only based on anecdotal evidence. Therefore, a quantitatively oriented study based on the findings of this examination could be carried out, including further aspects which may have an impact on the management of FTAs. A larger sample of companies across several different FTAs would certainly add value to such a study. 62 5 Utilization of Free Trade Agreements: Analysis of Customs Data86 5.1 Introduction The previous chapters suggested that the utilization of FTAs is characterized by both firmand industry-specific effects. This chapter tries to address some of the shortcomings of the two previous approaches, namely the limited sample size which made it impossible to perform an analysis on industry level, as well as the potential selection bias of the respondents. Highly disaggregated data of the Swiss Federal Customs Administration allows for a direct calculation of the JSFTEPA’s utilization rate per tariff line on the HS 8-digit level. Specifically, this chapter examines the relationship between the utilization rate and both relative and absolute tariff savings. The following section presents an overview of the existing literature. Sections three and four present the data on import values, margins of preference and utilization rates. Section five introduces the hypotheses and the resulting model, while section six presents the results of the analysis. Finally, section seven provides some concluding remarks. 5.2 Literature Review Previous studies on the utilization rate of FTAs based on administrative records from Customs were mainly concerned with the impact of the restrictiveness of the ROO on the utilization rate. For a study involving NAFTA see for example Anson et al. (2005). In Asia, Kohpaiboon (2010) examined exports by Thai manufacturers to Asean members. From 2003 to 2008 he found an increase in the utilization rate of exports to Indonesia from 20 to 60 percent. For Australia, Pomfret et al. (2010) studied import data from 2000 to 2009 under six FTAs, including the ones with Chile, New Zealand, Singapore and the U.S. The study finds that, in the long run, the utilization rates of most FTAs decreased substantially due to an increase in tariff lines which Australia liberalized unilaterally under MFN. In 2009, the utilization rate of Australia’s FTAs with regard to imports reached from below 10 percent for the ones with Singapore and Chile to up to 50 percent for the one with New Zealand. The U.S. – Australia FTA had a utilization rate of around 25 percent. Whether or not there is an increase in the utilization rate over time depends on the time period examined and the structure of the tariff reduction schedule. Tariffs in FTAs between developing countries are usually phased out over a number of years, which is why a longterm time effect can usually be observed (see for example Kohpaiboon, 2010). By contrast, the U.S. – Australia FTA reached a stable level of around 25 percent after one year already (Pomfret et al., 2010). 86 This chapter was written by Prof. Dr. Mun Heng Toh and Matthias Schaub. 63 With the JSFTEPA we examine an FTA between two developed countries. To our knowledge, this is the first study which analyses and compares relative and absolute tariff savings. In addition, utilization rates are only calculated on those imports which can, theoretically, benefit from the JSFTEPA. 5.3 Data Collection and Presentation Unlike chapter three and four, this chapter does not work with individual company data. Rather, data on imports from Japan into Switzerland were provided by the Swiss Federal Customs Administration 87 . Data cover all imports from Japan into Switzerland from September 1, 2009 to December 31, 2010, on the HS 8-digit level. Data were provided on a monthly basis, i.e. 16 months are covered. Each tariff line contained the value of imports in Swiss Francs (CHF) under the various import regimes, the amount of imports measured in the respective measurement unit, and customs revenue data for the respective imports. Data on tariffs under the MFN88 and the preferential JSFTEPA rate were also provided by the Swiss Federal Customs Administration. The majority of the tariff lines apply a weightbased tariff, indicated in CHF per 100 kilogram gross. Further units of measurement are CHF per piece, CHF per usual unit, CHF per liter, CHF per meter and CHF per MWh. In order to calculate the ad-valorem tariff rates, the customs revenue per tariff line was divided by the respective value of imports under the normal rate per tariff line on the HS 8digit level. Total imports from Japan into Switzerland from September 1, 2009 to December 31, 2010 amounted to CHF 4,862 M. Thereof, 99 percent were covered by the top eight industries as defined by the HS Nomenclature. Table 5-1 lists the respective industries’ trade values. 87 The data published by the Swiss Federal Customs Administration refer to the country of creation of a specific good. The country of creation equals the country of origin if the goods have not entered the market of a third country. 88 In the terminology of the Swiss Federal Customs Administration, the MFN rate is also known as the “normal rate”. The normal rate consists of the bound MFN duties as well as the autonomously reduced duties (applied MFN tariffs). 64 Table 5-1: Total imports by industries from September 2009 to December 2010 HS Codes Description Imports from Japan into (Industries) Switzerland, September 2009 to December 2010 86-89 Transportation: Vehicles (both rail mounted and non-rail mounted), ships, boats, aircraft, spacecrafts and parts thereof 68-71 Pearls, stones, precious metals, jewelry, glass and glassware, ceramic products, articles of stone, plaster, cement Chemicals and allied industries: Inorganic and organic chemicals, pharmaceuticals, fertilizers, dyes, paints, oils, perfumery, cosmetics M CHF In % % cumulated 1,381.77 28.42 28.42 1,373.36 28.25 56.67 885.20 18.21 74.87 Machinery and mechanical appliances, computers, electrical machinery and parts, telecommunications, recorders Miscellaneous: Instruments (optical, photographic, measuring, precision, medical, musical), clocks and watches, furniture 646.77 13.30 88.17 334.41 6.88 95.05 39-40 72-83 Plastics and rubbers and articles thereof Metals such as iron, steel, aluminum, lead and articles thereof 106.69 67.89 2.19 1.40 97.24 98.64 50-63 Textiles: Silk, yarn, wool, cotton, artificial fibers and woven fabrics thereof, carpets, fabrics, apparel Animal and animal products, vegetable products, foodstuffs 25.79 0.53 99.17 21.72 0.45 99.62 44-49 41-43 Wood, wood products, paper and books Raw hides, skins, leathers and furs 7.46 6.11 0.15 0.13 99.77 99.90 64-67 25-27 Footwear, headgear Mineral products 4.49 0.29 0.09 0.01 99.99 100.00 28-38 84-85 90-97 01-24 All Industries Note: Industries are based on the HS Nomenclature. Source of Data: Swiss Federal Customs Administration. 4,861.95 100.0 When excluding imports which cannot benefit from the JSFTEPA due to the nature of the agreement and/or the tariff structure, we arrive at 3,677 M of imports which could have, at least theoretically, utilized the JSFTEPA. Thereof, 99 percent were covered by the top 65 eight industries as defined by the HS Nomenclature. Table 5-2 lists the respective industries’ trade values. Table 5-2: Imports which could have, theoretically, benefited from the JSFTEPA, by industries from September 2009 to December 2010 HS Codes Description Imports from Japan into (Industries) Switzerland, September 2009 to December 2010 86-89 Transportation: Vehicles (both rail mounted and non-rail mounted), ships, boats, aircraft, spacecrafts and parts thereof 68-71 Pearls, stones, precious metals, jewelry, glass and glassware, ceramic products, articles of stone, plaster, cement Machinery and mechanical appliances, computers, electrical machinery and parts, telecommunications, recorders 84-85 M CHF In % % cumulated 1,373.91 37.36 37.36 1,342.48 36.51 73.87 365.59 9.94 83.81 Miscellaneous: Instruments (optical, photographic, measuring, precision, medical, musical), clocks and watches, furniture Chemicals and allied industries: Inorganic and organic chemicals, pharmaceuticals, fertilizers, dyes, paints, oils, perfumery, cosmetics 208.66 5.67 89.48 170.63 4.64 94.12 39-40 72-83 Plastics and rubbers and articles thereof Metals such as iron, steel, aluminum, lead and articles thereof 105.86 65.14 2.88 1.77 97.00 98.77 50-63 Textiles: Silk, yarn, wool, cotton, artificial fibers and woven fabrics thereof, carpets, fabrics, apparel Animal and animal products, vegetable products, foodstuffs 21.62 0.59 99.36 8.72 0.24 99.60 41-43 44-49 Raw hides, skins, leathers and furs Wood, wood products, paper and books 5.01 4.98 0.14 0.14 99.74 99.88 64-67 25-27 Footwear, headgear Mineral products 4.46 0.06 0.12 0.00 100.00 100.00 90-97 28-38 01-24 All Industries 3,677.12 100.0 Note: Industries are based on the HS Nomenclature. Source of Data: Swiss Federal Customs Administration. 66 There are several reasons for which some imports cannot benefit from the JSFTEPA due to the very nature of the agreement and/or the tariff structure. Firstly, certain tariff lines are not covered by the JSFTEPA. Secondly, for certain tariff lines the applied MFN tariff rate is already zero or equal to the rate under the JSFTEPA. Thirdly, regardless of the tariff line, certain imports enjoy duty free status when imported into Switzerland according to the Swiss Customs Law 89 , including imports affected by inward or outward processing, imports which are domestic or foreign returned goods, imports with a specific end use depending on the respective relief codes, and other imports such as those of not for profit organizations. The difference between the total imports and the imports which could, theoretically, benefit from the JSFTEPA can be quite high, as exemplified by the chemicals and allied industries (HS 28-38). The total imports amount to CHF 885 M, while the imports which could benefit from the JSFTEPA stand at CHF 171 M. This difference can be explained to a large extent by the fact that all duties under HS 30 (pharmaceutical products) are already eliminated due to the pharmaceutical tariff elimination agreement under the WTO. Similarly, the imports of machinery and electronics (HS 84-85) show quite a big difference, which can be traced back to the WTO information technology agreement which eliminates tariffs on most IT-related goods. Table 5-3 provides an overview of the average margins of preference by industries. Table 5-3: Average margins of preference of the JSFTEPA for imports from Japan into Switzerland from September 2009 to December 2010, by industries HS Codes Brief Description Average Margin of Preference as Ad(Industries) Valorem Duty under the JSFTEPA (in %) 01-24 25-27 Animals, foodstuffs Mineral products 3.31 0.36 28-38 39-40 Chemicals and allied industries Plastics and rubbers 0.27 0.31 41-43 Skins and leathers 0.46 44-49 Wood products 1.02 50-63 64-67 Textiles Footwear and headgear 1.23 0.22 68-71 72-83 Stone and glass Metals 0.02 0.41 84-85 86-89 Machinery and electrical Transportation 0.35 0.29 90-97 Miscellaneous 0.28 All Industries 0.26 Source of Data: Swiss Federal Customs Administration. 89 Article 8 and Article 10-14, Swiss Customs Law, SR 631.0. 67 Since the Swiss import tariffs are based on measurement units90, the margin of preference (ad-valorem value) was calculated by dividing the customs revenue per tariff line by the respective value of imports per tariff line on the HS 8-digit level for data from September 2009 to December 2010. The average margins of preference for industries reach from 0.02 percent to 1.23 percent. The maximum margins of preference which Switzerland grants Japanese imports across all tariff lines are between 35 and 40 percent and concern wood products, paper and textiles. 5.4 Utilization Rates: Conceptual Construction The dependent variable is the utilization rate of the JSFTEPA, based on the value of the imports91. In order to make the analysis more meaningful, the utilization rate is measured in both a general and an adjusted form. The general utilization rate (G-UR) of the JSFTEPA is defined as the ratio of goods imported from Japan into Switzerland under the JSFTEPA to the total imports from Japan into Switzerland. In order to adjust for imports which are, by the very nature of the agreement or the Swiss tariff structure, excluded from benefiting from the JSFTEPA, the adjusted utilization rate (A-UR) is introduced. While the G-UR is based on the total imports from Japan into Switzerland, the A-UR is only based on those imports which could have, theoretically, benefited from the JSFTEPA, as described in this chapter, section three92. 90 CHF per 100 kg, CHF per piece, CHF per usual unit, CHF per liter, CHF per meter and CHF per MWh. Depending on the respective HS Codes, the utilization rate based on the weight of imports is usually substantially higher than the one based on the value. However, since several chapters use units of measurements other than weight (HS 01, 05, 20, 22, 27, 37, 87 and 91), it is not possible to indicate a single utilization rate across all tariff lines in terms of units of measurement. 92 Pomfret et al. (2010) employed a similar concept. Their adjusted utilization rate, however, was calculated as the sum of imports under FTAs plus imports which already enjoyed zero tariffs under MFN, divided by the total imports. The adjusted utilization rate in this formula indicates the imports which entered duty free into Australia, but not necessarily because of an FTA. Therefore, their adjusted utilization rate overstates the actual adjusted utilization rate. 91 68 Table 5-4 shows a comparison of the two concepts. Table 5-4: Comparison of the concepts of G-UR and A-UR General Utilization Adjusted Utilization Rate (A-UR) Rate (G-UR) Numerator Goods imported from Japan into Switzerland under the JSFTEPA Denominator Total imports from Japan into Switzerland Goods imported from Japan into Switzerland under the JSFTEPA Total imports from Japan into Switzerland excluding imports - under tariff lines which are not covered by the JSFTEPA - under tariff lines for which the applied MFN tariff rates are already eliminated unilaterally or for which the applied MFN rates are the same as the JSFTEPA tariff rates - affected by inward or outward processing - which are domestic or foreign returned goods - with a specific end use (relief codes) - other imports which enjoy duty free status outside of the JSFTEPA 69 Table 5-5 reports imports from Japan into Switzerland from September 2009 to December 2010 under the respective import regimes as a percentage of total imports93. Tariff lines were not taken into consideration when there were no imports in the respective period of time. Table 5-5: Imports from Japan into Switzerland by industries and import regimes from September 2009 to December 2010 (in %) HS Codes Normal Normal Duty Free (Industries) Tariff Tariff Normal JSFTEPA Out-/ Inward Othera (MFN) (Preferential) Tariff (MFN) Processing 01-24 50.62 1.80 3.86 2.30 31.87 9.55 25-27 28-38 22.56 13.3 0.00 2.71 77.44 77.98 0.00 3.31 0.00 0.00 0.00 2.74 39-40 41-43 56.0 81.92 0.00 0.00 0.57 0.04 43.22 0.00 0.08 0.00 0.13 18.03 44-49 50-63 57.93 43.68 0.00 0.70 32.46 0.01 8.74 39.46 0.00 0.01 0.87 16.14 64-67 68-71 14.48 58.65 0.00 38.93 0.00 0.00 84.92 0.17 0.00 0.00 0.60 2.24 72-83 51.53 0.19 2.49 45.44 0.00 0.35 84-85 49.95 0.00 39.91 6.57 2.21 1.36 86-89 90-97 26.87 61.32 0.00 0.00 0.56 20.09 72.56 1.07 0.00 0.00 0.01 17.52 All 40.09 11.51 21.17 24.12 0.44 Industries Note: (a) Foreign and domestic returned goods, other preferential treatment. Source of Data: Swiss Federal Customs Administration. 2.68 The fourth column (“Normal Tariff (MFN)”) in table 5-5 reports the imports which enjoyed duty free treatment under the normal rate. Relatively high percentages of duty free imports under the normal rate can often be traced back to sectoral WTO agreements, specifically the pharmaceutical tariff elimination agreement (HS 28-38) and the information technology agreement (HS 84-85). The fifth column (“JSFTEPA”) in table 5-5 shows imports which benefited from the JSFTEPA as a percentage of total imports (G-UR). 93 Imports which are imported under the JSFTEPA on a reduced tariff (but not duty free) are marginal and limited to the agricultural industry. 70 Table 5-6 condenses these data and adds the average adjusted A-UR for imports from Japan from September 2009 to December 2010 by industries and HS chapters. Table 5-6: Average G-UR and A-UR of the JSFTEPA for imports from Japan into Switzerland by industries from September 2009 to December 2010 HS Codes Brief Description General Utilization Adjusted Utilization (Industries) rate (G-UR), in % rate (A-UR), in % 01-24 25-27 Animals, foodstuffs Mineral products 2.30 0.00 4.10 0.00 28-38 Chemicals and allied industries 3.31 17.18 39-40 Plastics and rubbers 43.22 43.56 41-43 44-49 Skins and leathers Wood products 0.00 8.74 0.00 13.11 50-63 64-67 Textiles Footwear and headgear 39.46 84.92 47.07 85.43 68-71 72-83 Stone and glass Metals 0.17 45.44 0.18 46.77 84-85 Machinery and electrical 6.57 11.63 86-89 Transportation 72.56 72.97 90-97 Miscellaneous All Industries 1.07 24.12 1.72 31.85 Source of Data: Swiss Federal Customs Administration. Table 5-6 shows that across all imports from Japan, the G-UR is 24.1 percent and the AUR somewhat higher with 31.9 percent. The spread between the G- and the A-UR can be quite high, as exemplified by the chemicals and allied industries (HS 28-38), for which the A-UR is more than five times higher than the G-UR. While the G-UR states that only 3.3 percent of goods imported under this industry are utilizing the JSFTEPA, the A-UR shows that actually 17 percent of all goods which can theoretically utilize the JSFTEPA do so already. This difference can be explained by the fact that all duties under HS 30 (pharmaceutical products) are already eliminated due to the pharmaceutical tariff elimination agreement and are therefore not counted for the calculation of the A-UR. A closer look at individual industries reveals that there are marked differences in terms of utilization rates among industries. Comparatively low G- and A-UR can often be explained by low MFN tariffs or because the Swiss weight-based tariff system may not translate into substantial savings, for example for leather products (HS 41-43) or clocks and watches (HS 91) 94 . In addition, the fact that the movements of Japanese watches are often 94 Under HS chapter 91, the highest MFN tariff rate imposes a tariff of CHF 3,863 per 100 kg for watch straps, bands or bracelets of precious metal or of metal clad with precious metal (HS 9113.1000). The 71 produced outside of Japan and as a result watches cannot reach the qualifying content could serve as another explanation for the low utilization rate. Industries with comparatively high G- and A-UR are plastics and articles thereof (HS 39) and especially vehicles other than railway (HS 87). The small difference between the Gand the A-UR of HS 39-40 and HS 86-89 can be traced back to the fact that there are almost no duty free imports into Switzerland other than under the JSFTEPA. From a temporal perspective, the utilization of the JSFTEPA is not expected to show a time effect in the long-term. With the exception of the agricultural industry – whose share of total bilateral trade is very small – all tariffs included in the JSFTEPA were eliminated upon entry into force of the JSFTEPA. A short-term effect may, however, be observed: Since the period of time between the signature of the legal text and the entry into force of an FTA is usually rather short95, not all companies may be aware of its existence once it enters into force. In addition, even companies that are aware of an FTA will need time to examine whether their production processes and production networks satisfy the rules and requirements of an FTA. Figures 5-1 and 5-2 show the share of imports benefiting from the JSFTEPA from January 2009 to December 2010 by months. Figure 5-1 depicts the G-UR and figure 5-2 the A-UR of the JSFTEPA across all imports from Japan into Switzerland. The JSFTEPA entered into force on September 1, 2009. Figure 5-1: G-UR of the JSFTEPA for all imports from Japan into Switzerland Normal Tariff Normal Tariff (Preferential) Duty free (other than Normal Tariff or JSFTEPA) Duty Free (Normal Tariff) Dec10 Nov10 Sep10 Oct10 Jul10 Aug10 Jun10 Apr10 May10 Mar10 Jan10 Feb10 Dec09 Nov09 Sep09 Oct09 Jul09 Aug09 Jun09 Apr09 May09 Mar09 Jan09 Duty Free (JSFTEPA) Feb09 Imports from Japan into Switzerland Total; G-UR (Value) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Note: “Duty free (other than Normal Tariff or JSFTEPA)” includes imports affected by inward and outward processing, imports consisting of foreign and domestic returned goods, imports with a specific end use (relief codes) and other imports which enjoy duty free status outside of the JSFTEPA. Source: Author. second highest MFN tariff rate imposes a tariff of CHF 419 per 100 kg for springs (HS 9114.1020), and the third highest a tariff of CHF 327 per 100 kg for complete movements of watches. 95 The JSFTEPA, for example, was signed in February 2009, and entered into force on September 1, 2009. 72 Figure 5-2: A-UR of the JSFTEPA for all imports from Japan into Switzerland Normal Tariff Normal Tariff (Preferential) Dec10 Nov10 Sep10 Oct10 Jul10 Aug10 Jun10 Apr10 May10 Mar10 Jan10 Feb10 Dec09 Nov09 Sep09 Oct09 Jul09 Aug09 Jun09 Apr09 May09 Mar09 Jan09 Duty Free (JSFTEPA) Feb09 Imports from Japan into Switzerland Total; A-UR (Value) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Source: Author. There is a notable shift in the utilization rate from January 2010 to February 2010 from around 20 percent to 40 percent under the A-UR. A closer look at the individual industries reveals that this shift can be traced back to the transportation industry (HS 86-89) which accounts for more than 35 percent of imports that could theoretically benefit from the JSFTEPA. A possible explanation for this shift may be that some car manufacturers have automated the utilization of FTAs and started utilizing the JSFTEPA at the beginning of the new year, i.e. January 1, 2010. The utilization of the JSFTEPA is then reflected in Switzerland’s import figures one to two months later – the period of time expected to ship cars from Japan to Switzerland. After about six months, both the G- and the A-UR seem to have reached a stable level; the G-UR slightly below 30 percent, and the A-UR close to 40 percent96. Similarly, Pomfret et al. (2010) find that the U.S. - Australia FTA, which entered into force in January 2005, reached a stable utilization rate of between 20 to 25 percent from 2006 97. Other previous studies based on administrative records found a substantial increase in the G-UR over several years. For exports from Thailand to Indonesia and the Philippines, Kohpaiboon (2010) finds an increase from 30 to 60 and 30 to 48 percent, respectively, from 2003 to 2008. A possible explanation may be that Kohpaiboon (2010) studied FTAs between developing countries. Such FTAs typically phase out large numbers of tariffs over longer periods of time, while FTAs between developed countries, such as the JSFTEPA, often eliminate all tariffs immediately upon the entry into force of the FTA. Therefore, in the case of the JSFTEPA, a phasing-out effect cannot be expected in the long-term98. For the subsequent analyses, the dependent variable will be the adjusted utilization rate (A-UR). Focusing only on tariff lines which could benefit from the JSFTEPA, on HS 8-digit 96 A relatively strong fluctuation of the utilization rates within some HS chapters over time may be due to the fact that there are only few companies involved in importing goods under certain HS Codes. One or two importers utilizing or not utilizing the JSFTEPA, respectively, may have a profound impact on the utilization rate. 97 However, since Pomfret et al. (2010) collected data only on a yearly basis, it could well be that the stable rate was reached already after six months. 98 Sporadically, individual companies may adapt their production and distribution network to fit the JSFTEPA if benefits of doing so exceed costs. However, no substantial increase in the utilization rate is expected from such changes. 73 level a total of 2,407 tariff lines showed trade flows in the period from September 2009 to December 2010. However, for any specific month, the number of tariff lines showing trade flows was between 914 (February 2010) and 1,072 (March 2010), with an average of 995 tariff lines per month. 5.5 Development of Hypotheses and Model Companies base the decision on whether or not to utilize FTAs on a cost-benefit analysis. Section two in chapter four has shown that existing literature estimates the costs of utilizing FTAs in the range of one to ten percent of the value of the goods traded. However, rather than studying the costs of utilizing FTAs, this chapter will focus on the benefits which companies can extract from FTAs. We begin with a multiple regression model where the utilization rate (UR) is specified to be dependent on the margin of preference (MOP) and the value of the imports (VIMP). It is expected that a higher margin of preference is related to a higher utilization rate. Hypothesis 1: All other things being equal, the higher the margin of preference between the MFN and JSFTEPA tariff rates, the higher the utilization rate. Section 5.1 of chapter four found that the costs of utilizing FTAs are largely fixed costs which are independent of the value of the goods traded. By contrast, the benefit, the difference between the MFN and FTA tariff rate, is proportional to the value of the goods traded99. Therefore, it may be argued that there is a threshold above which it is worthwhile to utilize an FTA. Such a threshold exists for each shipment (for example with regard to the costs and time required to apply for a COO), and each product (for example with regard to the costs and time required to comply with the respective ROO) 100. Therefore, the higher the value of the goods imported from Japan into Switzerland from September 2009 to December 2010, the more likely is a company in a position to compensate the fixed costs of utilizing the FTA by the respective tariff savings. Hypothesis 2: All other things being equal, the higher the value of imports (and thus the possible absolute tariff savings) per tariff line, the higher the utilization rate. Since no data are available on companies’ individual trade transactions, the study will examine the trade flows per tariff line on the HS 8-digit level by month for the first 16 months since the entry into force of the JSFTEPA. Although the disaggregation level chosen for this study is quite high and the respective time periods quite short, it may be argued that it is unrealistic to assume a specific product is traded only by one specific company in a specific month. This is, however, of a minor concern here as it is assumed that, on average, large absolute trade flows can be traced back to large shipments or 99 Other benefits such as simplified customs procedures or the elimination of duplicative testing are not considered here as the realization of such benefits does not create corresponding costs to a company. 100 It is assumed that most of the Japanese exporters face these costs since the status of the “approved exporter” is not yet well established in Japan and therefore an automated process not feasible; and even if the status was established well, only companies with frequent shipments would be able to become an “approved exporter” (JSFTEPA, Annex II, Article XIX). 74 large trade flows of specific firms. In addition, small trade flows can, by their very nature, only be caused by small trade flows of specific firms or a specific firm. In other words, if a trade flow under a specific tariff line is 10 times bigger than a trade flow under another tariff line, the assumption is that the first trade flow is caused by less than 10 times the number of companies. Therefore, the absolute import values between September 2009 and December 2010, on HS 8-digit level by month, serve as a proxy for trade values of individual companies. Table 5-7 provides an overview of the analytical framework. Table 5-7: Overview of the analytical framework Hypothesis 1 Hypothesis 2 Assumption Dependent Variable Independent Variable All other things being equal, All other things being equal, the higher the higher the margin of the value of imports (and thus the preference between the MFN possible absolute tariff savings) per tariff and the JSFTEPA tariff rates, line, the higher the utilization rate. the higher the utilization rate. A-UR on a monthly basis from September 2009 to December 2010; measured as a percentage Margin of preference (the difference between the MFN and the JSFTEPA tariff rate); measured as a percentage Value of imports from Japan into Switzerland on a monthly basis from September 2009 to December 2010; measured in million CHF Symbolically, the regression model is written as: UR = + 1MOP + 2VIMP (1) The coefficients 1 and 2 are expected to be positive. In another version of the model, we allow for the possibility that the coefficients 1 and 2 can vary with MOP and VIMP 1 = 1MOP + 2VIMP 2 = 3MOP + 4VIMP (2) (3) Substituting (2) and (3) in the original equation (1) leads to UR = + (1MOP + 2VIMP) MOP + (3MOP + 4VIMP) VIMP UR = + (1+ 3) MOP + (2+ 4) VIMP + 1MOP2 + 3VIMP2 + (1+ 3) MOP*VIMP UR = + 1MOP + 2VIMP + 1MOP2 + 2VIMP2 + 3MOP*VIMP (4) Subsequently, the following models are estimated. In model 1 (5), the utilization rate is simple function of MOP and VIMP with UR = + 1MOP + 2VIMP + error (5) 75 In model 2 (6), separate constant terms are assumed for each of the 13 industries. UR = 1MOP + 2VIMP + Dummies for HS Classification + Fixed Effect Dummies for Month + error (6) The fixed effects attributable to time and industrial grouping are included as explanatory variables. The parameter for the constant term () is dropped when the fixed effect for each time period is included in the model. In model 3 (7), squares and cross product terms are added as explanatory variables. UR = 1MOP + 2VIMP + 3MOP2 + 4VIMP2 + 5MOP*VIMP + Dummies for HS Classification + Fixed Effect Dummies for Month + error (7) Non-linear effects of MOP and VIMP are taken into account by the inclusion of squared and cross product of variables in the specification. Model 4 (8) estimates the propensity of the utilization rate with respect to MOP and VIMP in each industry. UR = 1MOP*IND_01 + 2MOP*IND_02 +…+ 13MOP*IND_13 + 1VIMP*IND_01 + 2VIMP*IND_02 +…+ 13VIMP*IND_13 + 1MOP2 + 2VIMP2 + 3MOP*VIMP + Dummies for HS Classification + Fixed Effect Dummies for Month + error (8) IND stands for the industries examined as described in table 5-8. The definition of the various industries follows the standard of the HS Nomenclature. Table 5-8: Description of industries examined Industries HS Chapters Brief Description IND_01 HS 01-24 Animal & Animal Products/ Vegetable Products/ Foodstuffs IND_02 HS 25-27 Mineral Products IND_03 HS 28-38 Chemicals & Allied Industries IND_04 HS 39-40 Plastics, Rubbers IND_05 HS 41-43 Raw Hides, Skins, Leather & Furs IND_06 HS 44-49 Wood & Wood Products IND_07 HS 50-63 Textiles IND_08 HS 64-67 Footwear, Headgear IND_09 HS 68-71 Stone, Glass IND_10 HS 72-83 Metals IND_11 HS 84-85 Machinery, Electrical IND_12 HS 86-89 Transport IND_13 HS 90-97 Miscellaneous 76 The MOP marginal propensity is the differential of the UR with respect to MOP UR/MOP = 1 + 21 MOP + 3VIMP (9) Similarly, the VIMP marginal propensity is given by UR/VIMP = 2 + 22 VIMP + 3MOP (10) 5.6 Results of Analysis Our time-series – cross-section analysis is based on an unbalanced panel as there are missing values (no imports in specific months under specific HS Codes) and varying numbers of tariff lines across the 13 industries examined. We use White Heteroskedasticity-consistent standard errors, a consistent estimator of standard errors which corrects for heteroskedasticity without altering the values of the coefficients. The results of the equations of models 1 to 4 estimated by Eviews are reported in table 59. More detailed results for model 4 are reported in appendix A-7. Table 5-9: Results of estimations for models 1 to 4 Variable Model 1 Model 2 Model 3 Model 4 Constant 4.8947 t-statistics 31.1707 MOP 0.3071 0.3692 1.1881 t-statistics 5.8935 8.8549 5.5686 MOP^2 -0.0308 -0.0125 t-statistics -7.2355 -2.7775 VIMP 0.9274 0.6751 1.3467 t-statistics 5.1244 5.5205 5.4237 VIMP^2 -0.0244 -0.0154 t-statistics -6.1323 -3.7007 MOP*VIMP 3.5257 5.3991 t-statistics 14.2398 6.6714 IND_Dummies Time_Dummies MOP coefficient for individual industries VIMP coefficient for Individual industries R-squared Adjusted R-squared S.E. of regression Log likelihood Durbin-Watson stat No No No Yes Yes No Yes Yes No Yes Yes Yes No No No Yes 0.0041 0.0040 22.4562 -71203.9 1.3530 77 0.0918 0.0902 21.4256 -70478.9 1.4664 0.1344 0.1326 21.0807 -70705.3 1.5283 0.2283 0.2255 19.7282 -69217.7 1.5413 Model 1 includes a constant term as well as two independent variables, MOP and VIMP. As expected, UR varies statistically significantly positively with both MOP and VIMP. Rsquared is, however, rather low with 0.0041. Moving from model 1 to model 2, the coefficient of determination increases to 0.0918. This substantial increase in explanatory power can be explained by the introduction of time and industry dummies. In addition, the statistical significance of both independent variables increases as compared to model 1. In model 3, we include squares and cross product terms. Both MOP 2 and VIMP2 are statistically significant, indicating a non-linear relationship. Since the coefficients of MOP2 and VIMP2 are negative, we note that the impact of MOP and VIMP diminishes as the magnitudes of the latter two variables become larger, effectively pointing to a diminishing marginal increase in UR with an increase in either MOP or VIMP. The cross product term of MOP and VIMP is statistically significantly positively related to UR. This result points to the fact that MOP and VIMP together have an impact on the UR as well. On the one hand, a very small MOP will result in a low utilization rate, regardless of how large VIMP is. On the other hand, a very small VIMP will also result in a low utilization rate, regardless of how large MOP is. This exemplifies that companies’ utilization of the JSFTEPA depends on the absolute savings extracted. The inclusion of squares and cross product terms results in a stronger explanatory power compared to model 2 (0.1344 as compared to 0.0918). The full estimation result of model 4 is reported in appendix A-7. As a result of the inclusion of the propensity of UR with respect to MOP and VIMP in each industry, the proportion of variability which is accounted for increases to 0.2283. Equations (9) and (10) illustrate that the propensities vary with MOP and VIMP. We compute the propensities at the mean values of the MOP and VIMP. The results of the computation are shown in table 5-10. Table 5-10: MOP and VIMP marginal propensities HS Codes Brief Description (Industries) 01-24 Animal & Animal Products/ Vegetable Products/ Foodstuffs 25-27 Mineral Products 28-38 Chemicals & Allied Industries 39-40 Plastics, Rubbers 41-43 Raw Hides, Skins, Leather & Furs 44-49 Wood & Wood Products 50-63 Textiles 64-67 Footwear, Headgear 68-71 Stone, Glass 72-83 Metals 84-85 Machinery, Electrical 86-89 Transportation 90-97 Miscellaneous Note: (a) Rescaled to 1,000 CHF. 78 Marginal Propensities UR/ MOP UR/ VIMPa 0.313 0.0685 -2.801 0.492 2.871 0.166 0.271 1.693 -0.813 11.611 2.102 1.734 7.094 1.808 0.0438 0.0185 0.0511 0.0023 0.2455 0.2594 0.2410 0.0040 0.1311 0.0075 0.0075 0.0016 As expected, for the majority of industries MOP and VIMP marginal propensities are positive. As an example, a one percent increase in MOP of HS 01-24 will increase the corresponding UR by 0.313 percentage points, holding other things constant. If the import values increase by CHF 1,000, UR will increase by 0.0685 percentage points. For mineral products (HS 25-27), UR/ MOP is negative and thus does not conform to theoretical expectations. However, the respective utilization rate is negligible (table 5-6) and the import value is very low (CHF 0.06 M, table 5-2). In addition, we noted that the coefficient associated with MOP is not statistically significant for this industry (appendix A7). Raw hides, skins, leathers and furs (HS 41-43) show the smallest positive propensity of UR with regard to MOP, and the second smallest with regard to VIMP. However, the import value is quite low (CHF 5.01 M, table 5-2). This may result in individual companies’ behavior having a profound impact on UR. In addition, the utilization rate is negligible (table 5-6). Specifically, only a few small shipments of leather handbags have been imported under the JSFTEPA, just after its entry into force. The tariff savings resulting from the JSFTEPA were below CHF 1, reflecting the minor impact of a weight-based tariff on comparatively light and expensive leather products. After these initial shipments, the JSFTEPA has not been used anymore, probably because the absolute savings did not justify the costs of utilizing the JSFTEPA. The negative relation between VIMP and UR stems from the fact that the very few shipments which utilized the JSFTEPA were quite small. The largest propensity with regard to VIMP is associated with textiles (HS 50-63). Import values are comparatively low (CHF 21.62 M, table 5-2). The utilization rate for this industry is over 47 percent (table 5-6) and the average margin of preference 1.23 percent (table 53), the second highest after agricultural goods. The large propensity with regard to VIMP may therefore be explained by the impact of the high margin of preference on absolute tariff savings when import values increase. For footwear and headgear (HS 64-67), UR/ MOP is negative and thus does not conform to theoretical expectations. However, as reported in appendix A-7, the coefficient associated with MOP is not statistically significant on the 5 percent level. In addition, import values in this industry were quite low (CHF 4.46 M, table 5-2). By contrast, the propensity with regard to VIMP is positive and the third largest after textiles and wood products. A utilization rate of above 85 percent (mostly for larger shipments) supports this finding (table 5-6). The largest propensity with regard to MOP corresponds to stone and glass (HS 68-71). While the import value is comparatively high (table 5-2), both the utilization rate (0.18 percent, table 5-6) and the margin of preference (0.02 percent, table 5-3) are very low. In 79 addition, the coefficient associated with MOP is not statistically significant; possibly due to the low margin of preference. 5.7 Conclusion Findings of the study Utilization rate: The utilization rates found in this study are comparable to results of existing literature on FTAs between two developed countries101. However, when looking at FTAs involving developing countries, the G-UR is somewhat higher 102 . A possible explanation is that, on average, developing countries maintain higher MFN import tariffs and have liberalized less tariff lines unilaterally. The A-UR of the JSFTEPA for Japanese imports into Switzerland varies strongly across industries. The A-UR is particularly high in the areas of transportation/ vehicles, plastics and rubber. Benefits: We put forward the following hypotheses: Hypothesis 1: All other things being equal, the higher the margin of preference between the MFN and JSFTEPA tariff rates, the higher the utilization rate. Hypothesis 2: All other things being equal, the higher the value of imports (and thus the possible absolute tariff savings) per tariff line, the higher the utilization rate. For all industries, the marginal propensity of UR with regard to the value of imports is positive. The same is true regarding the margin of preference, with the notable exception of mineral products (HS 25-27) and footwear and headgear (HS 64-67). This result points to the fact that companies are not only interested in FTA-related savings which are proportional to the value of trade, but also take into consideration the fixed costs of utilizing FTAs. With regard to the model itself, explanatory power increases with the inclusion of industry and time dummies, squares and cross product terms, as well as with the differentiation between industries. Findings of the study compared to the findings in chapter 3 (company survey) Chapter 3 presented the utilization rates of the JSFTEPA reported by a survey conducted between October 2010 and February 2011. Comparing the utilization rates of this survey with the utilization rates extracted from customs data, it appears that the survey overstated both the G-UR and the A-UR by about 100 percent. The survey reported a G-UR of 45 and an A-UR of 70 percent for trade flows from Japan to Switzerland, while the analysis of customs data results in an average G-UR of 24 and an average A-UR of 32 percent. Looking at the lower boundaries of the 90 percent confidence intervals of the survey responses (G-UR 30 percent; A-UR 49 percent), the findings from customs data are not 101 Compare for example Pomfret et al. (2010) who found a G-UR of 20 to 25 percent for imports under the U.S. – Australia FTA. 102 Kohpaiboon (2010) found a utilization rate close to 60 percent for exports from Thailand to Indonesia under the Asean FTA. 80 even within this 90 percent confidence interval. A possible sample selection bias in the survey may therefore serve well as an explanation for the difference. The two methods come to similar conclusions with regard to industry characteristics. Specifically, both methods find that the transportation industry’s (mainly vehicles) A-UR is exceptionally high, and that the machinery and electrical industry seems to face some challenges with regard to utilizing the JSFTEPA103. In addition, both methods conclude that the size of a firm (measured in terms of employees, or proxied by import values, respectively) is significantly positively related to the utilization of the JSFTEPA. Future research Our model includes time and industry dummies, squares and cross product terms, and controls for different industries. However, the model only accounts for 23 percent of variability in the data set. Future research could therefore make an attempt to include more explanatory variables. Specifically, costs of utilizing FTAs, such as the restrictiveness of rules of origin (ROO), were not considered in our study. Existing research suggests that ROO may act as a non-tariff barrier to trade, replacing the import tariffs as a new protectionist measure (Krueger, 1993). Although the general ROO of the JSFTEPA applies to more than two thirds of all tariff lines, a relationship between the restrictiveness of the ROO and the utilization rate may still exist, specifically in the area of agriculture. In addition, research could be carried out as to whether or not there is a computable threshold above which an FTA is utilized more often, and to what extent such a threshold differs among companies and industries. 103 The comparatively high A-UR of the transportation industry and the comparatively low A-UR of the machinery and electrical industry may be explained by the absolute size of trade volumes on a highly disaggregated level. While the transportation industry imports standardized goods (mostly cars) in large quantities, machinery and electrical products are usually exported less frequently and in smaller volumes per product. In addition, customs data supported statements made by survey respondents that final products (cars, motorcycles) rather than parts are imported under the JSFTEPA – even though parts are subject to higher ad-valorem tariffs than final products. 81 82 6 Location Choice and Homogeneity of Rules of Origin104 6.1 Introduction Against the background of a stalling WTO Doha Round, individual territories increasingly pursued bilateral and regional FTAs. In the area of trade in goods, the aim of negotiating FTAs is to provide exporting manufacturers a preferential market access to other territories. Thereby, territories try to increase their attractiveness as a manufacturing location. From a global point of view, the increasing number of bilateral and regional FTAs leads to a hub-and-spoke network with incoherent trading rules. From a company’s point of view, FTAs aim at reducing transaction costs for cross-border production and distribution networks. While the purpose of FTAs is to reduce transaction costs in the form of non-tariff and tariff barriers to trade, it may well be that new transaction costs come into existence if a territory’s FTAs contain different or multiple ROO. From an exporting manufacturer’s point of view, transaction cost theory therefore suggests that a company choosing a location to set up a production site to produce goods for exportation would, c.p., prefer a location with a large number of FTAs. If there are several territories with large numbers of FTAs, transaction cost theory further suggests that such a company would, c.p., prefer the territory with the most homogeneous ROO as these would create the least ROO-related compliance costs. Therefore, territories should aim at negotiating FTAs with homogeneous ROO. To my knowledge there are so far no previous studies which directly address the question of homogeneity of ROO of specific territories. This is an important gap in the literature which this paper is trying to close by developing both a theoretical and empirical approach to the topic. In order to empirically analyze the homogeneity of the ROO, this study will focus on two products on the HS 6-digit level. The following section introduces the theoretical foundation and develops a framework which allows for an analysis of the topic. Section three presents the research design and methodology, while section four discusses the results of the study. Finally, section five provides some concluding remarks. 104 I presented an earlier version of this chapter as a paper at the Singapore Economic Review Conference (August 2009), entitled “Trade Facilitation through Homogenization of Preferential Rules of Origins - How companies and territories can capitalize on Free Trade Agreements amidst a Hub-and-Spoke Bilateralism”. I am grateful for the feedback I have received during the conference. Compared with the previous version, both the methodology and the content of the study have changed slightly. 83 6.2 Theoretical Foundation and Framework Development 6.2.1 Location Choice This chapter assumes that a company has already decided to set up a manufacturing site abroad to produce goods for exportation. The specific location of the foreign direct investment (FDI), however, is not yet decided. Extensive research has been conducted on the interaction between country and firm specific factors as sources of global competitive advantage. A well-known conceptual framework is the eclectic paradigm developed by Dunning (1980, 1988a, 1988b). In order for FDI to take place, this framework requires the presence of ownership, location and internalization advantages. While ownership and internalization advantages are assumed to be met, location advantages in the form of existing FTAs are examined in this chapter. Studies by Crookell (1987) suggest that location decisions of companies are indeed influenced by government controlled changes in tariff regulations resulting from international agreements such as FTAs (Crookell, 1987) 105 . Similarly, the World Trade Report 2008 concludes that the process of international fragmentation of production can be explained, partially at least, with the decline in absolute costs of trading, including the reduction in tariff rates (World Trade Report 2008). Another conceptual framework, the national diamond approach developed by Porter (1990), describes why territories succeed or fail in developing a competitive advantage for FDI. Porter’s model incorporates macroeconomic factors (factor endowment and demand conditions), the relationship and support of industries as well as a firm’s strategic response, structure and rivalry. Exogenous factors are chance events (they can create shifts in competitive positions) and government (able to influence demand conditions and competition between firms). These six factors interact with each other and can lead to improved competitiveness. Apart from poorly specified theoretical relationships and concepts and a lack of precision (see for example Grant, 1991), Porter’s original framework was also criticized for not considering multinational activities sufficiently. Dunning (1992) and Moon (1994) therefore extended Porter’s framework to include not only market-seeking global strategies but also production-seeking ones. Moon, Rugman and Verbeke (1995) developed the national diamond further into a generalized double diamond model which analyses both the home diamond as well as the diamond of a territory’s largest trading and investment partner. This approach incorporates multinational activities, among them inbound and outbound FDI. From an economic geography perspective, studies by Forslid and Wooton (2003) and Puga and Venables (1997) examine the location choice of companies theoretically. Forslid and Wooton (2003) show that high trade costs lead to a dispersion of production, intermediate costs create an agglomeration effect, and low trade costs lead, again, to a dispersion of production. Therefore, their conclusion is that trade liberalization may or may not lead to more concentrated production. However, looking at the effects of 105 Crookell studied subsidiaries whose only purpose was to reach foreign markets protected by tariff barriers. Upon conclusion of an FTA, the very “raison d’être” of the respective subsidiary was therefore lost, forcing the subsidiary to make fundamental strategic changes (Crookell, 1987). 84 discriminatory trade policy on the location of industry, Puga and Venables (1997) show that preferential trade liberalization makes industry relocate into the integrating territories, whereby a hub-and-spoke arrangement results in a shift of industry into the hub rather than the spoke. Compared with companies located in the spokes, those located in the hub have preferential access to more markets and therefore face less transaction costs in the form of tariffs. Given the uncertainties with regard to the developments on WTO level, from a point of view of an individual territory, FTAs are considered a “rational” response to advance development in economic cooperation (Toh, 2006: 260). Therefore, many territories started to establish free trade relations with a large number of other territories in order to capitalize on being a hub of overlapping arrangements. A good example of such a territory is Singapore (see for example Rajan and Sen, 2002, or Rajan, 2005). Singapore’s intention was to “spin a web of interlocking free trade agreements between APEC members, which could help move the organization toward achieving free trade in the AsiaPacific” 106 . Similarly, but more recently, IE Singapore, Singapore’s trade development agency, stated that Singapore’s FTAs provide more benefits for Singapore exporters and that Singapore’s extensive network of FTAs “reaffirms Singapore's position as a territory which is well-connected and plugged into the global economy” 107 . For the subsequent analysis, territories which are party to a large number of FTAs or which are connected to a large number of FTA partner territories will henceforth be called “FTA hubs”. As a conclusion, transaction cost theory suggests that a company choosing a location to set up a production site to produce goods for exportation would, c.p., prefer a location with a large number of FTAs – an FTA hub. 6.2.2 Rules of Origin and the Spaghetti Bowl The pursuit of FTAs and the resulting overlapping memberships was in the best interest of individual territories – specifically small and open trading nations. However, from a regional or global perspective, this process led to a web of incoherent trading rules and standards, also known as the Spaghetti Bowl (see for example Bhagwati, 1996) or “Noodle Bowl Syndrome” (Baldwin, 2008: 450) in the Asian context. As a result, many territories are members of several bilateral, intra-regional and extra-regional FTAs. Between certain pairs of territories there are even two or more FTAs in place 108 . Regardless of whether such a web of FTAs has a network character without central players or a hub-and-spoke character with central players, the costs of administration and transportation are likely to be higher in a network than in a free trade area (Kowalczyk and 106 Then Singapore Prime Minister Goh Chok Tong, Straits Times, January 26, 2001, quoted in Dent (2006). Wong Toon Joon, deputy director for the exports and re-exports group at IE Singapore, Singapore Business Times, ‘More FTAs equals more benefits’, September 24, 2009. 108 As an example, Singapore and New Zealand are connected by three different FTAs: A bilateral one and two regional ones (the Australia-New Zealand-Asean FTA and the Transpacific Strategic Economic Partnership). 107 85 Wonnacott, 1992). While economic integration takes on different forms intra-regionally109, bilateral FTAs increasingly take over the function of “connectors” between these regions110. The Spaghetti Bowl is not only characterized by its network structure but also by FTAs which are very different from each other in terms of content, rules and requirements. In the area of trade in goods, FTAs are characterized by different procedures to prove origin, different COO and varying requirements regarding the length to keep documents and records related to the preferential treatment of a product. In addition, multiple ROO may lead to situations in which goods which satisfy the ROO of certain FTAs do not necessarily fulfill the ROO of other FTAs – forcing a company to either source parts and raw materials according to the specifications in the respective FTAs, or to pay the MFN import tariff. Since the ROO have the most profound impact on an exporter’s ability to utilize FTAs, the subsequent analysis will focus on ROO, and specifically multiple ROO111. Anecdotal evidence suggests that multiple ROO resulting from the Spaghetti Bowl are indeed a burden for companies and increase transaction costs which FTAs are supposed to reduce. As an example, respondents to the JSFTEPA survey indicated that some IT systems were not able to cope with more than one ROO per product – urging companies to program the ROO depending on the export market. More insightful is a study by Kawai and Wignaraja (2009) which surveyed companies in five Asian territories (Japan, Korea, the Philippines, Thailand and Singapore) on the utilization of the respective FTAs and companies’ perceptions of the burden created by multiple ROO. The lowest utilization rates across a territory’s FTAs were found in Singapore (17.3 percent) and the highest in Japan (29.0 percent). The study also found that companies located in Singapore reported the highest burden resulting from multiple ROO and at the same time also the strongest demand for harmonized ROO (57.1 percent). Companies in Japan, by contrast, reported the lowest desire for harmonized ROO (28.6 percent). The study also found that large companies were more likely to express concerns about multiple ROO adding to business costs than were small companies. This is probably due to the fact that large companies more often export to multiple markets and are therefore more likely to be affected by multiple ROO than small firms. Multiple ROO therefore seem to be an issue for large companies which export to several markets. This is in spite of the fact that large companies usually have more FTA specific resources available – such as FTA experts and automated systems – than small ones. 109 Economic integration in Europe (with the EU single market and the Pan-European-Mediterranean zone allowing for diagonal cumulation), North America (NAFTA), South America (Mercosur and the Andean Community) and to some degree also Africa (customs unions) is characterized by large integrated economic areas. By contrast, the Asia-Pacific region is fragmented by many bilateral and regional FTAs. 110 See for example Solis and Katada (2008) who argue that economic integration seen as region-bound is outdated. After consolidating their regional blocs, territories in Europe and North America have pursued cross-regional FTAs. Territories in Asia launched both regional and extra-regional FTAs later, but in parallel. 111 Appendix A-1 contains a general overview on technical aspects of ROO. 86 6.2.3 Rules of Origin and Location Choice A company which is exporting goods to an FTA partner territory may be able to satisfy the ROO and benefit from preferential import tariffs. However, in order to satisfy the ROO, the company may face higher costs of sourcing as well as documentation costs. If a costbenefit analysis shows that the costs of utilizing the FTA are higher than the benefits, the company may opt to pay the MFN import tariff in the importing territory. The more restrictive the ROO, the less likely is a company to satisfy them. Comparing FTAs with and without ROO theoretically and under a partial equilibrium model, Krishna (2005) finds that an FTA with ROO creates large changes in investment flows, while an FTA without ROO would cause large changes in trade flows as all imports would enter the FTA via the territory with the lowest import tariffs. ROO prevent a simple transshipment of goods via the territory with the lowest tariffs. Taking into account the international production processes, however, ROO do not require goods to be produced entirely in one of the territories party to an FTA. However, goods must have been sufficiently worked or processed and thus undergone substantial transformation in a member territory of the FTA. This provision requires that the final processing is performed within the territory of one or all the parties in order for the good to enjoy preferential treatment. Each FTA specifies the applicable ROO – either as a general rule or a product specific rule of origin on the level of chapter, heading or subheading of the HS Nomenclature. Depending on the respective FTA, goods usually have to fulfill one or several of the following ROO112. A change in tariff classification (CTC) requires the final product to fall under a different HS Code than all non-originating input materials in order to be conferred origin113. If a product results from a process (e.g. chemical transformation), the process rule (PR) establishes that the transformation takes place in a party to the FTA. If the value added rule (VA) applies, a minimum percentage of the value added in the final product needs to be originating in order for the final product to utilize the FTA. As a result of a Spaghetti Bowl, a company located in a territory which is party to several FTAs may be required to satisfy multiple ROO in order to utilize all FTAs. Referring to the national diamond framework introduced earlier (Porter, 1990), the reduction or elimination of barriers to trade due to FTAs may lead to larger diamonds114. However, multiple ROO may increase the costs for a company which tries to make use of several larger diamonds. For the remainder of this paper, the following definitions apply. The term preferential rules of origin (ROO) will refer to a rule as specified in the legal text of an FTA (e.g. VA 40% exworks price, CTC-4, PR etc.). “VA”, “CTC” and “PR” are the types, “40%”, “-4” the respective values, and “ex-works price” or “FOB” (free on board) the basis of the calculation. Full rules of origin (F-ROO) will refer to the types of ROO as written in the legal text115. The components of F-ROO will be called single rules of origin (S-ROO)116. 112 The requirement of “wholly obtained” which applies for goods such as agricultural or mining products is not examined in this study. 113 As an example, CTC-4 would refer to a change in tariff classification on the 4-digit level. 114 As an example, the Canada-US FTA led to the North American diamond (Rugman and Verbeke, 1993). 115 F-ROO can consist of any single one or combination of CTC, PR and VA. Examples of F-ROO might be VA AND CTC; VA OR CTC; CT OR [VA AND CTC] etc. 87 Territories aiming at a business environment which is as business friendly as possible with regard to ROO have basically three alternatives: Firstly, on a global level, territories could contribute towards liberalization via the WTO. Dieter (2009) suggests measures such as a multilateralization of commitments which territories have made in FTAs, or a renunciation of the single undertaking approach of the Doha Round. Secondly, on a regional level, territories could help making the Spaghetti Bowl disappear via a regional negotiation and standardization process. Such a process could lead to either regional FTAs or individual territories adjusting their bilateral and regional FTAs to a commonly accepted amalgamation (Scollay, 2007). Such solution would suggest that FTAs are stepping stones towards a more inclusive liberalization117. Other studies suggest a convergence of the ROO based on the concept of a variable geometry (Cornejo and Harris, 2007). A commonly accepted standard, however, will not exceed the concessions which the least open territories are willing to make. Thirdly, territories may aim at negotiating ROO which are as homogeneous as possible across their different FTAs by insisting on a consistent template in each FTA they negotiate. Rather than adopting a variety of different ROO from their FTA partners, such territories may impose their template on other territories. In order to improve the business environment via the first two alternatives, all or a number of territories have to act in concert to reach a solution. Individual territories are spectators rather than actors in this process. The third alternative, by contrast, allows individual territories to directly influence the business environment. The third alternative will therefore be examined in this study. As a conclusion, transaction cost theory suggests that an exporting manufacturer which chooses a location to set up a production site would, c.p., prefer a location with a large number of FTAs – an FTA hub. If there are several FTA hubs, transaction cost theory further suggests that such a company would, c.p., prefer the FTA hub with the most homogeneous ROO. From a company’s point of view, the more homogeneous the ROO, the lower the ROO-related compliance costs, and the more business friendly the trading environment. From an individual company’s point of view, the most important criterion with regard to preferential market access is the actual share of exports which is covered by FTAs with potentially homogeneous ROO. However, since this study looks at the homogeneity of ROO from a theoretical point of view, it is assumed that the better connected a territory is in terms of FTAs, the more benefits accrue to a company operating in its territory. Similarly, the study does not take into consideration the fact that in different parts of the world international production networks of companies are of different importance. Finally, the impact of the size of the domestic market on the homogeneity of FTAs will be examined later in the context of the negotiation power of territories. 116 A company can comply with the F-ROO VA OR CTC by simply fulfilling one of the S-ROO VA or CTC. However, the F-ROO VA AND CTC requires a company to fulfill two S-ROO at the same time, namely VA and CTC. 117 For an overview of the discussion as to whether FTAs are stepping stones or stumbling blocks, see for example Park (2006). 88 6.2.4 Restrictiveness versus Homogeneity of Rules of Origin Studies about compliance costs of ROO often examine the restrictiveness of individual ROO118. When comparing the ROO of different territories with regard to their business friendliness, however, the restrictiveness of individual ROO is not as decisive since the respective territories’ FTA partner would have exactly the same restrictiveness on the level of individual ROO119. Rather, from a locational point of view, the homogeneity of ROO seems to be more important. This does not imply, however, that the restrictiveness of the ROO is not of importance. It is simply proposed here to first look at the homogeneity of ROO and only at a later stage at their restrictiveness. This section provides a brief overview on the conceptual differences between the restrictiveness and the homogeneity of ROO. From a company perspective, both homogeneity and restrictiveness of the ROO are closely related in the sense that both concepts measure the difficulty of utilizing FTAs. Table 6-1 shows the conceptual difference between the restrictiveness and homogeneity of ROO. Table 6-1: Differences between the concepts of restrictiveness and homogeneity of ROO Restrictiveness of a ROO Homogeneity of ROO Description Difficulty of a company to of satisfy the ROO of a Concepts specific product exported to a specific FTA partner territory Examples A value added of 50% is more restrictive than a value added of 40% Difficulty of a company to satisfy the ROO of a specific product exported to several FTA partner territories ROO are considered to be homogeneous if they have the same requirements. By contrast, ROO are considered heterogeneous if their requirements are different. The restrictiveness of a ROO describes the difficulty of a company to satisfy the ROO of a specific product to a specific FTA partner territory. As an example, a ROO which requires a value added of 50% is more restrictive (more difficult to achieve) than a ROO which 118 Estevadeordal (2000) was the first to develop a synthetic restrictiveness index for ROO. The index is based on ex ante data, derived exclusively from the structure of the ROO themselves. When the utilization rates are available, the restrictiveness of the ROO may be based on ex post data on the utilization rate (see for example Cadot et al., 2005). An extensive overview on research on restrictiveness of the ROO provides Harris (2007). 119 Rather, studies suggest that restrictive ROO replace tariffs as a protectionist measure once tariffs are eliminated due to an FTA. One of the early theoretical works includes Krueger (1993) who finds an important protectionist bias inherent in FTAs which is not present in custom unions. Krishna and Krueger (1995) suggest that even if ROO are not restrictive, i.e. do not raise costs of production, they still have a very pronounced effect on trade flows – pointing to the fact that ROO can act as hidden protectionism and induce a switch in demand from low-cost external inputs to higher-cost partner inputs to ensure final products actually receive duty free access. 89 requires a value added of 40%120. By contrast, the homogeneity of ROO describes the difficulties companies face when exporting a specific product to several different FTA partner territories 121 . In order to illustrate the idea, it is assumed that a territory has concluded FTAs with three other territories. If the ROO of all three FTAs require a value added of 40% for a specific product, the ROO are very homogeneous, and a company has to examine and satisfy only one ROO for all three export markets. By contrast, if the three FTAs have different ROO for a specific product and are thus very heterogeneous, the company has to examine and satisfy three different ROO to assess whether its products can utilize all three FTAs. Consequently, the administration in terms of costs statements and the consistent compliance with the ROO becomes more time-consuming. In addition, software which can only be programmed for one ROO per product would have to be reprogrammed depending on the export destination. Software which allows for several different ROO per product would need to be programmed accordingly. The ROO can be relatively restrictive and homogeneous at the same time. If all FTAs of a territory require a local value added of 70%, for example, it will be comparatively difficult for a company to satisfy this requirement. Once the requirement is satisfied, however, all FTAs can be utilized. 6.3 Research Design and Methodology Geographical scope: The study examines all WTO members. Since members of the EU do only negotiate FTAs in the framework of the EU, individual EU members are not examined. Goods examined: Rather than having one general ROO which is applicable to all goods, most FTAs apply product specific ROO. In order to compare the homogeneity of ROO across FTAs, two goods on the HS Code 6-digit level (subheadings) were selected as case studies. The HS Codes selected are HS 300490 (medications not elsewhere specified, in dosage) and HS 870323 (automobiles, spark ignition engine of 1500-3000 cc). Within their respective HS chapters (pharmaceutical products and vehicles other than railway or tramway rolling stock), these two goods serve as case studies as they are representative in terms of export value; they accounted for the largest combined export shares of the territories selected as “FTA hubs” in section 6.4.1122. Scope of FTAs: The study examines FTAs which are currently in force. FTAs examined include bilateral FTAs between two territories, bilateral FTAs between a territory and a regional trade agreement, as well as regional FTAs. Non-reciprocal trade agreements, such as the GSP or the India-Nepal agreement, are not included in the study. In addition, if an FTA did not cover one or both of the examined goods, it was excluded from the 120 Based on Estevadeordal (2000), studies found that a change in tariff classification is causing least compliance costs, followed by value added and process rules (Carrère and De Melo, 2006; Anson et al., 2005). 121 It would also be possible to examine the homogeneity of ROO across one FTA. However, this is not within the scope of the present study. 122 The data on the export value were retrieved from UNCOMTRADE for 2009 (http://comtrade.un.org/; accessed September 15, 2011). 90 analysis of the respective good’s ROO. Since the purpose of this study is to compare ROO across FTAs, it is not examined whether or not and to what extent a good enjoys tariff preferences under a specific FTA123. If there is more than one FTA in force between two territories and the FTAs have different S-ROO for the same good, the S-ROO are combined into a new F-ROO124. Analysis: The analysis of the ROO’s homogeneity begins with the identification of FTA hubs. FTA hubs are defined as territories which are exceptionally well connected with other territories in terms of FTAs. Focusing on FTA hubs guarantees that the number of FTAs a territory has negotiated and the number of FTA partner territories a territory is connected to is controlled for when analyzing the homogeneity of the ROO. A territory is called an FTA hub if it is party to more than 10 FTAs, or if it is connected to at least 20 FTA partner territories, provided it is a party to at least eight FTAs125. Once the FTA hubs are identified, the respective territories’ FTAs are examined with regard to the homogeneity of the types of the S-ROO and F-ROO. The homogeneity of S-ROO is indicated by two coefficients. Coefficient CT measures the number of FTA partner territories a company can export to by complying with just one specific S-ROO 126 in relation to the total number of FTA partner territories (equation 1). Number of FTA partner territories a company can export to by complying with one specific S-ROO CT = ------------------------------------------------------------------------------------------------------------ (1) Total number of FTA partner territories Coefficient CF measures the number of FTAs a company can utilize by complying with just one specific S-ROO in relation to the total number of FTAs (equation 2). Number of FTAs a company can utilize by complying with one specific S-ROO CF = ------------------------------------------------------------------------------------------------------------ (2) Total number of FTAs 123 Certain territories may have eliminated their MFN tariffs unilaterally or via sectoral agreements such as the Pharmaceutical Tariff Elimination Agreement. While there may be a correlation between the margin of preference and the restrictiveness of the ROO (see for example Krishna and Krueger, 1995), no correlation is assumed between the margin of preference and the homogeneity of ROO which is examined here. 124 If there are several FTAs in force between two territories, a company may choose which one to utilize. As an example, if one FTA requires a VA and the other one a CTC, the combined F-ROO is VA OR CTC. If there are two FTAs with different ROO in force between two territories, the applicable margins of preference may be different, too. However, tariff preferences are not within the scope of this study. 125 To define a minimum number of FTAs serves two purposes. First, it guarantees that a territory which is party to a regional FTA with many other parties is not called an FTA hub just because of one FTA. Second, regional FTAs with a large number of members might distort the findings and hide potentially homogeneous ROO a territory might have on the bilateral level. The numbers necessary to qualify as an FTA hub are set arbitrarily and serve the purpose of a meaningful examination. 126 The respective S-ROO is always the one which appears the most among the different FTAs and thus allows a company to utilize the maximum number of FTAs possible by complying with only one S-ROO. For this exercise, FTAs were only considered when the F-ROO did not contain an “and” requirement, as this makes it impossible to find only one S-ROO which would allow a company to satisfy the F-ROO. 91 The higher the coefficients CT and CF, the more homogenous the S-ROO – a value of 1 indicates that a company which complies with one S-ROO can utilize all FTAs and export to all FTA partner territories. CT and CF can also be interpreted as the percentage of FTA partner territories a company can export to, or the percentage of FTAs a company can utilize, respectively. Apart from the types, S-ROO will also be analyzed with regard to their values and calculation bases. In addition to the S-ROO, the homogeneity of the F-ROO will be examined as well. However, since the F-ROO are not as decisive for companies as the S-ROO, the F-ROO are only discussed briefly. The analyses of territories’ FTAs with regard to the homogeneity of the S- and F-ROO will then lead to a conclusion on whether or not territories follow a template when negotiating the ROO in their FTAs, and to what extent territories can impose their template on other territories. Data collection: Data were collected through the WTO’s RTA Information System 127 , UNESCAP’s trade agreement database128 and individual territories’ homepages. The legal texts of the respective FTAs served as source of information on ROO. 6.4 Results and Discussion 6.4.1 Statistics Territories which emerged as FTA hubs according to the defined criteria are listed in the first column in table 6-2. Bilateral and regional FTAs concluded by these territories are listed in appendix A-8. In addition, appendix A-9 lists the members of the regional FTAs indicated in appendix A-8. Table 6-2: Number of FTAs and FTA partner territories of FTA hubs Territory Number of FTA Partner Territories Number of FTAs Australia Chile 24 60 8 21 China EU 20 23 9 21 India Japan 21 14 11 12 Mexico New Zealand 52 25 13 9 Singapore Switzerland 24 54 18 22 U.S. 17 11 127 128 http://rtais.wto.org/UI/PublicMaintainRTAHome.aspx (accessed June 29, 2011). http://www.unescap.org/tid/aptiad/agg_db.aspx (accessed June 29, 2011). 92 The second column in table 6-2 reports the number of FTA partner territories a territory is connected to, while the third column shows the number of FTAs a territory is party to. Chile, the EU, Japan, Mexico, Singapore, Switzerland and the U.S. are all party to more than 10 FTAs. Australia, China, India and New Zealand are all connected to at least 20 FTA partner territories and are party to at least eight FTAs129. The territories which are identified as FTA hubs are further examined regarding the homogeneity of their FTAs’ ROO. Tables 6-3 and 6-4 report statistics about the S-ROO by territory – parts a) of tables 6-3 and 6-4 show the number of FTA partner territories a company can export to by complying with only one S-ROO, while parts b) indicate the number of FTAs a company can utilize by complying with only one S-ROO. Table 6-3 shows the numbers for HS Code 300490, and table 6-4 for HS Code 870323. For HS Code 300490, part a) of table 6-3 compares the eleven territories’ number of FTA partner territories a company can export to by complying with one specific S-ROO. India, Japan and Mexico emerge as territories with very homogeneous ROO, as companies in these territories can export to all their FTA partner territories by simply fulfilling one S-ROO – in the case of India the value added rule (VA), in the cases of Japan and Mexico the CTC rule. By contrast, when complying with the most widely used S-ROO (VA), a company in Chile can only export to 23 out of Chile’s 31 FTA partner territories. In order to export to all FTA partner territories, a company in Chile would have to satisfy both the value added and the CTC rule. Part b) of table 6-3 compares the eleven territories’ number of FTAs a company can utilize by complying with one specific S-ROO. Again, India, Japan and Mexico emerge as territories with very homogeneous ROO, as companies in these territories can utilize all FTAs by simply fulfilling one S-ROO. A company in Chile, however, can only utilize 12 out of 18 FTAs by complying with the most widely used S-ROO (VA). The number of FTA partner territories and number of FTAs for the EU shows zero due to the fact that all FROO of HS Code 300490 across all FTAs of the EU contain an “and” requirement – therefore there is no specific S-ROO which would allow the satisfaction of the F-ROO. The numbers of FTA partner territories and numbers of FTAs are often lower in tables 6-3 to 66 than in table 6-2 for the same reason. 129 Other territories which fulfil above criteria are Iceland, Liechtenstein, Norway, Turkey and the Ukraine. Switzerland, Iceland, Liechtenstein and Norway are members of EFTA. Their FTAs are therefore identical, except that Switzerland has negotiated additional FTAs outside of EFTA. 93 Table 6-3: Number of FTAs and FTA partner territories for HS 300490a, by FTA hub Exporting Territory Part a) Territories Part b) FTAs Number of FTA partner territoriesa Australia Number of FTA partner territories a company can export to by complying with one specific SROO (respective SROO) 24 22 (VA) Types of SNumber ROO a of FTAs b company needs to satisfy in order to be able to export to all FTA partner territories VA, CTC 8 Number of FTAs a company can utilize by complying with one specific SROO (respective SROO) Chile China 31 20 23 (VA) 17 (VA) VA, CTC VA, CTC 18 9 12 (VA) 6 (VA) EU 0 n.a. n.a. 0 n.a. India 9 9 (VA) VA 2 2 (VA) Japan Mexico 13 21 13 (CTC) 21 (CTC) CTC CTC 11 11 11 (CTC) 11 (CTC) New Zealand 25 22 (VA) VA, CTC 9 7 (CTC) Singapore 23 20 (VA) VA, CTC 17 12 (VA) Switzerland U.S. 10 17 9 (VA) 12 (CTC) VA, CTC VA, CTC 6 11 5 (VA) 6 (CTC) 5 (CTC) Notes: (a) Medications not elsewhere specified, in dosage. (b) FTAs were only counted when the F-ROO did not contain an “and” requirement, as an “and” requirement makes it impossible to find only one S-ROO which would allow a company to satisfy the F-ROO. (n.a.) not applicable. For HS Code 870323, table 6-4 reports the number of FTA partner territories a company can export to by complying with one specific S-ROO, as well as the number of FTAs a company can utilize by complying with one specific S-ROO. Contrary to HS Code 300490, for HS Code 870323 most of the FTA hubs seem to have negotiated homogeneous ROO. With the exception of China, New Zealand and Switzerland, companies in the respective territories can export to all FTA partner territories and utilize all FTAs by complying with just one S-ROO. 94 Table 6-4: Number of FTAs and FTA partner territories for HS 870323b, by FTA hub Exporting Territory Part a) Territories Part b) FTAs Australia Number of FTA partner territories a company can export to by complying with one specific SROO (respective SROO) 22 22 (VA) Chile China 55 18 55 (VA) 16 (VA) VA VA, CTC 16 7 16 (VA) 5 (VA) EU 23 23 (VA) VA 21 21 (VA) 9 9 (VA) VA 2 2 (VA) Japan Mexico 12 42 12 (VA) 42 (VA) VA VA 10 4 10 (VA) 4 (VA) New Zealand 23 23 (VA) VA 6 4 (VA) Singapore 22 22 (VA) VA 14 14 (VA) Switzerland U.S. 54 12 53 (VA) 12 (VA) VA, CTC VA 22 7 21 (VA) 7 (VA) India Number of FTA partner territoriesa Types of SNumber ROO a of FTAs b company needs to satisfy in order to be able to export to all FTA partner territories VA 4 Number of FTAs a company can utilize by complying with one specific SROO (respective SROO) 4 (VA) Notes: (a) Automobiles, spark ignition engine of 1500-3000cc. (b) FTAs were only counted when the F-ROO did not contain an “and” requirement, as an “and” requirement makes it impossible to find only one S-ROO which would allow a company to satisfy the F-ROO. In order to perform a meaningful analysis of above information, the coefficients C T (equation 1) and CF (equation 2) are calculated. Coefficient CT measures the number of FTA partner territories a company can export to by complying with just one specific SROO in relation to the total number of FTA partner territories (equation 1). CF measures the number of FTAs a company can utilize by complying with just one specific S-ROO in relation to the total number of FTAs. The respective values of C T and CF are reported in tables 6-5 and 6-6 for HS Codes 300490 and 870323, respectively. The values of coefficients CT and CF lie between close to 0 and 1. The more homogeneous the ROO are, the closer the values to 1. A value of 1 indicates that compliance with one specific S-ROO would allow a company to utilize all FTAs and to export to all FTA partner territories. The minimum values of coefficients CT and CF depend on a specific territory’s total number of FTA partner territories and total number of FTAs, respectively. 95 For HS Code 300490 (table 6-5), CT is 1 under both parts a) and b) for India, Japan and Mexico, indicating that these territories have negotiated very homogeneous S-ROO across their FTAs. While this result has already emerged in table 6-3, CT in addition allows for a ranking of territories with regard to the homogeneity of their ROO. When complying with only one specific S-ROO, companies can export to less than 90 percent of the FTA partner territories of Chile (74 percent), China (85 percent), New Zealand (88 percent), Singapore (87 percent), and the U.S. (71 percent). These values are even lower when looking at the number of FTAs a company can utilize by complying with only one specific S-ROO. Table 6-5: Coefficients CT and CF for HS 300490a, by FTA hub Exporting Territory Part a) Territories Australia 24 Number Number of CF b of FTAs FTAs a company can utilize by complying with one specific SROO 22 0.92 8 5 0.63 Chile 31 23 0.74 18 12 0.67 China 20 17 0.85 9 6 0.67 EU India 0 9 n.a. 9 n.a. 1 0 2 n.a. 2 n.a. 1 Japan Mexico 13 21 13 21 1 1 11 11 11 11 1 1 New Zealand Singapore 25 22 0.88 9 7 0.78 23 20 0.87 17 12 0.71 Switzerland 10 9 0.90 6 5 0.83 U.S. 17 12 0.71 11 6 0.55 Number of FTA partner territoriesa Part b) FTAs Number of FTA partner territories a company can export to by complying with one specific S-ROO CT Notes: (a) Medications not elsewhere specified, in dosage. (b) FTAs were only counted when the F-ROO did not contain an “and” requirement, as an “and” requirement makes it impossible to find only one S-ROO which would allow a company to satisfy the F-ROO. (n.a.) not applicable. 96 The values of CT and CF for HS Code 870323 are presented in table 6-6. Table 6-6: Coefficients CT and CF for HS 870323a, by FTA hub Exporting Part a) Territories Part b) FTAs Territory Number Number of FTA CT Number Number of of FTA partner territories a partner territories a company can export to by complying with one specific S-ROO of FTAs b CF FTAs a company can utilize by complying with one specific SROO Australia 22 22 1 4 4 1 Chile China 55 18 55 16 1 0.89 16 7 16 5 1 0.71 EU India 23 9 23 9 1 1 21 2 21 2 1 1 Japan Mexico 12 42 12 42 1 1 10 4 10 4 1 1 New Zealand 23 23 1 6 4 0.67 Singapore 22 22 1 14 14 1 Switzerland U.S. 54 12 53 12 0.98 1 22 7 21 7 0.95 1 Notes: (a) Automobiles, spark ignition engine of 1500-3000cc. (b) FTAs were only counted when the F-ROO did not contain an “and” requirement, as an “and” requirement makes it impossible to find only one S-ROO which would allow a company to satisfy the F-ROO. In addition to the types of S-ROO which were analyzed above, the values and calculation bases are important indicators for the homogeneity of ROO, too. The values and calculation bases of territories’ ROO are reported in table 6-7. With regard to the homogeneity of ROO, a low number of different values and calculation bases points to homogeneous ROO. The restrictiveness of the ROO is not being discussed here130. 130 A good which satisfies the VA 50% rule automatically satisfies the VA 40% rule. Similarly, a good which satisfies the CTC-4 rule automatically satisfies the CTC-6. Whether or not a company decides to always use the most restrictive ROO across all FTAs or the most liberal ROO for each FTA touches the restrictiveness of the ROO (rather than their homogeneity) and is therefore not further discussed here. 97 Table 6-7: Values and bases of calculations of FTA hubs, HS 300490a and 870323b Exporting Territory Values Australia VA: 40%, 50%; CTC-6 Chile HS Code 300490 Calculation Bases HS Code 870323 VA: 40%, 50%; CTC-4 HS Code 300490 FOB, ex-factory cost HS Code 870323 VA: 30%, 40%, 50%; CTC-4, -6 VA: 20%, 26%, 30%, 32%, 40%, 45%, 60%; CTC-4 FOB, ex-works price FOB, ex-works price, adjusted value, net cost China VA: 40%, 45%, 50%; CTC-4, -6 VA: 40%, 45%, 50% FOB FOB EU India VA: 50%; CTC-4 VA: 35%, 40%, 45%, 50%; CTC4, -6 VA: 60% VA: 35%, 40%, 45%, 50%; CTC-4, -6 ex-works price FOB ex-works price FOB Japan VA: 30%, 35%, 40%; CTC-4, -6 VA: 30%, 35%, 40%, 60%, 65%; CTC-4, -6 FOB, ex-works price FOB, ex-works price Mexico VA: 50% VA: 26%, 32%, 40%, 50%, 60% FOB, ex-works price FOB, ex-works price New Zealand Singapore VA: 40%, 50%; CTC-2, -4, -6 VA: 35%, 40%, 50%; CTC-4, -6 VA: 40%, 45%, 50%; CTC-4 VA: 35%, 40%, 45%, 55%, 60%; CTC-4, -6 FOB, ex-factory cost FOB, ex-factory cost, ex-works price FOB, ex-factory cost FOB, ex-factory cost, ex-works price VA: 40%, 60%; CTC-4 VA: 30%, 35%, 50%; CTC-4 ex-works price ex-works price FOB, ex-factory cost FOB, ex-factory cost Switzerland VA: 40%, 50%; CTC-4, -6 U.S. VA 35%; CTC-4, -6 FOB, ex-factory cost, adjusted cost, net cost Notes: (a) Medications not elsewhere specified, in dosage. (b) Automobiles, spark ignition engine of 1500-3000cc. (FOB) free on board. Companies in territories such as Chile and Singapore face a huge variety of different values and calculation bases. By contrast, companies in the EU, India and Mexico are dealing with a limited number of values and calculation bases, depending on the respective good. These findings mirror the examinations of the types of the homogeneity of the S-ROO. 98 In addition to the analysis of S-ROO, the extent to which territories try to negotiate homogeneous F-ROO is examined. Table 6-8 lists the number of different F-ROO by territory and goods131. Table 6-8: Number of different F-ROO by FTA hub and HS 300490 and 870323 Exporting HS Code 300490: Medications not HS Code 870323: Automobiles, Territory elsewhere specified, in dosage spark ignition engine of 1500-3000cc Australia Chile 3 6 2 3 China 4 2 EU 1 1 India Japan 2 4 2 3 Mexico New Zealand 4 4 3 4 Singapore Switzerland 6 4 3 3 U.S. 4 3 The EU emerges as a territory with very homogeneous F-ROO. For both goods examined, the EU is the only territory which has negotiated the same F-ROO across all FTAs. All other territories have at least two different sets of F-ROO, with Chile and Singapore up to six for HS Code 300490. While the F-ROO are insightful when it comes to a territory’s template with regard to ROO, a company will find the homogeneity of the S-ROO of more practical relevance. 6.4.2 Rankings of Territories according to the Homogeneity of Rules of Origin The examined territories are ranked in order to establish their relative position with regard to the homogeneity of the S- and F-ROO (table 6-9). The higher a territory is ranked, the more homogeneous are the S- and F-ROO across its FTAs, and thus the more business friendly the export environment. Generally, the relative position of territories depends on the good and the criterion one is looking at. However, certain patterns can be detected: Whenever data on the S- and F-ROO are available, the EU, India, Japan and Mexico seem to have negotiated quite homogeneous ROO across their FTAs. By contrast, Chile, China, New Zealand, Singapore and the U.S. emerge as territories with relatively inhomogeneous ROO. Australia and Switzerland are not clearly attributable. From a company perspective the homogeneity of S-ROO is more relevant than that of the F-ROO. Therefore, among the FTA hubs, companies would find the most business friendly environment with regard to the homogeneity of ROO in the EU, India, Japan and Mexico. 131 The homogeneity of F-ROO is not calculated separately for the number of FTA partner territories and number of FTAs as there is no difference. 99 Table 6-9: Relative position of FTA hubs regarding the homogeneity of FTAs’ ROO Relative HS Code 300490: Medications not HS Code 870323: Automobiles, spark Position elsewhere specified, in dosage ignition engine of 1500-3000cc S-ROO CT 1. IN, JP, MX F-ROO S-ROO CT CF IN, JP, MX EU F-ROO CF AU, CL, EU, AU, CL, IN, JP, MX, EU, IN, NZ, SG, U.S. JP, MX, SG, U.S. 2. IN 3. 4. AU CH AU CN, JP, MX, NZ, CH, U.S. 5. CH NZ 6. NZ SG 7. SG CL, CN EU AU, CN, IN CL, JP, MX, SG, CH, U.S. 8. CN 9. CL 10. U.S. 11. n.a. EU AU U.S. CL, SG CH CH CN CN NZ NZ EU Notes: (AU) Australia; (CH) Switzerland; (CL) Chile; (CN) China; (IN) India; (JP) Japan; (MX) Mexico; (NZ) New Zealand; (SG) Singapore. (n.a.) not applicable. 6.4.3 The Emergence of Templates Above analysis suggests that some territories which were identified as FTA hubs may apply a template when negotiating the ROO in their FTAs. When examining the ROO across all FTA hubs’ FTAs, certain territories indeed appear to follow a template (table 610). 100 Table 6-10: Templates of FTA hubs for ROO of HS 300490 and 870323 Template for HS Code 300490a No obvious template No obvious template Template for HS Code 870323b No obvious template No obvious template China EU No obvious template No obvious template VA ex-works price AND CTC VA ex-works price India Japan VA FOB AND CTC VA FOB OR CTC VA FOB AND CTC VA FOB OR CTC Mexico New Zealand VA FOB OR CTC No obvious template VA FOB AND CTC No obvious template Singapore Switzerland No obvious template No obvious template VA ex-works price AND CTC No obvious template VA ex-works price No obvious template Territory Australia Chile U.S. Notes: (a) Medications not elsewhere specified, in dosage. (b) Automobiles, spark ignition engine of 1500-3000cc. Australia: For HS Code 300490, early FTAs are usually based on VA, while later ones adopt a choice between VA and CTC. For HS Code 870323, Australia’s early FTAs and the FTA with Asean require a VA, while later ones, specifically those based on the NAFTA-template with Chile and the U.S., require VA AND CTC. Therefore, no clear template can be detected. Chile: Chile seems to have adopted the templates of the respective FTA partner territories. China: For both HS Codes 300490 and 870323, China negotiated VA 40% FOB in its FTAs with Asean, Singapore and Pakistan. However, different types of ROO are used in the FTA with New Zealand and the recently concluded one with Peru. Therefore, a template for ROO does not seem to exist. EU: The EU, by contrast, negotiated CTC-4 and 50% ex-works price for HS Code 300490 and 60% ex-works price for HS Code 870323 consistently across all FTAs. India: With regard to both HS Codes 300490 and 870323, India’s template seems to be VA AND CTC. Even when negotiating with Asean – which usually pushes its own template of VA or VA OR CTC through – India negotiated a VA AND CTC. The only FTAs in which India could not negotiate VA AND CTC as a general ROO are the India-Mercosur FTA and the Asia-Pacific Trade Agreement. However, both FTAs have a very low coverage of goods and a low margin of preference for the few goods covered 132. Neither HS 300490 nor HS 870323 are covered by these FTAs. Japan: Almost all of Japan’s FTAs require VA OR CTC for HS Code 300490 and VA or VA OR CTC for HS Code 870323133. The calculation base is almost always FOB. The only 132 The India-Mercosur FTA covers only 450 tariff lines on the HS 8-digit level. Interestingly, for HS Code 870323, Japan’s bilateral FTAs with members of Asean contain the standard VA 40% OR CTC-4 rule, while the regional Asean-Japan FTA contains a seemingly more restrictive VA 40% 133 101 exceptions to these templates are Japan’s FTAs with India, Mexico and Switzerland. In the FTA with India, Japan had to accept India’s template (the more restrictive VA AND CTC rule) for both HS Codes. Similarly, in the FTA with Mexico, Japan had to accept the VA AND CTC rule for HS Code 870323, which is the NAFTA-template. The FTA with Switzerland is the only one were Japan negotiated ex-works price instead of FOB as a basis of calculation. The “ex-works price” is the standard basis of calculation in FTAs negotiated by Switzerland and the EU. Mexico: For HS Code 300490, Mexico consistently negotiated the NAFTA-template of VA OR CTC, with the calculation based on FOB. Only the FTAs with the EU and Switzerland, or EFTA, respectively, deviate by requiring VA AND CTC. HS Code 870323 predominantly uses VA AND CTC – the NAFTA-template. However, the NAFTA-template seems challenged in the FTAs between Mexico and South American territories. In both the Latin American Integration Association (LAIA), which Mexico is part of, and the FTA with Chile, a VA OR CTC rule is found. In addition, similarly to HS Code 300490, the FTAs with the EU and Switzerland adopt the EU template of VA based on ex-works price, whereas Mexico’s standard is FOB. New Zealand: New Zealand does not seem to have a particular template for ROO. Singapore: Similarly, Singapore seems to have adopted the templates of the respective FTA partner territories. Switzerland: With a few exceptions, the templates of Switzerland, or EFTA, respectively, are similar to the ones of the EU. Exceptions occur in industries where interests between EFTA and EU members differ, such as in the automobile industry. The template for HS Code 300490 (VA AND CTC) could not be followed in the FTAs with Japan and Korea, where a VA OR CTC rule was negotiated. In addition, the FTAs with Canada, Chile, SACU and Singapore contain either a VA or a CTC rule. Similarly, for HS Code 870323, Switzerland follows the template of the EU (VA), with the exception of the FTAs with Canada, Japan and Korea. U.S.: The U.S. does not seem to have a particular template for ROO. Out of 11 territories which were identified as FTA hubs, the five which seem to follow a ROO template are the EU, India, Japan, Mexico and Switzerland. Switzerland follows largely the template of the EU. Since templates point to homogeneous ROO and therefore provide for a more business friendly trading environment, territories would be expected to follow a certain template when negotiating the ROO in their FTAs. Possible explanations as to why certain territories seem to be able to follow a template while others do not are discussed subsequently. Firstly, territories which are highly dependent on trade are assumed to be more likely to follow a ROO template. Dependency on trade is measured as exports of goods and services in percent of the gross domestic product (GDP). The figures in table 6-11, however, do not seem to support this assumption. rule. However, the ROO in the regional FTA may only seem to be more restrictive as companies in fact may be able to cumulate local value added among Asean member states. 102 Table 6-11: Export of goods and services in % of GDP, 2008 and 2009, by FTA hub Territories Export of Goods & Services in % of GDP 2008 Territories for which a ROO template could be identified Switzerland 56 52 EU Mexico 47 28 41 28 India Japan 23 18 20 13 221 45 --38 China New Zealand 35 31 27 28 Australia U.S. 20 13 --11 134 Territories for which a ROO template could not be identified 2009 Singapore Chile Source: World Bank National Accounts Data (http://data.worldbank.org; accessed September 15, 2011). Secondly, it is assumed that the negotiating power of a territory is positively related to the homogeneity of the ROO. Table 6-12 reports the gross domestic product for 2010 in billion USD by FTA hubs as a proxy for the negotiating power. Table 6-12: Gross domestic product of FTA hubs in 2010, by FTA hub Territories Gross Domestic Product (2010, billion USD) Territories for which a ROO template could be identified Territories for which a ROO template could not be identified EU Japan 16,070 5,459 India Mexico 1,538 1,039 Switzerland Median 524 1,538 U.S. China 14,660 5,878 Australia Singapore 1,236 223 Chile New Zealand 203 140 Median 730 Source: CIA World Factbook (https://www.cia.gov/library/publications/the-world-factbook/; accessed September 15, 2011). 134 Approximated by the respective figures for Germany, the biggest economy within the EU. 103 Territories for which a ROO template could be identified tend to have a higher GDP than territories for which a ROO template could not be identified. The respective medians are 1,538 billion USD and 730 billion USD for territories with and without a ROO template, respectively. This difference becomes even larger when accounting for the fact that behind the templates of Switzerland, Mexico and the U.S. are the templates of the EU and NAFTA. The negotiating power of a territory helps explain why the EU, Japan, India, Mexico and Switzerland have ROO templates and thus comparatively homogeneous ROO across their FTAs. A lack of negotiating power explains why territories such as Singapore, Chile and New Zealand face problems when negotiating ROO – although they are highly dependent on trade. The negotiating power, however, cannot explain why the U.S. and China do not follow a ROO template in their FTAs. Thirdly, apart from economic motivations, territories may negotiate FTAs for political or strategic reasons. Specifically, the U.S.’ FTAs with comparatively small territories in the Middle East and Latin America may be motivated by political rather than economic reasons 135. Among the U.S.’ political and strategic interests in FTAs, Feinberg (2006) identifies security interests, support of democratic regimes, and rewards of countries for their foreign policy loyalty. When it comes to China, political and strategic interests in FTAs may include the consolidation of China’s regional influence, specifically against the background of its historical influence in Southeast Asia and the rivalry with Japan (Hoadley and Yang, 2008). Yang (2010) questions whether China has a coherent FTA strategy since political and economic interests vary depending on the different stages of the policy making progress. Such an approach, however, makes China flexible regarding the structure and the coverage of its FTAs, allowing for vague framework agreements with developing countries, and comprehensive agreements with developed countries (Ravenhill and Yang, 2009). 6.4.4 The Clash of Templates While early FTAs were predominantly concluded intra-regionally, they are increasingly negotiated on a global scale. Thus, the chances of territories with specific templates meeting in FTA negotiations are growing. A crucial question is therefore to what extent territories can push their templates through. Table 6-13 lists FTA activities among territories which were identified as both FTA hubs and following a specific template for HS Codes 300490 and 870323. 135 The U.S. maintain FTAs with territories such as Bahrain, Jordan or Oman in the Middle East, and with Costa Rica, El Salvador, Honduras or Nicaragua in Latin America. 104 Table 6-13: FTA activities among FTA hubs using a ROO template for HS 300490a and 870323b EU Switzerland (EFTA) FTA under negotiation FTA under negotiation India FTA under negotiation FTA in force FTA in force Japan No FTA FTA in force FTA in force FTA in force Mexico Notes: (a) Medications not elsewhere specified, in dosage. (b) Automobiles, spark ignition engine of 1500-3000cc. FTAs are in force between the following territories: EU-Mexico, Switzerland-Japan, Switzerland (EFTA)-Mexico, India-Japan and Japan-Mexico. There are currently no FTAs in place between the following territories: EU-India, EU-Japan, Switzerland-India and India-Mexico. Table 6-14 lists the FTAs which are currently in force, including the respective templates for HS Codes 300490 and 870323, where applicable. Table 6-14: Adopted ROO templates among FTA hubs FTA Mexico-EU HS Codes 300490a Template of the EU HS Codes 870323b Template of the EU Mexico-Switzerland (EFTA) Template of Switzerland Template of Switzerland Japan-India Template of India Template of India Japan-Mexico Japan-Switzerland No specific template No specific template Template of Mexico No specific template Notes: (a) Medications not elsewhere specified, in dosage. (b) Automobiles, spark ignition engine of 1500-3000cc. The ROO in Mexico’s FTAs with the EU and Switzerland were negotiated according to the templates of the EU and Switzerland for both goods, with Switzerland’s template largely following the one of the EU. The Japan-India FTA adopted the ROO template of India for both HS Codes, while the Japan-Mexico FTA adopted the ROO template of Mexico for HS Code 870323. No specific template was used in the case of the Japan-Switzerland FTA136. Comparing this result with the negotiating power in terms of GDP (table 6-11), it is surprising that Japan, being almost four times larger than India, could not push through its own template. It may therefore be speculated whether the negotiating power is proxied best by the current GDP, or rather by the future expected growth, proxied by the size of the population. 136 The ROO in the Switzerland-Japan FTA (for both HS Codes a VA 40% ex-works price or a CTC-4) could be interpreted as a compromise: The VA OR CTC rule stems from Japan’s ROO template, while the basis of the calculation corresponds to the template of Switzerland (and the EU). 105 As a conclusion, a company choosing a location to set up a production site to produce goods for exportation would, c.p., prefer the FTA hub with the most homogeneous ROO. In a world with several templates and inter-regional FTAs, the most homogeneous ROO are held by the territory with the most dominant template, i.e. by a territory which is able to impose its template on all other territories. 6.5 Conclusion Findings of the study Transaction cost theory suggests that an exporting manufacturer choosing a location to set up a production site would, c.p., prefer a location with a large number of FTAs – an FTA hub. If there are several FTA hubs, transaction cost theory further suggests that such a company would, c.p., prefer the FTA hub with the most homogeneous ROO. In world with several ROO templates and inter-regional FTAs, the most homogeneous ROO can be found in the territory with the most dominant template. Such a territory is able to impose its template on all other territories. Out of all WTO members, eleven territories were identified as FTA hubs. The territories identified were Australia, Chile, China, the EU, India, Japan, Mexico, New Zealand, Singapore, Switzerland, and the U.S. These territories were then ranked with regard to the homogeneity of the ROO across their FTAs. In addition, it was studied to what extent these eleven territories follow a template when negotiating ROO in their FTAs. Territories with relatively homogeneous ROO and ROO templates were the EU, India, Japan, Mexico and Switzerland. By contrast, Australia, Chile, China, New Zealand, Singapore and the U.S. did not seem (to be able) to apply or follow a template when negotiating the ROO in their FTAs. Possible explanations as to why certain territories manage to follow a template while others do not include the negotiating power measured in terms of GDP. According to the procedures applied in this study, the territories with the most dominant templates are the EU and India. An FTA between these two territories is currently being negotiated. Small territories seem to be at a disadvantage when it comes to following a ROO template. Unless such territories can follow a specific template of a larger territory, they will have to accept whatever template the larger territories are willing to offer them. In this regard, Switzerland escaped the fate of small territories due to the fact that it shares its template with the EU, a large territory. Small territories which are not clearly attributable to a region of a larger territory, however, are being ground between the different templates. Such territories include Chile, New Zealand and Singapore – small territories which heavily depend on trade. Recognizing the potential effects of FTAs, these territories started negotiations comparatively early. However, if they do not take into consideration the homogeneity of the ROO, companies may find themselves confronted with multiple ROO. This in turn may lead to overlapping FTA memberships not being a locational advantage. Recommendations for policy makers Governments of large territories may take the initiative to negotiate harmonized templates of ROO on a global level. This, however, may be a difficult undertaking due to the fact that 106 ROO and tariff reductions are usually very carefully balanced to cater to the specific circumstances of the territories involved. In the absence of a global effort to liberalize trade or to harmonize ROO, policy makers in small territories could therefore try to either follow the template of a larger territory137, or to only negotiate FTAs within a regional framework which increases the likelihood of homogeneous ROO. If small territories do not manage to do so, their companies are at a competitive disadvantage compared with companies in larger territories due to higher compliance costs stemming from inhomogeneous ROO. Since large territories have the negotiating power to impose their templates on smaller territories, policy makers of large territories should be aware of their role as leaders. Their templates should therefore be designed as liberal as possible. The EU and India seem to have quite dominant templates when it comes to ROO. Therefore, their individual templates may be adopted as a global template for harmonized ROO. Unfortunately, their templates are comparatively restrictive and thus not the optimal solution for globally harmonized ROO. In order to help companies deal with the incoherent ROO, governments or their appointed agencies may offer assistance in the form of information sessions, training seminars, and the provision of solutions regarding the implementation of an FTA process within companies. Future research Comparing Japan and Singapore, the study by Kawai and Wignaraja (2009) found that multiple ROO are of concern, primarily to companies in Singapore, while companies in Japan were less concerned about added business costs by multiple ROO. The present study found that ROO in Singapore are among the least homogeneous, while Japan seems to have quite a dominant ROO template. This result indicates that the methodology used in the present study mirrors companies’ assessment from a theoretical perspective. However, there was no statistical test performed to suggest that it is generalizable. Future research may therefore attempt to statistically test the relationship between the homogeneity of the ROO and the actual utilization rates of the respective FTAs138. In addition, instead of an ad-hoc ranking of territories, future research may test the relationship between the homogeneity of the ROO and the negotiating power in a more structured way, for example by employing a rank-order test. Moreover, additional variables which might explain the level of the homogeneity of ROO may be examined. The two goods examined in this study (HS Codes 300490 and 870323) do not allow for a cross-industry analysis. Therefore, future research may analyze more industries and HS 137 Anecdotal evidence suggests that the negotiating power of a small territory which follows the template of a large territory depends on whether it negotiates an FTA before or after the larger territory does so: Switzerland negotiated FTAs with the NAFTA members Mexico and Canada. In the case of Mexico, Switzerland could impose its template on Mexico. By contrast, Canada imposed its template on Switzerland. While the FTA with Mexico was negotiated after the EU has done so, the EU has not entered into negotiations with Canada until this day. Similarly, Switzerland could not impose its template on Korea, Singapore and Japan – territories with which the EU has not concluded FTAs at the time Switzerland was negotiating its FTAs. It therefore seems that small territories which follow a large territory’s template have a first-mover disadvantage. 138 For such a study, the utilization rates of all FTAs of the territories examined would be required. 107 Codes in order to compare the homogeneity of ROO not only across territories but also across industries. Finally, more research is necessary on how the ROO templates of large territories can be harmonized on a global level. 108 7 Conclusion 7.1 Recommendations for Policy Makers The fact that mainly large companies are found to utilize FTAs should be of a concern to policy makers, especially if trade policy in the form of FTAs is supposed to address the topic of internationalization of SMEs. The main reason for this finding is the fact that relatively high initial fixed costs arise in order to benefit from FTAs in the long-term. These fixed costs include education of staff, infrastructure, systems and resources and can be seen as an entry barrier to access the world of FTAs. Increasing the utilization rate of FTAs among SMEs is therefore a key challenge for policy makers. With regard to an automated FTA-process, governments may provide information on respective information technology and software. Alternatively, governments may commission the development of software which suits the needs of SMEs. With regard to the JSFTEPA, the promotion of the authorized exporter scheme as a fundamental precondition to automate the FTAprocess is of utmost importance. Unless SMEs are supported in the initial stage, they will find the costs of utilizing FTAs to be higher than the benefits, and thus rather pay the MFN import tariff. Thereby, they may forfeit their competitive position. While large companies are found to utilize FTAs more often, they, too, face challenges, especially when exporting to several markets. Multiple ROO are adding to business costs – for example with regard to the automation of the FTA process – and should thus be avoided by negotiators. However, due to the negotiating power of large territories, small territories may find themselves unable to follow a template on ROO. Therefore, in the absence of a global effort to liberalize trade or to harmonize ROO, policy makers of small territories could try to either follow the template of a larger territory, or to only negotiate FTAs within a regional framework. If small territories do not manage to do so, their companies are at a competitive disadvantage compared with companies in larger territories due to higher compliance costs stemming from inhomogeneous ROO. Another topic which policy makers should pay attention to is the prevalence of international production and distribution networks. Since FTAs usually only allow for cumulation of origin between the members of the respective FTA, regional FTAs are preferable to bilateral ones. In the absence of regional FTAs, ROO should be designed as liberal and homogeneous as possible or even include the possibility of some form of diagonal cumulation as currently practiced in the Pan-European-Mediterranean zone. 7.2 Comparisons of the Methodologies In order to analyze the mechanisms of FTAs from a company perspective, this dissertation has employed different methods to provide as much insight into the topic as possible. At the same time, the advantages and disadvantages of the various methods became apparent. Qualitative surveys are well suited if the researcher is interested in the collection of anecdotal evidence which subsequent studies may utilize as a basis for a more broadbased research. Qualitative surveys may also provide insight on a level of detail which 109 quantitatively oriented studies cannot. In addition, a qualitative approach suits well if the study is of exploratory nature without pre-determined answers. Finally, the replies of respondents will necessarily be more accurate than in the case of a quantitative survey as the researcher can ask follow-up questions immediately. Quantitative large-scale surveys, by contrast, are well suited if a researcher is interested in findings which are more general in nature and which should allow for a statistical analysis. Questions of such surveys are usually pre-determined, with occasional possibilities for comments. However, drawbacks of this method include possible sample selection biases and incorrect replies by the respondents, be it due to ignorance because the wrong person received the survey, or due to an undue influence by the survey design or questions. While this method helps understand mechanisms and relations between certain variables, it is not suitable for the collection of authentic data. Finally, quantitative data collected via an administrative process appears to provide the most reliable insight into the topic examined. Having said that, trying to understand how exactly the data have been collected helps interpret the outcome of an analysis. A drawback of this method is that it may be difficult to identify explanatory variables which should be included in the model. As an example, identifying possible reasons for a high or a low utilization rate may be difficult without having the input of the companies which were utilizing or not utilizing an FTA. In this regard, surveys provide a good opportunity to get an initial understanding of the variables which may be of explanatory power. As a conclusion, all three methods are equally necessary to get a complete picture on a research topic. However, not all methods are suited for all stages of the research process. 7.3 Considerations of the Effect of a Free Trade Agreement on Trade Traditionally, effects of FTAs are measured with regard to their impacts on trade flows. This section presents reasons collected from above chapters as to why FTAs do not necessarily need to have an impact on trade flows. Situations where an FTA has no impact on trade flows can occur regardless of whether companies do not utilize it (a) or utilize it (b). a) Companies do not utilize an FTA Firstly, Companies may not utilize an FTA because it is impossible if certain tariff lines are not covered by the FTA. Secondly, a company may find the utilization of an FTA unnecessary, for example when tariffs are already eliminated under MFN. Thirdly, companies may face obstacles which are not directly cost-related, such as fear of government exposure. Finally, a company may find the costs of utilizing an FTA to be higher than the benefit, for example when ROO require a company to change the sourcing pattern or the distribution network in order to utilize the FTA. b) Companies do utilize an FTA Even if companies utilize an FTA, i.e. claim preferential treatment, there may be no effect on trade. Firstly, if the price-elasticity of demand is too small to create a consumption 110 effect as described by Meade (1955), there is no increase in trade139. Secondly, when the competitive environment is comparatively weak and the price-elasticity of demand relatively low, companies may choose not to pass on the tariff savings to the consumers, but to keep it in the form of a higher profit margin. In this case, whether or not a trade effect can be expected in the future would depend on how the company spends the tariffs saved. If the savings are invested in marketing or product innovation because the respective market becomes more attractive, an effect on trade may be possible in the long-term. Consequently, an FTA only has an impact on trade if the following three requirements are satisfied: Companies do not face obstacles which prevent them from utilizing it, companies pass the tariff savings on to their customers, and the reduction in the selling price leads to an increase in the demand for the respective product from the FTA partner territory. Therefore, even when an FTA is utilized, there is not necessarily a trade effect to be observed. By contrast, a trade effect due to an FTA will require some utilization of the FTA. 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They ensure that only goods originating from a certain territory benefit from tariff concessions under the FTA. A good can achieve originating status in two ways: 1. Goods which are wholly obtained in a member territory of the free trade area, such as agricultural or mining products, enjoy preferential treatment. 2. Goods which were manufactured in a party to the FTA and thus may contain originating as well as non-originating materials must have been sufficiently worked or processed in the party. Sufficiently worked or processed refers to the last substantial transformation. Depending on the respective agreement and the product, one or several of the following requirements have to be satisfied by the product in order to receive preferential treatment: - A Change in Tariff Classification (CTC) requires the final product to fall under a different tariff classification code than all non-originating input materials in order to be conferred origin. Whether a tariff change is necessary on the 2- (chapter), 4(heading) or 6-digit (subheading) HS level depends on the product and the agreement. - If products result from reaction or transformation (e.g. chemical reaction), the Processing Rule establishes that the chemical reaction takes place in a member territory of the free trade area in order for the final product to achieve origin. - If the Value-Added Rule applies, a minimum percentage of the input in the final product needs to be originating in order to confer origin to the whole product. Depending on the respective FTA, there is either one set of ROO which applies to all products, or there are product specific ROO. The ROO usually also contain one or several of the following provisions - Territoriality principle: Generally, products are not allowed to leave the free trade during the production process. - Outward processing: Certain agreements allow for processing in non-parties for certain stages of the production process. - Direct transportation rule: Products have to be transported directly between the parties of an FTA. If they are transported via a third territory, evidence has to be provided that no processing occurred in the third territory. - Cumulation: Provisions which establish whether or not and to what extent the value added in other members of the FTA can be counted towards preferential origin. 121 A-2: Survey Questions Remarks Companies located in Japan and Switzerland received the survey questions via two separate web-links. The survey questions where the same, except - where location mattered, the versions were slightly different. The respective adaptations for companies located in Japan are highlighted in italic - that the questions for companies located in Japan referred to “Economic Partnership Agreements” (EPA) instead of “Free Trade Agreements” (FTAs), as the terminology “EPA” is more common in the Japanese context “JSFTEPA” refers to the Japan Switzerland Free Trade and Economic Partnership Agreement. Due to the conditional tree structure, several questions appear twice. For an overview of the structure of the survey, compare appendix A-3. General information I 1. Information on respondent [if you prefer to complete this survey anonymously, please leave these fields empty] - Company name - Your name - Your position and function - Your contact details (email/phone) 2. Which sector is your company active in? General information II 1. How many permanent staff does your company employ globally (fulltime equivalent)? [please indicate approximate number] 2. How many permanent staff does your company employ in Switzerland [Japan] (fulltime equivalent)? [Please indicate approximate number] 3. How many years has your company been operating in Switzerland [Japan]? [please indicate number of years] 122 4. What kind of activities/ functions do you perform in Switzerland [Japan] and/or Japan [Switzerland]? [please tick all appropriate boxes] Global ManuSales/ RepresenR&D Agent/ Headfacturing Support tative Office/ Distributor quarter Site Office Branch (3rd Party) Switzerland [Japan] Japan [Switzerlan d] Comment (if any) Area of Business 1. What is your company's area of business? [please tick one] - Manufacturing in Switzerland [Japan] - Logistics provider forwarding goods between Switzerland [Japan] and Japan [Switzerland] for another company - Importing/ distributing goods from Japan [Switzerland] into/ in Switzerland [Japan] - Service provider, e.g. financial services, telecommunications etc Exports 1. Does your company export goods produced in Switzerland [Japan] to Japan [Switzerland]? [please tick one] - Yes - No - I do not know Your company exports goods out of Switzerland [Japan] to Japan [Switzerland] 1. What is the approximate relation of exports (overseas sales) to total sales from your operations in Switzerland [Japan]? [please tick one] - 0-25% - 26-50% - 51-75% - 76-100% - I do not know 2. What is the share of intra-firm exports (i.e. exported to an affiliated company or subsidiary abroad) to total exports globally? [please tick one] - 0-25% - 26-50% - 51-75% - 76-100% - I do not know 123 3. When exporting goods from Switzerland [Japan] to Japan [Switzerland], do you transport the goods directly or transship them via third countries? [please tick one] - All our goods are being transported directly to Japan [Switzerland] - Some or all of our goods are being transshipped via one or several third countries If your goods are being transshipped via third countries, please specify the countries involved and whether you keep the goods within the customs transit zone 4. Do you use the JSFTEPA when exporting goods to Japan [Switzerland] (i.e. apply for preferential certificates of origin or print a declaration as to preferential origin on the invoices)? [please tick one] - Yes, we sometimes or always use the JSFTEPA for exports to Japan [Switzerland] - Not currently, but we have plans to maybe use the JSFTEPA in future - Not currently, and no plans to do so in future - I do not know as our logistics provider/ freight forwarder decides on the use of the JSFTEPA for exports to Japan [Switzerland] - I do not know - I am not aware of the fact that exports to Japan [Switzerland] may benefit from the JSFTEPA Your company uses the JSFTEPA for exports to Japan [Switzerland] 1. Which of the following statements is true for your company? When exporting goods to Japan [Switzerland] that fulfill the preferential rules of origin stated in the JSFTEPA, we attach a preferential certificate of origin or print an invoice declaration as to preferential origin... [please tick one] - always - randomly - only if a customer asks - I do not know 2. Does your company export goods to Japan [Switzerland] under the "approved exporter" status? [please tick one] - Yes, we export under the "approved exporter" status - No, our company was not able to get the "approved exporter" status - No, but we plan to apply for the "approved exporter" status - No, and we do not plan to apply for the "approved exporter" status as we are fine with applying for preferential certificates of origin - I do not know Comment (if any) 124 3. Why do you use the JSFTEPA for exports to Japan [Switzerland]? [please tick all appropriate boxes] - Because our customer(s) in Japan [Switzerland] wish to claim back import tariffs - Expected increase in sales to customer through enhanced price competitiveness of our goods - Higher profit-margin when selling goods to our subsidiaries in Japan [Switzerland] - To circumvent import quota in Japan [Switzerland] - I do not know Other (please specify) Your company uses the JSFTEPA for exports to Japan [Switzerland] 1. Do you face difficulties using the JSFTEPA for exports to Japan [Switzerland] when your goods are transshipped via third countries? Which countries are involved and what problems do you face? 2. What other problems/ difficulties do you face when using the JSFTEPA for exports to Japan [Switzerland]? 3. When exporting a good to Japan [Switzerland], how much time do you need on average to... [please tick one per line] <5min 5311>3h I do not 30min 59min 3h know …check if the rules of origin of JSFTEPA are satisfied? …prepare the cost statement? …apply for a preferential certificate of origin for this good? Comments (if any) 4. Does your company analyze the savings of using the JSFTEPA and/or the impacts on your business? [please tick one] - Yes - No - I do not know Your company analyses the benefits of the JSFTEPA (exports) 1. What are the effects of using the JSFTEPA so far? [please tick one] - No clear effect so far - Increase in sales but no change in profit - Increase in sales and in profits - I do not know Others (please specify) 125 2. What are your approximate savings from the JSFTEPA for exports to Japan [Switzerland]? [please tick one] - <10,000 CHF [<1M JPY] - 10,000-100,000 CHF [1M-10M JPY] - 100,001-1M CHF [>10M-100M JPY] - >1M CHF [>100M JPY] - No savings; we pass benefits on to clients - I do not know Comment (if any) 3. What share of your exports to Japan [Switzerland] enjoys preferential treatment/ uses the JSFTEPA? [please tick one] - <5% - 5-50% - 51-95% - 96-100% - I do not know Comments Your company may make use of the JSFTEPA for exports to Japan [Switzerland] in future 1. Why has your company not (yet) used the JSFTEPA for exports to Japan [Switzerland]? [please tick all appropriate boxes] - No incentives (e.g. margin of preference too small, small trading volume, other preferential schemes etc) - No interest from our side as exporter needs to prove preferential origin while importer gets all the benefits - Too much time needed for administration/ compliance - Costs of using the JSFTEPA are too high - Rules of origin are too restrictive - Our supplier(s) cannot or do(es) not want to confirm preferential origin - Compliance-related problems - Lack of awareness of JSFTEPA - Lack of information on JSFTEPA - Lack of management support Specifications or other reasons (please specify) 2. Did your company face difficulties using the JSFTEPA for exports to Japan [Switzerland] because the goods were transshipped via third countries? Which countries were involved and what problems did you face? 3. Please describe the plans of your company with regard to using the JSFTEPA for exports to Japan [Switzerland] in future 126 Your company does not use the JSFTEPA for exports to Japan [Switzerland] 1. Why has your company not used the JSFTEPA for exports to Japan [Switzerland] so far? [please tick all appropriate boxes] - No incentives (e.g. margin of preference too small, small trading volume, other preferential schemes etc) - No interest from our side as exporter needs to prove preferential origin while importer gets all the benefits - Too much time needed for administration/ compliance - Costs of using the JSFTEPA are too high - Rules of origin are too restrictive - Our supplier(s) cannot or do(es) not want to confirm preferential origin - Compliance-related problems - Lack of awareness of JSFTEPA - Lack of information on JSFTEPA - Lack of management support Specifications or other reasons (please specify) 2. Did your company face difficulties using the JSFTEPA for exports to Japan [Switzerland] because the goods were transshipped via third countries? Which countries were involved and what problems did you face? Re-export of goods 1. What happens to the goods you export to Japan [Switzerland]? [please tick all appropriate boxes] - All the goods we export to Japan [Switzerland] are sold in the domestic market. - All or some of the goods we export to Japan [Switzerland] are later re-exported to other countries in Asia [the European Union] - All or some of the goods we export to Japan [Switzerland] are further processed in Japan [Switzerland] and then exported to other countries in Asia [the European Union] - All or some of the goods we export to Japan [Switzerland] are further processed in Japan [Switzerland] and then exported to other countries in Asia [the European Union] by using the respective FTAs (i.e. claiming Japanese preferential origin) [the EU-Switzerland free trade agreement (i.e. claiming Swiss preferential origin)] - I do not know Comments (if any) Imports 1. Does your company import goods from Japan [Switzerland] for further processing at your manufacturing site in Switzerland [Japan]? [please tick one] - Yes - No - I do not know 127 Your company imports goods from Japan [Switzerland] into Switzerland [Japan] 1. What is the approximate relation of imports (overseas procurement) to total procurement for your operations in Switzerland [Japan]? [please tick one] - 0-25% - 26-50% - 51-75% - 76-100% - I do not know 2. What is the share of intra-firm imports (i.e. imported from an affiliated company or subsidiary) to total imports? [please tick one] - 0-25% - 26-50% - 51-75% - 76-100% - I do not know 3. When importing goods from Japan [Switzerland] into Switzerland [Japan], do you transport the goods directly or transship them via third countries? [please tick one] - All goods are being transported directly from Japan [Switzerland] - Some or all goods are being transshipped via one or several third countries If the goods are being transshipped via third countries, please specify the countries involved and whether you keep the goods within the customs transit zone 4. Do you use the JSFTEPA when importing goods from Japan [Switzerland] (i.e. do you make sure you have preferential certificates of origin or declaration as to preferential origin on invoice from your supplier(s))? [please tick one] - Yes, we sometimes or always use the JSFTEPA when importing from Japan [Switzerland] - Not currently, but we have plans to maybe use the JSFTEPA in future - Not currently, and no plans to do so in future - I do not know as our logistics provider/ freight forwarder decides on the use of the JSFTEPA for imports from Japan [Switzerland] - I do not know - I am not aware of the fact that imports from Japan [Switzerland] may benefit from the JSFTEPA 128 Your company uses the JSFTEPA for imports from Japan [Switzerland] into Switzerland [Japan] 1. Which of the following statements is true for your company? We ask our supplier(s) for preferential certificates of origin or declarations as to the preferential origin of the goods... [please tick one] - always - randomly - never - only when we re-export the goods later or use it for cumulation - I do not know Comment (if any) 2. Why does your company use the JSFTEPA for imports from Japan [Switzerland]? [please tick all appropriate boxes] - To avoid paying Swiss [Japanese] import tariffs/ reduce landed costs - To circumvent import-quota in Switzerland [Japan] - To make use of cumulation possibilities when re-exporting the goods - I do not know Other (please specify) 3. Do you face difficulties using the JSFTEPA for imports from Japan [Switzerland] when the goods are transshipped via third countries? Which countries are involved and what problems do you face? 4. What other problems/ difficulties do you face when using the JSFTEPA for imports from Japan [Switzerland]? Your company uses the JSFTEPA for imports from Japan [Switzerland] into Switzerland [Japan] 1. How much time do you need to solicit a preferential certificate of origin from your supplier(s) in Japan [Switzerland] per shipment? [please tick one] - <5min - 5-59min - 1-3h - >3h - I do not know - Our supplier(s) always declare preferential origin unasked Comments (if any) 2. Does your company analyze the savings of using the JSFTEPA and/or the impacts on your business? [please tick one] - Yes - No - I do not know 129 Your company analyses the benefits of the JSFTEPA (imports) 1. What are the effects of using the JSFTEPA so far? [please tick one] - No clear effect so far - Increase in sales but no change in profit - Increase in sales and in profits - I do not know Others (please specify) 2. What are your approximate savings from the JSFTEPA for imports from Japan [Switzerland] into Switzerland [Japan]? [please tick one] - <10,000 CHF [<1M JPY] - 10,000-100,000 CHF [1M-10M JPY] - 100,001-1M CHF [>10M-100M JPY] - >1M CHF [>100M JPY] - No savings; we pass benefits on to customers - I do not know Comment (if any) 3. What share of your imports from Japan [Switzerland] enjoys preferential treatment/ uses the JSFTEPA? [please tick one] - <5% - 5-50% - 51-95% - 96-100% - I do not know Comments Your company may make use of the JSFTEPA for imports from Japan [Switzerland] in future 1. Why has your company not (yet) used the JSFTEPA for imports from Japan [Switzerland]? [please tick all appropriate boxes] - No incentives (e.g. margin of preference too small, small trading volume, other preferential schemes etc) - Too much time needed for administration/ compliance - Costs of using the JSFTEPA are too high - Rules of origin are too restrictive - Our supplier(s) cannot or do(es) not want to confirm preferential origin - Compliance-related problems - Lack of awareness of JSFTEPA - Lack of information on JSFTEPA - Lack of management support Specifications or other reasons (please specify) 130 2. Did your company face difficulties using the JSFTEPA for imports from Japan [Switzerland] because the goods were transshipped via third countries? Which countries were involved and what problems did you face? 3. Please describe the plans of your company with regard to using the JSFTEPA for imports from Japan [Switzerland] in future Your company does not use the JSFTEPA for imports from Japan [Switzerland] 1. Why has your company not used the JSFTEPA for imports from Japan [Switzerland] so far? [please tick all appropriate boxes] - No incentives (e.g. margin of preference too small, small trading volume, other preferential schemes etc) - Too much time needed for administration/ compliance - Costs of using the JSFTEPA are too high - Rules of origin are too restrictive - Our supplier(s) cannot or do(es) not want to confirm preferential origin - Compliance-related problems - Lack of awareness of JSFTEPA - Lack of information on JSFTEPA - Lack of management support Specifications or other reasons (please specify) 2. Did your company face difficulties using the JSFTEPA for imports from Japan [Switzerland] because the goods were transshipped via third countries? Which countries were involved and what problems did you face? Re-export of goods 1. What happens to the goods you import from Japan [Switzerland] into Switzerland [Japan]? [please tick all appropriate boxes] - All the goods we import into Switzerland [Japan] are sold in the domestic market. - All or some of the goods we import into Switzerland [Japan] are later re-exported to the European Union [other countries in Asia] - All or some of the goods we import into Switzerland [Japan] are further processed in Switzerland [Japan] and then exported to the European Union [other countries in Asia] - All or some of the goods we import into Switzerland [Japan] are further processed in Switzerland [Japan] and then exported to the European Union [other countries in Asia] by using the EU-Switzerland free trade agreement (i.e. claiming Swiss preferential origin) [the respective FTAs (i.e. claiming Japanese preferential origin)] - I do not know Comments (if any) 131 Internal Environment I Only to be filled in if your company uses FTAs for either exports or imports; otherwise click "Next" 1. How is your company's strategy regarding use of FTAs decided? [please tick all appropriate boxes] - Headquarters decides alone - Headquarters and overseas subsidiaries/ affiliates - Overseas subsidiaries/ affiliates decide by themselves - There is no strategy - I do not know Other (please specify) 2. Who is primarily responsible for certifying origin and FTA-compliance in your company? [please tick one] - Supply chain - Sales department - Finance department - Legal department - Project assistant/ specially assigned staff - Nobody is responsible - I do not know Others and/or comments (if any) 3. How does your company manage FTAs? [please tick all appropriate boxes] - Manually - With an internally developed software - With a commercial software - Outsourced to a third party - We do not manage them systemically - I do not know Others and/or comments (if any) Internal Environment II Only to be filled in if your company uses FTAs for either exports or imports; otherwise click "Next" 1. Did or would your company consider changing and optimizing the production network/ manufacturing strategy as a response to FTAs? [please tick one] - Yes - No - I do not know Comment (if any) 132 2. The JSFTEPA contains provisions on the entry and temporary stay of natural persons, specifically for business purposes [please tick one] - Our company is aware of these provisions, and we have already referred to them when dispatching employees to Japan [Switzerland] - Our company is aware of these provisions, but so far we have not referred to them - Our company is not aware of these provisions Comment (if any) Your company provides logistics services between Switzerland [Japan] and Japan [Switzerland] (Export Processing) 1. What roles do Switzerland [Japan] and Japan [Switzerland] play in your business model? Some or all of the goods we forward between Switzerland [Japan] and Japan [Switzerland]... [please tick all appropriate boxes] - are produced in Switzerland [Japan] - are produced in Japan [Switzerland]] - are being transshipped via Switzerland [Japan] - are being transshipped via Japan [Switzerland] - end up in Switzerland [Japan] - end up in Japan [Switzerland] - I do not know Others and/or comments (if any) 2. When forwarding goods between Switzerland [Japan] and Japan [Switzerland], do you transport the goods directly or transship them via third countries? [please tick one] - All goods are being transported directly - Some or all goods are being transshipped via one or several third countries If the goods are being transshipped via third countries, please specify the countries involved and whether you keep the goods within the customs transit zone: 3. Which of the below statements are true with regard to your clients? [please tick all appropriate boxes] - Some or all of our clients in Switzerland [Japan] and/or Japan [Switzerland] have outsourced all international trade operations; therefore our company performs all export/import documentations for them - Some or all of our clients perform all export/import documentation by themselves - I do not know Other and/or comments (if any) 4. Does your company support clients with regard to exports/ export processing? [please tick one] - Yes - No - I do not know 133 Your company supports clients with regard to export processing 1. Do all or some of your clients in Switzerland [Japan] and/or Japan [Switzerland] ask your company to apply for a preferential certificate of origin on their behalf when exporting to Japan [Switzerland] or Switzerland [Japan], respectively? [please tick one] - Yes, but less than 5% of our clients - Yes, approximately 50% of our clients - Yes, more than 95% of our clients - No, our clients never ask - I do not know Comments (if any) 2. Does your company actively advise clients to make use of the JSFTEPA when exporting to Japan [Switzerland] or Switzerland [Japan] (i.e. applying for preferential certificates of origin, printing a declaration as to preferential origin on the invoice or claiming back import tariffs)? [please tick one] - Yes, we always or usually mention that by using the JSFTEPA the client may have to pay less/no import duties - Yes, but we advise the client to use the JSFTEPA only when we see some savings potential - No, we never advise clients to use the JSFTEPA, because we do not see any benefits in using FTAs - No, we never advise clients to use the JSFTEPA, because we are not familiar with FTAs - No, we never advise clients to use the JSFTEPA - I do not know Others (please specify) 3. What problems/ difficulties do you face when using the JSFTEPA with regard to export processing? 4. Do you face difficulties using the JSFTEPA when goods are transshipped via third countries? Which countries are involved and what problems do you face? Your company provides logistics services between Switzerland [Japan] and Japan [Switzerland] (Import Processing) 1. Does your company support clients in Switzerland [Japan] and/or Japan [Switzerland] with regard to imports/ import processing? [please tick one] - Yes - No - I do not know 134 Your company supports clients with regard to import processing 1. Do all or some of your clients in Switzerland [Japan] and/or Japan [Switzerland] ask your company to check with their suppliers in Japan [Switzerland] or Switzerland [Japan], respectively, for proof of preferential origin of the imported goods? [please tick one] - Yes, but less than 5% of our clients - Yes, approximately 50% of our clients - Yes, more than 95% of our clients - No, our clients never ask - I do not know Other and/or comments (if any) 2. Does your company actively ask manufacturers in Switzerland [Japan] and/or Japan [Switzerland] for a proof of preferential origin prior to importing their goods into Japan [Switzerland] or Switzerland [Japan], respectively? [please tick one] - Yes, we usually ask manufacturers in Switzerland [Japan] and/or Japan [Switzerland] if they can provide proof of preferential origin when exporting to Japan [Switzerland] and/or Switzerland [Japan] as their goods might benefit from lower/no import duties - Yes, but we ask manufacturers only when we see savings potential in form of lower/no import duties - Yes, but only if the final buyer is asking for it - No, we never ask manufacturers, because we do not see any benefits in using FTAs - No, we never ask manufacturers, because we are not familiar with FTAs - No, we never ask manufacturers - I do not know Other and/or comments (if any) 3. What problems/ difficulties do you face when using the JSFTEPA with regard to import processing? 4. Do you face difficulties using the JSFTEPA when goods are transshipped via third countries? Which countries are involved and what problems do you face? Your company imports/ distributes goods from Japan [Switzerland] into/in Switzerland [Japan] 1. How does your business model look like? [please tick one] - We import goods from Japan [Switzerland] into Switzerland [Japan] - We distribute goods from Japan [Switzerland] in Switzerland [Japan] - We import and distribute goods from Japan [Switzerland] into/in Switzerland [Japan] - I do not know Other (please specify) 135 2. When importing goods from Japan [Switzerland] into Switzerland [Japan], do you transport the goods directly or transship them via third countries? [please tick one] - All goods are being transported directly from Japan [Switzerland] - Some or all goods are being transshipped via one or several third countries If the goods are being transshipped via third countries, please specify the countries involved and whether you keep the goods within the customs transit zone 3. Who is paying the import tariffs/ duty in Switzerland [Japan] when there is no proof of preferential origin as stated in the JSFTEPA? Your company imports/ distributes goods from Japan [Switzerland] into/in Switzerland [Japan] 1. Does your company actively ask producers in Japan [Switzerland] for a proof of preferential origin under the JSFTEPA prior to importing and/or distributing their goods in Switzerland [Japan]? [please tick one] - Yes, we usually ask producers in Japan [Switzerland] if they can provide proof of preferential origin when exporting to Switzerland [Japan] as their goods might benefit from lower/no import duties under the JSFTEPA - Yes, but we ask producers only when we see savings potential in form of lower/no import duties under the JSFTEPA - Yes, but only if the final buyer is asking for it - No, we never ask producers, because we see no benefits in using FTAs - No, we never ask producers, because we are not familiar with FTAs - No, we never ask producers - I do not know Other (please specify) 2. Does your company analyze the savings of using the JSFTEPA and/or the impacts on your business? [please tick one] - Yes - No - I do not know Your company analyses the benefits of the JSFTEPA (imports/ distribution) 1. What are the effects of using the JSFTEPA so far? [please tick one] - No clear effect so far - Increase in sales but no change in profit - Increase in sales and in profits - I do not know Others (please specify) 136 2. What are your approximate savings from the JSFTEPA for imports from Japan [Switzerland] into Switzerland [Japan]? [please tick one] - <10,000 CHF [<1M JPY] - 10,000-100,000 CHF [1M-10M JPY] - 100,001-1M CHF [>10M-100M JPY] - >1M CHF [>100M JPY] - No savings; we pass benefits on to clients - I do not know Comment (if any) 3. What share of your imports from Japan [Switzerland] enjoys preferential treatment/ uses the JSFTEPA? [please tick one] - <5% - 5-50% - 51-95% - 96-100% - I do not know Comments 4. Do you face difficulties using the JSFTEPA for imports from Japan [Switzerland] when the goods are transshipped via third countries? Which countries are involved and what problems do you face? 5. What other problems/ difficulties do you face when using the JSFTEPA for imports from Japan [Switzerland]? Re-export of goods 1. What happens to the goods you import from Japan [Switzerland] into Switzerland [Japan]? [please tick all appropriate boxes] - All the goods we import into Switzerland [Japan] are sold in the domestic market. - All or some of the goods we import into Switzerland [Japan] are later re-exported to the European Union [other countries in Asia] - All or some of the goods we import into Switzerland [Japan] are further processed in Switzerland [Japan] and then exported to the European Union [other countries in Asia] - All or some of the goods we import into Switzerland [Japan] are further processed in Switzerland [Japan] and then exported to the European Union [other countries in Asia] by using the EU-Switzerland free trade agreement (i.e. claiming Swiss preferential origin) [the respective FTAs (i.e. claiming Japanese preferential origin)] - I do not know Comments (if any) 137 Service providers 1. Was your company aware of the currently existing FTA between Switzerland [Japan] and Japan [Switzerland]? [please tick one] - Yes, and we were aware that the FTA also addresses service-related issues - Yes, but we were not aware that the FTA also addresses service-related issues - No, we were not aware of an FTA between Switzerland [Japan] and Japan [Switzerland] - I do not know Comment (if any) External Environment I 1. Has your company ever been involved in consultations with the government or its agencies to provide input to negotiations on FTAs? [please tick one] - Yes - No - I do not know Comment (if any) 2. Via which channels do you get information on FTAs currently, and which ones should be more active in providing information? [please tick all appropriate boxes] Ministries/ Business Private Agencies Associations Consultants Currently we get information from… It would be good to get more information from… Other (please specify) 3. Do you face problems when interacting with the Swiss [Japanese] or Japanese [Swiss] Customs regarding the JSFTEPA? [please tick one] - No, we do not face any problems at all - In the beginning we faced problems, but they are solved now - We still face minor difficulties - We still face major difficulties which do not allow us to use the JSFTEPA If you face difficulties, please describe them here 4. Do you have any suggestions which would simplify the use of FTAs? 138 External Environment II 1. Which of the below countries do you trade with? Do you use FTAs when exporting or importing? [please tick all appropriate boxes] We export We import We use We use I do not to… from… FTAs for FTAs for know exports imports to… from… Canada Chile Croatia Egypt EU/EEA Faeroe Islands Israel Jordan Korea Lebanon Macedonia Mexico Morocco Palestinian Authority Singapore Tunisia Turkey South African Customs Union (Botswana, Lesotho, Namibia, South Africa, Swaziland) Developing Countries (Generalized System of Preferences (GSP)) Comments (if any) 139 We export to… We import from… We use FTAs for exports to… We use FTAs for imports from… I do not know Brunei Cambodia Chile Indonesia Laos Malaysia Mexico Myanmar Philippines Singapore Thailand Vietnam Developing Countries (Generalized System of Preferences (GSP)) Comments (if any) 2. With which other countries should Switzerland [Japan] negotiate FTAs? External Environment 1. Has your company ever been involved in consultations with the government or its agencies to provide input to negotiations on FTAs? [please tick one] - Yes - No - I do not know Comment (if any) 2. Via which channels do you get information on FTAs currently, and which ones should be more active in providing information? [please tick all appropriate boxes] Ministries/ Agencies Business Associations Currently we get information from… It would be good to get more information from… Other (please specify) 140 Private Consultants 3. Do you face problems when interacting with the Swiss [Japanese] or Japanese [Swiss] Customs regarding the JSFTEPA? [please tick one] - No, we do not face any problems at all - In the beginning we faced problems, but they are solved now - We still face minor difficulties - We still face major difficulties which do not allow us to use the JSFTEPA If you face difficulties, please describe them here 4. Do you have any suggestions which would simplify the use of FTAs? Possible review of the JSFTEPA Below please provide input for a possible review of the JSFTEPA 1. Are there any regulatory obstacles to market access which should be addressed in a future review of the JSFTEPA? Is there red tape which makes it more burdensome or more costly for Switzerland [Japan]-based companies to sell into Japan [Switzerland] or to provide services from Switzerland [Japan]? Are there instances where either Japanese [Swiss] competitors, or those of countries with which Japan [Switzerland] has concluded an FTA, get better treatment? Are there instances where Japanese [Swiss] authorities do not recognize Swiss [Japanese] standards, or require double testing? 2. Do you have any general remarks or problems? 3. Which areas of the JSFTEPA are of importance to your company and/or should be reviewed? [please tick all appropriate boxes] Are of importance to us Should be reviewed Elimination/ reduction in tariffs Elimination/ reduction in non-tariff barriers Mutual recognition of standards, certifications Trade in services Protection of investments Movement of natural persons Government Procurement Protection of intellectual property rights Others and/or comments 141 A-3: Structure of the Survey Explanations White boxes Questions to be answered by respondents Grey boxes Reply options DNK I do not know NA Not aware Source: Structure and programming by the author. 142 A-4: Topics of Interest to Policy Makers 1. Importance of the JSFTEPA’s Content Question: Which areas of the JSFTEPA are of importance to your company and/or should be reviewed? (multiple replies possible) Of Importance Should be reviewed Elimination/ reduction in tariffs Elimination/ reduction in non-tariff barriers to trade 32 19 5 7 Mutual recognition of standards, certifications 27 3 Protection of intellectual property rights 21 0 Trade in services Protection of investments 11 12 1 5 Movement of natural persons Government procurement 16 6 1 4 2. Movement of Natural Persons Question: The JSFTEPA contains provisions on the entry and temporary stay of natural persons, specifically for business purposes (N = 22) Number of Respondents Our company is aware of these provisions, and we have already referred to them when dispatching employees to Japan Our company is aware of these provisions, but so far we have not referred to them 5 Our company is not aware of these provisions 8 9 3. Problems Companies are facing with regard to the JSFTEPA Various questions on problems/ difficulties companies face when utilizing the JSFTEPA Intertemporal view - 9 companies initially were facing problems (but they are solved now) - 5 companies still face minor difficulties - 5 companies still face major difficulties which do not allow them to use the JSFTEPA. 143 Problems companies face include - Lack of information - Restrictive ROO - Multiple ROO (which is also a challenge to automate the FTA-process) - Costs of utilizing FTAs are higher than benefits, specifically for spare parts of machinery - Support needed with regard to the implementation of a process in the company - Confidentiality of sensitive date of exporting company (observer in FTA partner territory, lack of trust in counterpart customs) - Companies in Japan or companies importing into/ exporting out of Japan are facing problems with regard to o recognition of international standards o double testing o technical regulations and product registrations o difficulties getting the certificate of origin from suppliers in Japan and applying for the certificate of origin in Japan (approved exporter status seems not yet well established in Japan) - Companies in Switzerland or companies importing into/ exporting out of Switzerland are facing problems with regard to the movement of natural persons, e.g. issues regarding cantonal work permits for Japanese nationals, social insurance etc. 4. Sources of Information on FTAs in General Question: Via which channels do you get information on FTAs currently, and which ones should be more active in providing information? (multiple replies possible) Business Associations and Chambers of Commerce Currently More Expected Government Ministries and Agencies Private Consultants and Trade Lawyers Companies located in Switzerland 32 Currently More Currently More Expected Expected 8 21 15 7 2 Companies located in Japan 10 5 7 144 6 2 0 5. Negotiation of other FTAs Question: With which other countries should Switzerland negotiate FTAs? (multiple replies possible) Territory Number of Respondents Argentina Asean 1 1 --- Thailand --- Vietnam 3 1 Australia 2 Brazil 7 China India 10 5 Mercosur New Zealand 1 1 Russia Taiwan 5 1 U.S. As many as possible 2 2 Question: With which other countries should Japan negotiate FTAs? (multiple replies possible) Territory Number of Respondents China European Union 4 3 India Korea 1 1 U.S. 2 145 A-5: Survey Directory of Sampled Companies Company Respondent Position and Function Ajinomoto Switzerland AG AKRIS Japan Limited Ernie Good Chieko Ino General Manager President Aon Insurance Services (Switzerland) AG arushi GmbH Tadashi Yamanaka Senior Account Manager & Director President Ascar AG Attexor Tools S.A. R. Hüsser Hans Bergkvist Director Chief Executive Officer and President BASF Schweiz AG British American Tobacco International Charles Zollinger Stuart Kidd Head International Trade Affairs Finance Director Brother Schweiz AG Buhler K.K. not available Max Klinger not available Managing Director Bühlmann Laboratories AG Canon (Schweiz) AG Thomas Hafen not available Chief Operating Officer not available Chocolats Camille Bloch SA Volker Kremser Head of Export Chromos Ltd Daniel Broglie Chief Executive Officer Clariant International AG E. Hunziker DKSH Japan K.K. Rune Foldnes Senior Expert Customs and Foreign Trade Country Finance Manager DSM Nutritional Products Ltd Feintool International Holding AG Cajetan Hürzeler not available Head International Trade Affairs not available Fibag AG Furrer-Jacot AG Freddy Oswald Niklaus Bieri Chief Executive Officer Board Member Gaipro, Inc. Martin Stricker President Geberit Shanghai Trading Co., Ltd Manfred Koenigslehner Technical Director Asia-Pacific Genedata K.K. Georg Fischer AG Frank Staubli Urs Werner Managing Director not available Gessner AG Helmut Fischer AG Eugen Weibel Walter Mittelholzer Director Marketing and Sales Chief Executive Officer Hiestand Japan Co Ltd Hilti AG Robert Grimme Rainer Moosmann Managing Director Teamlead Export Hirotec Europe GmbH Toshifumi Uno Managing Director Hitachi Medical Systems Europe Holding AG Concettina Frijia Assistant to Chief Executive Officer Gregory Glanzmann 146 Honda Automobiles (Suisse) SA Francois Launaz General Manager Invoclar Vivadent AG Christoph Linder John Lay Electronics AG not available Senior Area Sales Manager Japan/ Korea not available Josef Binkert AG Japan Tobacco International S.A. not available Hisashi Sekiguchi not available Japan Affairs Manager KLAS S.A. Knecht & Müller AG Akemi Takayama not available General Manager not available L. Kellenberger & Co. AG Lonza AG Sandro Mock Ivana Helbling Sales Manager Foreign Trade Affairs Mana Pearl KK Maxon Japan Corporation Nicolas Savary Sumio Kaneko Managing Director President Mayekawa Intertech AG Medala K.K. not available Ryoji Sugihara not available President Metrohm AG Heinz Honsell MM Automobile Schweiz AG Bernd Hoch Senior Manager Sales Administration Managing Director Naiman Trust Solutions Ltd Nestlé S.A. Alyona Friedel Kenji Holzer Japan Desk Consultant Regional Assistant Manager – Zone AOA Nihon Buchi K.K. Nippon Express (Switzerland) Ltd Joerg Duppenthaler Tsutomu Masuda President Deputy Managing Director Nishi’s Japan Shop Novartis International AG Yoshiko Nishihama Stephan Bruni Owner Head of Corporate Trade Affairs Pentel Papeteriewaren AG Rausch AG John Ayuse Iris Kesselring Managing Director Executive Export Manager Reishauer KK Martin W. Browne Roellin Books Martin Roellin Chief Executive Officer and Representative Director Owner Sato Furnishings AG Sekisui Alveo AG Erwin Zehnder Hiroshi Suganami Managing Director Director Corporate Planning Shiseido S.A. SIX Telekurs Yukihiro Yamada Alain Delfosse President Managing Director Snowflake Co., Ltd Sony Overseas AG Thomas Schläpfer Gregory Glanzmann Chief Executive Officer Market & Business Analyst Stoll Giroflex AG Swarovski AG Tobias Gerfin Thomas Mersch Chief Executive Officer Head of Global Planning & 147 Procurement Consumer Goods Business Swiss International Air Lines Ltd Swiss Japanese Society Noboru Okabe General Manager (Japan) Herbert Haag President Sysmex Digitana AG Systag AG not available Matthias Haas not available Engineering Manager TecDev UBP Investments Co., Ltd Jean Pierre Bloch Kazuhito Yoshihara Director CEO and President UBS AG Michael Viana UHNW/ Market Head Union Tool (Europe) SA Nicolas Wenger Accounting, IT & Operations Manager Victorinox AG Vischer & Bolli AG Carl Elsener not available Chief Executive Officer not available Walter Meier Ltd WEKA AG Lehner Urs Fridolin Holdener Head of Sales and Marketing General Manager Wide Concept Sàrl Anonymous Haruo Hasegawa not available Director not available Anonymous not available not available Anonymous not available not available 148 A-6: Distribution of Independent Variables Trade flow based responses (TFBRs) utilizing the JSFTEPA Number of permanent employees (EMP) Original data Trade flow based responses (TFBRs) not utilizing the JSFTEPA TFBR not utilizing the JSFTEPA, original data 25 20 15 10 5 0 Frequency Frequency TFBR utilizing the JSFTEPA, original data 0 00 25 0 00 75 00 50 2 1 00 50 7 1 M 12 10 8 6 4 2 0 e or 0 00 25 0 00 75 00 50 12 Bin 00 50 17 M e or Bin Log transformed data TFBR not utilizing the JSFTEPA, log transformed data TFBR utilizing the JSFTEPA, log transformed data 4 Frequency 5 10 Frequency 12 8 6 4 2 0 3 2 1 0 1 2 3 4 5 More 1 2 3 Bin 4 5 More Bin Number of countries a company is represented in with an own business unit (CRO) Original data TFBR not utilizing the JSFTEPA, original data 8 6 4 2 0 Frequency Frequency TFBR utilizing the JSFTEPA, original data 20 40 60 80 100 120 140 More 5 4 3 2 1 0 20 40 60 80 Bin 100 120 140 More Bin Square root transformed data TFBR not utilizing the JSFTEPA, square root transformed data 4 6 4 2 0 Frequency Frequency TFBR utilizing the JSFTEPA, square root transformed data 2 4 6 8 10 12 3 2 1 0 More 2 Bin 4 6 8 Bin 149 10 12 More Number of countries a company is represented in (CRP) Original data TFBR not utilizing the JSFTEPA, original data Frequency Frequency TFBR utilizing the JSFTEPA, original data 8 6 4 2 0 8 6 4 2 0 5 20 40 60 80 100 120 15 140 More 25 35 45 M e or Bin Bin Square root transformed data TFBR not utilizing the JSFTEPA, square root transformed data 6 7 M e or or e 5 M 4 7 3 6 2 1 1 0 5 0 2 4 2 4 3 4 6 2 6 Frequency Frequency TFBR utilizing the JSFTEPA, square root transformed data Bin Bin Number of other FTAs utilized (UOF) Original data TFBR not utilizing the JSFTEPA, original data More 24 20 22 18 14 16 10 Bin 12 8 2 24 More 22 20 18 16 14 12 10 8 6 4 0 4 5 5 4 3 2 1 0 6 Frequency 10 2 Frequency TFBR utilizing the JSFTEPA, original data Bin Intra-firm intensity of trade (IIN)* Original data TFBR not utilizing the JSFTEPA, original data 6 Frequency Frequency TFBR utilizing the JSFTEPA, original data 4 2 0 1 2 3 4 More 6 4 2 0 1 Bin 2 3 Bin 150 4 More Trade Intensity (TIN)* Original data 8 6 4 2 0 TFBR not utilizing the JSFTEPA, original data Frequency Frequency TFBR utilizing the JSFTEPA, original data 1 2 3 4 6 4 2 0 1 More 2 3 4 More Bin Bin (*) These variables were recoded: 1 = 0-25%; 2 = 26-50%; 3 = 51-75%; 4 = 76-100%. 151 A-7: Detailed Results of Model 4 Dependent Variable: UR? Method: GLS (Cross Section Weights) Included observations: 2367 Number of cross-sections used: 16 Total panel (unbalanced) observations: 15831 White Heteroskedasticity-Consistent Standard Errors & Covariance Variable MOP?^2 VIMP?^2 MOP?*VIMP? MOP?* IND_01 MOP?*IND_02 MOP?*IND_03 MOP?*IND_04 MOP?*IND_05 MOP?*IND_06 MOP?*IND_07 MOP?*IND_08 MOP?*IND_09 MOP?*IND_10 MOP?*IND_11 MOP?*IND_12 MOP?*IND_13 VIMP?*IND_01 VIMP?*IND_02 VIMP?*IND_03 VIMP?*IND_04 VIMP?*IND_05 VIMP?*IND_06 VIMP?*IND_07 VIMP?*IND_08 VIMP?*IND_09 VIMP?*IND_10 VIMP?*IND_11 VIMP?*IND_12 VIMP?*IND_13 Coefficient Std. Error t-Statistic Prob. -0.0125 0.0045 -2.7775 0.0055 -0.0154 0.0041 -3.7007 0.0002 5.3991 0.8093 6.6714 0.0000 0.4104 0.1495 2.7459 0.0060 -2.8202 3.8483 -0.7328 0.4637 -0.0610 0.1939 -0.3147 0.7530 2.3561 0.9567 2.4627 0.0138 0.0660 0.0832 0.7937 0.4274 0.2541 0.1727 1.4710 0.1413 1.7030 0.2659 6.4060 0.0000 -0.8732 0.5163 -1.6913 0.0908 2.3209 1.3178 1.7612 0.0782 1.9439 0.7207 2.6974 0.0070 1.2507 0.4875 2.5658 0.0103 -2.9220 0.8527 -3.4267 0.0006 1.3109 0.3038 4.3143 0.0000 35.4964 19.0849 1.8599 0.0629 42.9129 42.2440 1.0158 0.3097 15.7288 3.3885 4.6418 0.0000 46.8127 5.3479 8.7535 0.0000 -4.7179 1.1465 -4.1151 0.0000 237.3246 85.4668 2.7768 0.0055 243.2097 37.4305 6.4976 0.0000 231.3260 51.9322 4.4544 0.0000 0.9177 0.2315 3.9645 0.0001 127.8660 16.7994 7.6113 0.0000 4.5473 1.5488 2.9361 0.0033 -1.2343 0.6737 -1.8322 0.0669 -2.0401 0.6546 -3.1166 0.0018 152 IND_02 IND_03 IND_04 IND_05 IND_06 IND_07 IND_08 IND_09 IND_10 IND_11 IND_12 IND_13 Fixed Effects N0909--C N0910--C N0911--C N0912--C N1001--C N1002--C N1003--C N1004--C N1005--C N1006--C N1007--C N1008--C N1009--C N1010--C N1011--C N1012--C Weighted Statistics R-squared Adjusted R-squared S.E. of regression Log likelihood Durbin-Watson stat 1.5501 3.3854 3.2620 1.0105 2.3271 0.3399 3.7924 1.2547 4.1973 2.1340 29.6160 2.9676 0.9308 0.6482 1.0698 0.5208 0.8691 0.9851 1.6280 0.8931 0.8217 0.5915 2.0560 0.5756 1.6653 5.2223 3.0491 1.9401 2.6776 0.3450 2.3294 1.4048 5.1082 3.6078 14.4044 5.1560 0.0959 0.0000 0.0023 0.0524 0.0074 0.7301 0.0198 0.1601 0.0000 0.0003 0.0000 0.0000 -4.318565 -3.272913 -2.358575 -2.542517 -1.459997 -0.468241 -0.458909 0.042668 0.390361 1.389781 1.168628 2.223352 0.826274 1.429392 1.822157 0.915223 0.2283 0.2255 19.72815 -69217.69 1.5413 Mean dependent variable S.D. dependent variable Sum squared residuals F-statistic Prob(F-statistic) 153 6.3015 22.4174 6139237 116.6483 0.0000 A-8: Bilateral and Regional FTAs of Territories Identified as FTA Hubs Territory Entry Into Force of FTA’s Trade in Goods Chapter (Review) Australia Bilateral FTAs (one partner territory) Chile New Zealand 2009 1983 (2007) Papua New Guinea Singapore 1991 2003 Thailand U.S. 2005 2005 Bilateral FTAs (several partner territories) Asean-Australia-New Zealand FTA (AANZFTA) 2010 Regional FTAs South Pacific Regional Trade and Economic Cooperation Agreement (SPARTECA) 1981 Chile Bilateral FTAs (one partner territory) Australia Canada 2009 1997 China Colombia 2006 2009 Costa Rica El Salvador 2002 2002 Guatemala Honduras 2002 2002 India Japan 2007 2007 Korea Mexico 2004 1999 Nicaragua Panama 2002 2008 Peru Turkey 2009 2011 U.S. 2004 Bilateral FTAs (several partner territories) European Union (EU) 2003 154 European Free Trade Area (EFTA) 2004 Regional FTAs Latin American Integration Association (LAIA) 1981 Trans-Pacific Strategic Economic Partnership (TPSEP) China 2006 Bilateral FTAs (one partner territory) Chile 2006 Hong Kong Macao 2004 2004 New Zealand 2008 Pakistan 2007 Peru Singapore 2010 2009 Bilateral FTAs (several partner territories) Asean-China FTA (ACFTA) Regional FTAs Asia Pacific Trade Agreement (APTA) 2005 (2006) 2002 European Union Bilateral FTAs (one partner territory) Albania Algeria 2009 2005 Bosnia and Herzegovina Chile 2008 2003 Croatia Egypt 2005 2004 Faroe Islands Former Yugoslav Republic of Macedonia 1997 2004 Israel 2000 Jordan 2002 Lebanon Mexico 2006 2000 Montenegro Morocco 2010 2000 Palestinian Authority Serbia 1997 2010 South Africa Switzerland (Liechtenstein) 2000 1973 Syria Tunisia 1977 1998 Regional FTAs 155 European Economic Area (EEA) 1994 India Bilateral FTAs (one partner territory) Afghanistan Chile 2003 2007 Japan Korea 2011 2010 Singapore Sri Lanka 2005 2001 Thailand 2004 Bilateral FTAs (several partner territories) Asean-India FTA (AIFTA) Southern Common Market (Mercosur) 2010 2009 Regional FTAs Asia Pacific Trade Agreement (APTA) 2002 South Asian Free Trade Agreement (SAFTA) Japan 2006 Bilateral FTAs (one partner territory) Brunei 2008 Chile India 2007 2011 Indonesia Malaysia 2008 2006 Mexico Philippines 2005 2008 Singapore Switzerland 2002 (2008) 2009 Thailand 2007 Vietnam 2009 Bilateral FTAs (several partner territories) Asean-Japan FTA (AJCEP) 2009 Mexico Bilateral FTAs (one partner territory) Chile Costa Rica 1999 1995 Israel Japan 2000 2005 Nicaragua Colombia 1998 1995 El Salvador 2001 156 Guatemala 2001 Honduras Bilateral FTAs (several partner territories) 2001 European Union (EU) European Free Trade Area (EFTA) 2000 2001 Regional FTAs Latin American Integration Association (LAIA) 1981 North American Free Trade Agreement (NAFTA) New Zealand 1994 Bilateral FTAs (one partner territory) Australia 1983 (2007) China Hong Kong 2008 2011 Malaysia Singapore 2010 2001 Thailand Bilateral FTAs (several partner territories) 2005 Asean-Australia-New Zealand FTA (AANZFTA) Regional FTAs 2010 South Pacific Regional Trade and Economic Cooperation Agreement (SPARTECA) Trans-Pacific Strategic Economic Partnership (TPSEP) 1981 2006 Singapore Bilateral FTAs (one partner territory) Australia China 2003 2009 India Japan 2005 2002 (2008) Jordan Korea 2005 2006 New Zealand Panama 2001 2006 Peru U.S. 2009 2004 Bilateral FTAs (several partner territories) Asean-Australia-New Zealand FTA (AANZFTA) 2010 Asean-China FTA (ACFTA) 2005 (2006) Asean-India FTA (AIFTA) 2010 Asean-Japan FTA (AJCEP) Asean-Korea FTA (AKFTA) 2009 2007 157 European Free Trade Area (EFTA) 2003 Regional FTAs Asean Trade in Goods Agreement (ATIGA) Trans-Pacific Strategic Economic Partnership (TPSEP) Switzerland 1993-1999 2006 Bilateral FTAs (one partner territory) Albania* 2010 Canada* Chile* 2009 2004 Croatia* 2002 Egypt* 2008 Faroe Islands Former Yugoslav Republic of Macedonia* 1995 2002 Israel* Japan 1993 2009 Jordan* Korea* 2002 2006 Lebanon* Mexico* 2007 2001 Morocco* Palestinian Authority* 1999 1999 Serbia* Singapore* 2010 2003 Tunisia* Turkey* 2006 1992 Bilateral FTAs (several partner territories) European Union (EU) 1973 Southern African Customs Union (SACU) 2008 Regional FTAs European Free Trade Area (EFTA) U.S. 1960 Bilateral FTAs (one partner territory) Australia 2005 Bahrain Chile 2006 2004 Israel Jordan 1985 2001 Morocco Oman 2006 2009 Peru 2009 158 Singapore 2004 Regional FTAs Dominican Republic - Central America - US FTA (CAFTA-DR) North American Free Trade Agreement (NAFTA) Note: (*) FTAs which Switzerland negotiated within the framework of EFTA. 159 2006-2009 1994 A-9: Regional Free Trade Agreements and Member Territories Free Trade Agreement Abbreviation Territories Party to the Agreement Asean Trade in Goods Agreement/ Asean FTA ATIGA Asean-Australia-New Zealand FTA AANZFTA Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, Vietnam Asean members, Australia, New Zealand Asean-China FTA Asean-Japan FTA ACFTA AJCEP Asean members, China Asean members, Japan Asean-Korea FTA Asean-India FTA AKFTA AIFTA Asean members, Korea Asean members, India Asia Pacific Trade Agreement Dominican Republic Central America – U.S. FTA APTA CAFTA-DR Bangladesh, China, India, Korea, Laos, Sri Lanka Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua, U.S. European Union European Economic Area EU EEA European Community (27 territories) EU, Iceland, Liechtenstein, Norway European Free Trade Area EFTA Latin American Integration Association LAIA Iceland, Liechtenstein, Norway, Switzerland Argentina, Bolivia, Brazil, Chile, Colombia, Cuba, Ecuador, Mexico, Paraguay, Peru, Uruguay, Venezuela Southern Common Market North American Free Trade Agreement MERCOSUR NAFTA Argentina, Brazil, Paraguay, Uruguay Canada, Mexico, U.S. Southern African Customs Union SACU Botswana, Lesotho, Namibia, South Africa, Swaziland South Asian Free Trade Agreement SAFTA Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, Sri Lanka South Pacific Regional Trade and Economic Cooperation Agreement SPARTECA Trans-Pacific Strategic Economic Partnership TPSEP Australia, Cook Islands, Fiji, Kiribati, Marshall Islands, Micronesia, Nauru, New Zealand, Niue, Papua New Guinea, Samoa, Solomon Islands, Tonga, Tuvalu, Vanuatu Brunei, Chile, New Zealand, Singapore Source: WTO RTA Database. 160 Curriculum Vitae Matthias Schaub Date of Birth: 22 April 1979 Nationality: Swiss [email protected] 1, Pearl Bank, #33-14 Singapore 169016 EDUCATION Since 10.2006 University of St.Gallen (HSG), St.Gallen, Switzerland Doctoral Program in International Affairs Specialization in International Trade Research Interests: International Trade, Free Trade Agreements, Regional Economic Integration from a Company Perspective Acceptance of Proposal: 09.2008 Since 08.2007 National University of Singapore (NUS), Singapore Attachment to NUS Business School 07.2010 EcoMod Modeling School, Istanbul, Turkey Practical Techniques in CGE Modeling with GAMS (July 12-16, 2010) 10.1999 - 12.2005 University of St.Gallen (HSG), St.Gallen, Switzerland Master of Arts (M. A. HSG) in International Affairs and Governance Graduate Studies in International Affairs and Governance: International Economics, International Law, Public Management, Political Science Undergraduate Studies: Accounting, Controlling, Finance, Human Resources, Marketing, Organization, Risk-Management, Technology-Management 01.2004 - 04.2004 Chinese University of Hong Kong, Hong Kong, China International Asian Studies Program (Student Exchange) 03.2003 - 06.2003 The Graduate Institute of International Studies (HEI), Geneva Courses in International Trade, Chinese Politics (Student Exchange) 08.1995 - 12.1998 Gymnasium Liestal, Switzerland 12.1998 Graduation: Matura (General qualification for university entrance): Type E (Economics) 161 PROFESSIONAL EXPERIENCE Since 03.2006 University of St.Gallen, Singapore Position: Representative 50% Assignment Alumni and Corporate Relations, Student Recruiting Regional Responsibility 12.2007 - 11.2009 Ciba (Singapore) Pte Ltd, Singapore Position: Head Free Trade Agreement Coordination Asia-Pacific 35% Assignment (External Consultant) Assisting Business Segments in using FTAs Providing Training (Singapore, Shanghai) Coordination of Virtual FTA-Team at Group Companies in AsiaPacific Reporting to International Trade Affairs, Basle, Switzerland 05.2004 - 07.2004 Consulate General of Switzerland in Hong Kong, China Position: Internship Responsible for Projects in the Fields of Culture & Economy 06.2002 Soberman Isenbaum Colomby Tessis Inc., Toronto, Canada Position: Internship Department for Bankruptcies 10.2001 - 03.2002 PricewaterhouseCoopers Ltd., Basle, Switzerland Position: Internship (Auditing Department) Auditing Team Member PUBLICATIONS, CONFERENCES, SEMINARS AND GUEST LECTURES - - Speaker: “The Free Trade and Economic Partnership Agreement between Switzerland and Japan (JSFTEPA) in Practice: Results from a Company Survey – Firm-Characteristics and Management”, Seminar on the Evaluation of the JSFTEPA, in cooperation with the Japan External Trade Organization (JETRO), University of Zurich, the Swiss Embassy in Tokyo and the Swiss Business Hub Japan, Tokyo, 16 September 2011 Speaker: “The Free Trade and Economic Partnership Agreement between Switzerland and Japan (JSFTEPA) in Practice: Results from a Company Survey – Firm-Characteristics and Management”, Business Luncheon on the Evaluation of the JSFTEPA, in cooperation with the Swiss Chamber of Commerce and Industry in Japan (SCCIJ), Tokyo, 15 September 2011 162 - - - - - - - Speaker: “Free Trade Agreements – Economic Integration in Asia”, Guest Lecture at University of St.Gallen’s Asia Term, Course Business Study Mission, Singapore Management University, Singapore, 31 August 2011 Speaker: “Evaluation of the Free Trade and Economic Partnership Agreement Switzerland – Japan – A preliminary Assessment”, Seminar on the Free Trade and Economic Partnership Agreement between Switzerland and Japan, in cooperation with the University of Zurich, the Swiss-Japanese Chamber of Commerce (SJCC), the Swiss State Secretariat for Economic Affairs (SECO), Business Network Switzerland (Osec) and the Japan External Trade Organization (JETRO), Zurich and Lausanne, Switzerland, 10-11 November 2010 Speaker: “Utilizing FTAs: Problems, Benefits & Best Practice for Companies”, V&P Breakfast Briefing, Vriens & Partners, 3 November 2010 Speaker: “Companies’ Use of Free Trade Agreements”, Business Luncheon with the Swiss Business Association Singapore, on the occasion of the Third Joint EFTA-Singapore Committee Meeting, 6 July 2010 Article: “EFTA remains relevant to businesses”, Singapore Business Times, 4 May 2010; written together with Ambassador Joerg Al Reding on the occasion of the 50th Anniversary of EFTA Article: “Präferentielle Handelsabkommen in der Praxis: Herausforderungen bei der Umsetzung”, Die Volkswirtschaft, October 2009: State Secretariat for Economic Affairs (SECO), Federal Department of Economic Affairs (FDEA) Paper and Presenter: “Trade Facilitation through Homogenization of Preferential Rules of Origins - How companies and countries can capitalize on Free Trade Agreements amidst a Hub-and-Spoke Bilateralism“, Singapore Economic Review Conference, Singapore, 6-8 August 2009 Paper and Presenter: “Economic Analysis of Law – Special Focus on Intellectual Property Chapters in Free Trade Agreements”, Workshop on IP Aspects of Free Trade Agreements in the Asia Pacific Region, Centre for Comparative Law and Development Studies in Asia and the Pacific (CLDSAP), University of Wollongong, Australia, in cooperation with the Max Planck Institute for Intellectual Property Competition and Tax Law, 25-26 November 2008 RESEARCH AND CONSULTING PROJECTS 2009 - 2011: Various Research and Consulting Projects with Business Associations and Multinational Corporations, mainly with regard to regional economic integration and specifically also the currently negotiated FTA between the European Union and Singapore. 163