The firm-level costs of utilizing free trade agreements

Abstract

The number of free trade agreements (FTAs) has surged in recent years. In order to benefit from lower import duties, firms must apply for preferential customs treatment and comply with rules of origin requirements. This is costly and explains why preference utilization rates are typically far below 100 percent. Analyzing Switzerland’s wide FTA network based on a novel data set on all import transactions, our findings shed light on how sourcing requirements affect FTA utilization. Using a revealed preference criterion, we identify a fixed cost component of the utilization which firms avoid especially for urgent shipments. We also find limited evidence of learning effects and provide well-identified estimates of the restrictive effects of rules of origin.