The EU has established numerous free trade agreements (FTAs) with partner countries around the world over the past two decades. The immediate objective is to promote more trade by removing or reducing import duties and other barriers to trade (Dhingra et al. 2021, Espitia et al. 2019, Fernandez et al. 2021). More trade, in turn, is expected to contribute to economic growth through increased specialization, skills acquisition and product diversification (Corcos et al. 2012, Melitz and Reading 2014).
A key benefit of an FTA lies in the tariff choices offered by the agreement. The use of tariff preferences, however, involves costs related to the basic rules governing administrative procedures (Felbermeyer et al. 2019, Haaland and Wooton 2021). Weighing benefits against expected costs, firms may choose not to use existing tariff choices, especially when FTAs are relatively new and information is limited. It raises questions about how long it takes to acquire the knowledge needed to use tariff choices and what determines learning outcomes.
To address these questions, we analyzed Swedish import transaction-level and firm-level data for the EU-South Korea FTA during 2008-2018 (Kasteng et al. 2022).1
Styled information from literature
It is often argued that source rules are a major determinant of choice usage and more restrictive source rules reduce the use of tariff choices (Felbermeyer et al. 2019, Holland & Uton 2021, Hayakawa et al. 2014, Kim and Cho201) costs related to proof of origin. It mainly affects the exporters, but the importer has to request the use of the tariff choice and conduct the necessary tariff administration (Kasteng and Almufti 2021).
Studies based on aggregate trade data, including Hayakawa et al. (2013), Hayakawa et al. (2014), Keck and Lendle (2012) and Nilsson (2016) have identified a positive relationship between the size of choice margins and choice usage. However, although a positive choice margin is required, studies using transaction-level data have shown that the value of imported transactions is more important than the size of the preferred margin, probably due to the less variability of the preferred margin (Casting et al. 2021).
Some studies have analyzed preferred use over time based on transaction-level data. A rare exception is Krishna and others. (2021), who analyze learning over time from an exporter-cost perspective. Their analysis complements our approach, which focuses on the importer-benefit perspective.
Experimental Search: Rising Imports and Priority Preservation Rates
The EU-South Korea FTA came into force in July 2011. The price of Swedish imports from South Korea has been stable for the previous three years, as shown in Figure 1, but has begun to rise as the FTA came into effect. Figure 1 also shows that a large portion of imports have already benefited from tariff preferences, with a preferential savings rate of over 60%.2
Figure 1 Import value and preferred savings rate over time
Nearly four years after the FTA came into force, the value of annual imports has risen again, at the same time the priority preservation rate has risen above 90%. Apparently, companies were learning to use FTA. The following paragraphs show how the learning process reflected in Figure 1 relates to the number of importers, entry and exit of importers, and frequency changes in import transactions.
Number of importers and average import price
Figure 2 shows that about 620 companies imported from South Korea three years before the FTA, and seven years later the number increased to about 750. At the same time, total imports have tripled, from about € 200 million to € 600 million. This means that the average import price per firm has increased a lot.
Figure 2 The number of importers over time
Figure 2 also shows that more than half of the importers did not use tariff choices at the end of the term. In view of the high priority savings rate (shown in Table 1), it is clear that import growth was concentrated among importers using tariff choices and that non-users were relatively marginal importers engaged in small and irregular import transactions.
Strong turnover and permanent importer
Despite the limited growth in the number of importers, the turnover of companies with many entries and departures was high. To understand the learning over time, it is helpful to focus on ‘permanent importers’, meaning that companies have made at least one import transaction each year during this period.
Figure 3 shows that permanent importers learned to use FTA faster than the average importer and they recorded higher preferred use. Permanent importers reached a preferential savings rate of 75% in the first year of the FTA and above 95% just four years later.
Figure 3 Preferred savings rate for fixed importers over time
The lower priority savings rate for the average importer is probably related to the firms’ continued entry and exit and the opportunity to learn about limited incentives and tariff choices.
Frequency of import transactions
In learning process analysis, it is normal to use individual import transactions as a unit of analysis.3 Since each import transaction is an opportunity to learn, it is possible to consider the number of import transactions and how long the firm has been an active importer as a proxy for empirical education. In analyzing the frequency of import transactions, we distinguish between a few import trading firms (less than five) and make a large number of import transactions (over 100) during this period. This distinction is useful for examining the learning effect of repeated import transactions.
Figure 4 Preferred savings rate by department of transactions over time
The left-hand panel in Figure 4 shows that the preferred savings rate tends to increase over time for all classes of farms. Also, many companies that do import transactions learn faster and have a higher priority savings rate than companies that do less import transactions. These observations are consistent with estimates relating to learning over time and the number of recurring import transactions.
The panel on the right of Figure 4 shows how there is variation in learning across the firm-size and frequency segment of the transaction. This suggests that choice savings rates are more closely related to the number of import transactions than the size of the firm. Similar results were found in Casting et al. (2021), where an original finding was that the preferred savings rate is not poorly related or strongly correlated with size.
Is it learning over time or not?
The learning-over-time hypothesis suggests that the longer a firm is engaged in importing goods from a particular partner country, the more it will learn to use tariff choices. This implies a positive link between a firm being an importer and its preferred use. An alternative assumption is that time is not important, but rather ‘learning to do’, which can be proxied by the total import transactions performed during this time. From a practical point of view, learning about tariff choices probably includes both of these dimensions. It is reasonable to expect higher education impact from conducting many import transactions over a longer period of time than some import transactions scattered over many years. However, which has a higher marginal effect – time or number of import transactions?
Figure 5 Learning over time versus learning using work and choice
Note:: Graphs show the relationship between how long a firm has been importing (left) and how many import transactions have been conducted on the x-axis (right) and the likelihood of using choice on the y-axis.
Figure 5 gives an overview of economic analysis from Casting et al. (2022) and suggests that the use of choice as an importer increases with the number of repeated import transactions rather than the length of time. In other words, adding an import transaction to the model, holding time and all other variables constant, increases the likelihood that tariff choices will be used. However, there is no similarity between the amount of a firm being active as an importer and its preferred use. Instead, ceteris paribus, the longer a firm is active in direct imports, the less likely it is to use tariff choices. There may be a partial explanation that corporate education has a ‘best before’ date: if too much time elapses between each import transaction, companies may forget how to handle procedures, routines may change, and skilled workers may be replaced over time. Maybe.
It takes time to learn, but time alone does not guarantee learning. Importers seem to be learning about the use of choice, mainly through repeated import transactions. The number of years as an importer does not seem to matter – in contrast, long-term importers who have not used tariff choices in the past are less likely to start using them in the future.
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1 This column draws on an analysis of nearly one million import transactions performed by about 6,500 companies.
2 The choice savings rate measures the use of tariff preferences in an FTA. It is defined as the value of actual tariff savings (e.g. actual tariff savings and tariff savings) using tariff preferences on preferred imports as a fraction of the potential tariff savings.
3 An import transaction is defined here as the importation of a particular product (at a 10-digit tariff level) from a particular exporter on a particular day by a specific importer.