Utilisation Of Trade Agreements

Many free trade agreements apply the principle of direct transport. In order for a product to benefit from preferential tariff treatment, it must be shipped directly from one partner country of the agreement to the other. Subsequently, companies that use central warehouses (hubs) for long delivery distances often do not benefit from preferential rates. Problems related to the principle of direct transport and the use of regional nodes could be solved by innovative technologies, such as microchips, which are applied directly to goods. Francois, J, B Hoekman and M Manchin (2006), “Preference erosion and multilateral trade liberalization”, World Bank Economic Review 20, 197-216. The influence of exchange rates on the use of free trade agreements is used to determine the origin of automobiles in the Trans-Pacific Partnership (TPP). Net costs are “total costs” less “promotion, marketing and after-sales service costs, royalties, shipping and packaging costs, and ineligible interest. This net cost ratio is less sensitive to exchange rate changes than the value-added ratio, since the net cost ratio does not include the export price, the changes of which are the effect of exchange rates on the value-added ratio. Consequently, the influence of exchange rates on the use of free trade agreements should be less if the net cost method is used instead of the value-added method. In other words, the application of the net cost method would free exporters from the fear of exchange rate fluctuations and encourage exporters to make stable use of free trade agreements. We observe this effect of exchange rates on the Utilization rate of the AFTA FTA.

In particular, by examining the product-level use of nafta exports from ten ASEAN countries to Korea during the period 2007-2011, we find statistically significant evidence that a devaluation of the ASEAN exporter`s currency against the importer`s currency (the Korean won) increases NAFTA utilization rates. In particular, the positive effects of exchange rates are greater for regional value rules than for non-regional value rules, which implies, at least in part, that exchange rates influence preferential utilization rates by changing the value-added ratio, which plays a key role in regional value rules in AFTA. Our results indicate that exporters cannot meet the rules of origin in error if exchange rates fluctuate and the value-added ratio changes. A similar official communication is announced by the Japan Chamber of Commerce and Industry that exporters are changing exchange rates (e.g. .