Enabling Trade in the Pacific Alliance:
3. Supply Chain Barriers to Trade in the Pacific Alliance
Efforts to reduce regional supply chain barriers to trade should typically begin with an assessment of the impacts of existing barriers. Input from the private sector can help governments to prioritize barriers based on how and to what degree they restrict the flow of goods within the region, and to generate ideas for initiatives to reduce these barriers.
In this spirit, the IDB, in collaboration with private-sector associations in Chile, Colombia, Mexico and Peru8, is gathering input from companies that trade across the Alliance countries. The input collected is in two forms: first, a broad survey targeting companies associated with the largest business association in each country, as well as members of AACCLA; and second, subsequent in-depth focus group discussions with representatives from selected companies in each country. The resulting picture of challenges and potential solutions will be provided, as noted, in a final report prior to the World Economic Forum on Latin America in Panama City, Panama on 1-3 April 2014.
In this report, survey results provide early signals of which barriers are seen as most restrictive to trade within the Pacific Alliance. Although these results are based on a relatively small sample of about 140 firms and have to be considered as preliminary, they are generally consistent with the findings of the Enabling Trade Index, and the authors believe they are directionally accurate. A profile of respondents to date is given in the Appendix.
To supplement the quantitative survey results, qualitative case studies based on interviews with executives illustrate the kind of concrete, practical input that is expected to result from focus group discussions.
Exporters and importers completed separate questionnaires. This preliminary report focuses on key questions that can help policy-makers when prioritizing actions.
Evaluation of infrastructure, services and border efficiency
Respondents were asked to evaluate the performance of their country of origin10 for various aspects of infrastructure, services and border efficiency. Aggregating all countries’ answers, the main priorities were inland infrastructure, border control infrastructure, cold-chain installations and public information on freight (e.g. price transparency).11
Around 39% of the companies indicated land infrastructure as an important issue that is not satisfactory in their own countries, and consequently hinders their capacity to trade across borders (Figure 5). To illustrate this issue, Case Study 1 describes the challenges facing transport along Peru’s Pan-American Highway and presents the liberalization of cabotage regulations as a potential solution.
Figure 5: Land Infrastructure Emerges as the Highest Priority for Country-of-Origin Performance
Note: (*) Including non-applicable answers; results are shown excluding non-applicable answer. Source: Ongoing survey
Shortcomings in domestic transport infrastructure are not exclusive to Peru. The concern is also present in the other Pacific Alliance countries and across the Latin American region, with considerable value at stake. A recent IDB report shows that reductions in domestic freight rates can significantly boost trade flows. According to the results, a reduction of 1% in domestic ad-valorem costs could increase exports on average by around 4%.12 From the countries studied (which include all of the Alliance members), the major issue tends to be underinvestment, particularly in cheaper and alternative modes of transport such as rail and waterways. The agenda behind inland transport is complex, and it obviously varies by country. However, the report shows that this agenda is not just restricted to the construction of new and/or better roads; it also touches on a number of institutional and regulatory weaknesses typically seen in the transport industry.
Case Study 1: Land Infrastructure13
Insufficient land infrastructure with regard to transport highlights the potential benefits of liberalized cabotage legislation
Peru’s Pan-American Highway is a major route for transporting cargo domestically between the north and south. The country’s national port authority estimates that 30,000 containers are trucked from southern Peru to Callao each year for international shipping. Existing rail infrastructure is insufficient to support this traffic, and would require significant investment and time to make operational. The Pan-American Highway is the only viable route to transport cargo. Inland transport costs are thus high due to lack of alternatives, and excessive use of the route has also led to poor road quality. In addition to increasing the prices of many domestically-sourced goods for Peruvian consumers, these costs and delays negatively affect the competitiveness of Peruvian businesses within the Pacific Alliance and across other international markets.
One opportunity to alleviate these barriers is liberalizing the use of cabotage, permitting foreign transporters to bypass congested overland routes and move containers by sea along the Peruvian coast. Two main challenges exist for this opportunity. First, local unions are strongly opposed to reform of the existing cabotage legislation, which prohibits foreign companies from providing domestic transport services. By limiting competition, this regulation drives up costs along these routes. The second challenge relates to infrastructure. Medium-sized Peruvian ports would require investments in order to accommodate the additional volumes from a significant cabotage development. Small feeder roads to these ports would also require investment.
Progress towards implementing this solution is being made. In 2013, Peru’s national port authority drafted an amendment to the national cabotage law, removing the restriction on foreign operators. In support of this reform, the public and private sectors are exploring sources of funding to pursue a more detailed feasibility study of the requirements and potential impacts of the cabotage opportunity. First, the costs of the required investments must be calculated. Negative impacts on Peruvian unions and transporters must also be understood, and the cost of mechanisms to mitigate these risks needs to be estimated. These costs must then be compared with the potential upside: increased competitiveness of Peruvian businesses, leading to increased trade, economic growth and job creation.
About 26% of respondents indicate border control infrastructure as a particularly problematic obstacle, with 18% claiming this affects the work of the other specialized agencies. A vivid example of this problem is SaniCo, a manufacturer of disposable sanitary products such as baby diapers, sanitary napkins and wet wipes (Case Study 2).14 While specific and narrow, the SaniCo example illustrates a broader point: while maintaining border control is obviously important for many reasons, many of the inspections and controls can be improved, eliminating waste in the process. The example also hints at another, more general barrier also covered here: non-harmonized regulation across the Alliance countries.
Finally, another concern prioritized by firms regarding their own countries is public information on freight. Almost 30% of the surveyed companies indicated the lack of public information on freight as an important obstacle to trade. The lack of transparency on prices set by freight forwarders and customs brokers adds a layer of uncertainty to the operations of importing and exporting firms. Implementing mechanisms to improve transparency of pricing should be a priority, given the large number of companies concerned about this issue.
Survey results have also been segmented according to the firms’ country of origin. For each country, the top three and top four-to-six priorities have been identified. When comparing the results across the Alliance, the same common priorities appear: inland infrastructure, border and customs control infrastructure, and public information on freight (Figure 6). The fact that these priorities are shared among all countries should create momentum and promote joint investment of focus and resources in identifying best practices from other regions.
Figure 6: Many Priorities Are Shared across Countries
Sources: Bain & Company analysis; ongoing survey
Major obstacles in source and destination markets within the Pacific Alliance
Firms were also asked to evaluate a list of obstacles in source and destination markets within the Pacific Alliance.15 The top concern, cited by 30% of firms, was the time to process paperwork (Figure 7). Similar to Case Study 1, the experience of SaniCo in Case Study 2 illustrates a more general concern explicitly raised by many firms: the steps required to fulfil many of the regulations behind trade transactions are often painstakingly slow.
Figure 7: Time Required to Process and Authorize Paperwork: An Issue for 30% of Respondents
Note: (*) 60 exporters and 76 importers Source: Ongoing survey
Case Study 2: Efficiency of Inspections and Time to Process Paperwork16
Sanitary certification requirements are not harmonized across countries, creating duplicate processes that delay entry into new markets.
SaniCo manufactures and markets disposable sanitary products such as baby diapers, incontinence briefs, sanitary napkins, trainers and wet wipes. Among other end markets, these products are sold in Peru, Ecuador and Colombia.
Peru and Colombia both require sanitary registration for most of SaniCo’s products, while Chile requires it only for sanitary wipes. The process of obtaining registration is relatively efficient in Colombia, but it takes much longer in Chile (four to six months) and Peru (six to eight months).
The main reason for the longer processing periods is the difference in sanitary certification requirements across countries. Unlike the other Pacific Alliance members, Mexico does not require sanitary certification for the types of products sold by SaniCo because Mexican regulations do not deem these products to pose a significant health risk. As a result, authorities in the importing country may request a document stating that there is no sanitary registration from Mexico. In Mexico, that document must be approved locally by the Federal Commission for Protection Against Sanitary Risk and then stamped by the importing country’s embassy. This process usually takes several weeks, but can be delayed by up to two years, depending on the request. Finally, said document goes to the appropriate officials of the importing country’s government for approval. The same document must be provided every time a new product is introduced.
Aside from expediting the current process, representatives from the sanitary authorities of the Alliance countries should consider ways to avoid repetitive provision of the same document. Colombia’s officials may have best practices that could be shared with Chile and Peru. In the longer term, the countries should ideally harmonize their assessments of which products pose health risks and which do not.
Shifting from paper- to electronic-based processes is one way to reduce delays. Implementing these types of initiatives can be challenging, given the multitude of stakeholders that need to be involved and the perception that change may not be in the best interests of all parties. The “Enabling Smart Borders” section of the Enabling Trade: From Valuation to Action report provides a proposed approach to implementation in light of these challenges.
Frequent changes in regulation were cited as a concern by 24% of the firms. This is a broad issue that extends beyond trade facilitation, and a key reason why countries engage in deep forms of integration. When countries collectively decide to go beyond the dismantling of tariff rates and seek to converge and harmonize the many rules (e.g. investment rules, intellectual property rights, technical standards), they not only pursue more compatible processes across their economies, but also effectively eliminate the need to frequently change their own regulations.