3. Description of Supply Chain Barriers to Trade
3. Description of Supply Chain Barriers to Trade
Consistent with the categories used by the Enabling Trade Index (ETI), this report organizes supply chain barriers to trade into four main categories and the nine specific pillars they embrace. This section briefly describes each of the barriers, presents some illustrative case examples, examines how barriers interact across categories, and describes the consequences they have on companies’ operations.
Supply Chain Barriers to Trade
A. Market access
Market access encompasses both domestic and foreign market access.
1. Domestic and foreign market access
Frequently cited by companies as a primary concern, market access includes tariffs as well as non-tariff measures that disadvantage foreign firms, which are a major focus of this report. Many of these measures primarily serve other purposes, and usually fulfil valid policy goals. However, when they are sometimes abused or not standardized when possible, they become barriers. Market access barriers include safety and sanitary requirements, technical standards, local content requirements and other regulations that make importing into the country more difficult. Like tariffs, these restrictions give the domestic industry a price advantage over foreign competitors.
The case studies in this report include numerous instances of market access barriers. For example, PC Co. faces burdensome local content requirements and rules-of-origin restrictions when serving the Middle East and Indonesian markets from its manufacturing base. In Vietnam, many pharmaceuticals importers are required to conduct local clinical trials, even for drugs that the US Food and Drug Administration (FDA) or the European Union’s European Medicines Agency (EMA) had previously approved. In the US, the Jones Merchant Marine Act of 1920 restricts the movement of merchandise between US ports to ships that are US-owned, US-crewed, and US-built, reducing competitive forces and raising the costs and environmental impact of transport. The case studies on Chemical Co., Mexican Chemical Co., Technology Co., Handset Distribution Co., and Computer Co. provide further examples of market access barriers.
B. Border administration
The second category of barrier is border administration, which includes three pillars: efficiency of customs administration, efficiency of import-export procedures, and transparency of border administration.
2. Efficiency of customs administration
Efficiency of customs administration refers to the speed and ease with which imports and exports can clear customs and the quality and range of services national customs authorities provide. Inefficiency usually reflects an insufficient allocation of resources to customs agencies or a failure to adopt best practices in customs procedures. These barriers can include frequent inspections and long wait times.
As a global express delivery company, Express Delivery Services Co. is highly sensitive to the efficiency of customs processes around the world and particularly in developing countries where investments to improve customs processing have lagged. Customs authorities in many developing countries do not employ risk analysis tools to target physical inspections, requiring them to inspect far more shipments. Also, in China, India and other emerging markets, customs agencies do not operate around the clock, seven days a week, resulting in long delays. Other examples illustrating how customs efficiency affects trade can be found in the Healthcare Co. and Semiconductors Co. case studies.
3. Efficiency of import-export procedures
Border delays and burdensome requirements can extend beyond a customs administration to include a lack of coordination between border agencies and compliance with import-export standards.
These barriers weigh especially heavily on industries like chemicals that are regulated by multiple agencies. For example, when Chemical Co. exports into the US, its products can fall under the jurisdiction of up to 12 regulators, including the FDA, the Drug Enforcement Agency (DEA), the Department of Commerce Bureau of Industry and Security (BIS) and the Department of Homeland Security. These agencies operate independently and often lack effective coordination of communications, which results in the imposition of additional rules and regulations and increased delays.
4. Transparency of border administration
Transparency of border administration reflects barriers associated with corruption, which could include the direct costs of making “facilitation payments” (bribes) or the added delays that result if a bribe is refused or not forthcoming. CPG Co., a global consumer goods company, refuses to pay bribes as a matter of policy and faces severe delays at customs and ports in Africa, where its shipments are queued behind those of companies that do pay off officials (see sidebar, “The corrosive effects of corruption”).
C. Telecom and transport infrastructure
Telecom and transport infrastructure, the third category of barrier, includes availability and quality of transport infrastructure, availability and quality of transport services, and availability and use of information and communication technologies.
5. Availability and quality of transport infrastructure
Inadequate road, rail, sea or air transportation networks can be a huge burden, especially when moving goods across a large territory from inland facilities to coastal ports. The availability of quality transport infrastructure reflects the number of airports, the quality of roads and the amount of congestion at ports and other transport facilities.
The case study on Agriculture Co., an agricultural products and food company with significant operations in Brazil, illustrates the types of barriers firms can face in transport infrastructure. Poorly maintained roadways reduce truck weight capacity and speed, and increase maintenance and repairs. A poor rail network forces Agriculture Co. to rely on trucks for longer-haul cargoes where rail would be more efficient. Additionally, inadequate port infrastructure creates choke points when cargo is unloaded. The case studies of CPG Co., Apparel Co. and Express Delivery Services Co. provide further examples of how poor transport infrastructure impedes trade.
6. Availability and quality of transport services
Closely related to transport infrastructure are barriers related to transport services, which may include a dearth of companies picking up or delivering goods to a country and a lack of a capable local logistics industry. In Madagascar, for example, Apparel Co., an apparel company that has manufacturing facilities in the country, struggles to compete with Asian rivals because Madagascar’s low trade volume accommodates only one ship sailing per week.
7. Availability and use of information and communication technologies (ICT)
Unreliable communications and technology infrastructure add uncertainty to a company’s supply chain by, for example, making it difficult to track containers at ports or forcing shippers to rely on paper documentation instead of electronic customs processing.
Agriculture Co., an agriculture company with operations in Brazil, cannot rely on Brazil’s limited electronic freight invoice system to handle all transactions. The company also estimates that it encounters five- to six-hour delays about twice a week when government computer servers crash. The IATA and PC Co. case studies describe other barriers stemming from inadequate ICT.
D. Business environment
Business environment encompasses broad issues related to a country’s general business conditions, but two aspects – its regulatory environment and physical security – are especially salient.
8. Regulatory environment
Barriers arising from a country’s regulatory environment that increase costs and risks may reflect an unstable or poorly functioning government, difficulties in hiring foreign workers and a lack of available trade finance. The costs and risks that an uncertain regulatory environment creates can be steep. In Nigeria, for example, CPG Co. was forced to cease operations temporarily because of internal social and political conflicts. In Zambia, CPG Co. and many other foreign companies saw their businesses adversely affected by economic and political mismanagement. The case studies on Rubber Products, Handset Distribution Co., Express Delivery Services Co. and Chemical Co. provide other examples of how regulatory barriers handicap supply chains.
9. Physical security
High crime rates and frequent thefts along the supply chain drive up operating costs and are major factors companies weigh when deciding whether they will enter a market. Semiconductors Co. points to security breaches at customs warehouses in India. PC Co. has been forced to cease transporting its goods between Middle Eastern countries during holiday periods because of the spike in thefts that occurs from the backlog of deliveries that build while customs offices are shut down. Other examples of the impact of poor security can be found in the case study on Global Co.
Although it is useful to separate barriers into distinct categories, in reality the lines between them are blurry. For example, it may not be obvious whether a rule enforced at customs is a market access barrier or a border administration barrier. In other cases, one set of barriers can activate or magnify a second set. For instance, many regulations provide more opportunities for corruption of agents at the border. One company interviewed for this study reported that border agents will exploit any vagueness in customs rules to extract “fines” (bribes). As described in the PC Co. example, frequent border delays during holiday periods led to higher rates theft. Barriers also interact to increase the costs companies must bear. Delays are a serious problem in their own right, but their effects are worsened when poor ICT means the company cannot track the shipment. And the cost of the initial delay is magnified further when business regulations limit a company’s ability to return its shipment.
Consequences of Barriers to Trade
Supply chain barriers weigh on a business in four direct ways:
- Add to costs, both in terms of higher operating costs and increased capital expenditures
- Worsen the delays the business faces by making them less predictable or longer.
- Reduce volume of trade activity
- Increase risk
A company’s experiences will vary by the specific barrier it encounters and the actions, if any, it takes in response. For example, a company that must contend with frequent truck breakdowns resulting from badly maintained roads (poor transportation infrastructure) might simply accept a higher average delay in shipments, or it could purchase additional trucks, thereby increasing capital expenditures.
How an individual company responds will depend on its operational priorities or characteristics specific to its industry. For instance, transportation delays will be more harmful to a company that sells fresh fish than to one that sells canned tuna. Likewise, a company that differentiates itself as the industry’s most reliable provider may absorb higher costs – by maintaining a buffer stock of inventory, say – for the sake of fewer, more predictable delays. Finally, while it may be possible to classify a supply chain barrier’s direct impact into one of the four categories, the lines may ultimately blur. A company that incurs additional costs because of a barrier may eventually discover that there is no longer a business case to be in that market and will reduce its volume. Or a company that suffers reduced volume – as the result of a quota, for example – could see its production costs rise if it is no longer able to capture economies of scale.
The corrosive effects of corruption
Perhaps the most sensitive and difficult trade barrier for companies to discuss is corruption. Because no company likes to admit paying illegal bribes, corruption’s full scope is hard to quantify. Multinational corporations like those interviewed for this report are highly unlikely to acquiesce to paying bribes, and as a consequence are the most likely to be harmed by corruption. Although the size of a bribe may be relatively insignificant, the consequences of not paying can be quite large. One company featured in the study reported that in Russia, some businesses pay bribes to avoid tariffs, leaving those that refuse to engage with corrupt officials at a significant competitive disadvantage. In extreme cases of pervasive corruption, some companies may be forced to exit a market altogether rather than try to compete on unequal terms. Since local firms may be better able to deal with corrupt officials, either because of relationships with officials or more knowledge of workarounds, foreign firms are more likely to withdraw from a market because of widespread corruption.
Note: The Global Enabling Trade Report identifies 9 pillars, this is an extended list including several sub-pillars as tested in a separate survey for this study.
Note: Includes manufacturing, retail and logistics, N=108
Source: World Economic Forum survey.