5. Policy Implication: Think Supply Chain!
5. Policy Implication: Think Supply Chain!
As the case studies in this report show, companies are increasingly organizing production of goods and services through global supply chains. Products are processed – and value is added – in many different countries. A company’s ability to participate in these supply chains depends greatly on their government’s policy choices: the extent of restrictions on market access; the efficiency of border management; information technology capabilities; transport and logistics services infrastructure; and the business environment. Even if tariffs on their exported goods are zero, firms that confront high and uncertain border costs and inefficient and unpredictable logistics will not be able to compete with firms in countries that provide a more efficient economic environment.
A key problem highlighted by the case studies is that many different policies and administrative procedures can artificially “break” the supply chain by introducing discontinuity and affecting reliability. Supply chain efficiency is not simply about greater trade in parts and components and trade facilitation at the border. It also involves the ability to invest in facilities, protection of intellectual property, international movement of businesspeople and workers, and access to and use of technology. The policy-related factors that affect the operation of supply chains are numerous and interrelated. Regulatory requirements regarding health, product safety, security and the like often add a layer of complexity to the customs clearance process. Investment-related policies may restrict foreign companies from wholly owning critical operations. Exclusivity or preferential treatment for state-owned or state-supported enterprises (such as postal monopolies) may impede supply chain services. The exercise of market power by a dominant entity that controls access to a gateway, facilities or networks may hinder the functioning of some parts of a supply chain; examples include port operations and airport cargo handlers. Moreover, groups that have a vested interest in the status quo, such as customs brokers, freight forwarders and domestic trucking industries, may resist reforms. In short, a variety of factors may raise the cost of operating a supply chain and impede reform efforts.
“Logistics” as such is not the focus of any one government department or entity, but rather the purview of a number of different agencies. An approach centred on all the policies that significantly affect supply chain efficiency will improve a country’s competitiveness and may substantially enhance the commercial relevance of trade agreements. International negotiations have focused primarily on reducing tariff and non-tariff barriers to trade for specific products and sectors. The lack of a “whole of the supply chain” focus in trade agreements means that key factors affecting supply chain efficiency are not addressed. The benefits of traditional trade negotiations are thus significantly reduced.
Research has shown that the different dimensions of national logistics efficiency – as measured by the World Bank’s Logistics Performance Index (LPI) – are the most important determinants of the trade costs that prevail between any given pair of countries. Improving LPI performance would reduce average bilateral trade costs ten times more than an equivalent percentage reduction in average tariffs.48 A significant reduction in trade costs has positive effects on wages and labour demand, as lower costs allow more productive firms to expand. Consumers and businesses benefit through greater and more timely access to critical goods, such as medical devices or components needed for production. They also benefit from lower prices, higher quality or both, not least because the incentive for goods to enter the market through informal channels is reduced.
Regional and multilateral cooperation in this area could help identify best practices, assist in overcoming resistance to reform from vested interests, and enhance transparency and accountability for results. But progress in improving the policy environment need not and should not wait for international agreements. Countries need concerted domestic regulatory reforms – informed by an understanding of the importance of coordination – to ensure that reform efforts have a positive impact on supply chain efficiency. There is much that governments can and should do to improve the logistics environment in their own countries to capture the gains from participation in supply chains.
The following sections identify critical areas for action by governments, both at the national level and through international cooperation.
A Domestic Agenda to Improve National Supply Chain Performance
The case studies illustrate the need for a holistic approach focusing on all major aspects of the supply chain. Reform efforts should target factors with the greatest impact on operational efficiency and should prioritize those that are relatively easy to implement – the “low-hanging fruit”. Governments need to work with businesses and analysts to identify the binding constraints – policies and procedures where a concerted effort moves companies past the tipping point to enable successful transactions.
To identify the key constraints, governments can draw on data compiled by the World Economic Forum’s Global Enabling Trade Report and the World Bank’s Logistics Performance Index and Doing Business reports. These capture different dimensions of the determinants of countries’ supply chain performance, including: border management; the quality of trade-related infrastructure and transport and logistics services; and related intermediation services, such as timeliness of delivery and the ability to track and trace consignments. However, while existing country-level indicators are useful measures of overall performance, they cannot capture the heterogeneity in the factors that matter most for different types of supply chains and industries. Identification of binding constraints requires information and analysis of impacts on a sector and industry basis, including assessments of the distributional effects of policies – that is, which social groups pay the price and which get the benefits.
Policy recommendation 1: Create a national mechanism to set policy priorities for improving supply chain efficiency based on objective performance data and feedback loops between government and firms.
It is critically important to establish credible mechanisms at the national level to monitor performance and progress. These mechanisms can generate feedback from businesses and other stakeholders to the government entities responsible for implementation of reforms. Firms need to be proactive and willing to invest resources in collecting relevant information and putting it in the public domain. This will help mobilize a “user voice” from businesses that rely on access to imports – whether to sell on the domestic market or to export – as they and their customers are the beneficiaries of lower trade costs.
Creating or mandating an institution to interact with business and to act as a depository for logistics performance data would help ensure that policy efforts are maintained over time and that governments are held accountable for outcomes. These could build on the “logistics performance observatories” that a number of countries have put in place. Such bodies would have a mandate to do the requisite analysis and then put the information in the public domain. One of its functions would be to aggregate data so that individual businesses need not be concerned about “retaliation” by regulatory agencies or releasing commercially sensitive information. There are good practice models that could inform the design of such mechanisms, such as the Productivity Commission in Australia and the Canada Gateway project. It is important that concepts and data tools be comparable across countries to allow for comparisons and benchmarking, an agenda that could be supported by international development organizations.
There are also many existing tools that can be deployed, such as corridor- or gateway-specific observatories, regulatory impact assessments, and trade and transport facilitation audits. A public-private partnership model that brings together business, government, regulators and civil society could be a good option to consider. An example is the partnership between the government of the Netherlands and Dinalog – the Dutch Institute for Advanced Logistics.
Policy recommendation 2: Create a focal point within government that has a mandate to coordinate and oversee all regulation that directly affects supply chain efficiency.
The examples discussed in this report illustrate that there are often many different regulatory and control agencies, some representing local or regional authorities and others the central government. These agencies do not have an economy-wide mandate or vision – each focuses on the attainment of its specific mandates. The result is not just complexity for business but potential redundancy, excess costs, and a lack of policy coherence.
Given the importance of tipping points, governments need to recognize that industry-specific supply chains are affected by different clusters of policies. Improving supply chain performance requires coherence and coordination across many government agencies and collaboration with industry. The authors recommend that governments create a high-level body to oversee all regulation directly affecting the supply chain. Governments should establish effective coordination mechanisms linking the various regulatory and control bodies that set and enforce product and process regulations affecting supply chain efficiency. Insofar as governments are addressing this issue, efforts tend to focus either on policies regulating and controlling the movement of merchandise (for example, through a “single window” approach) or on the movement of vessels (including containers or trailers) – for example, through a logistics agency (as has been done in Panama).
What is needed is greater integration of such efforts that bring together all the relevant regulatory authorities. Doing so will help government “think supply chain” in the design and implementation of border management, transport, trade facilitation, and logistics-related policies. In some cases it may be appropriate to focus on specific gateways, trade lanes or corridors. Most countries have just one or a few freight gateways and transport corridors, and it may be easier to pursue a coordinated whole of the supply chain approach for one of these rather than for the country as a whole.
Policy recommendation 3: Ensure that SME interests are represented in the policy prioritization process and that solutions are designed to address specific constraints that disproportionately affect SMEs.
Another area for action concerns small- and medium-sized enterprises (SMEs). SMEs tend to face proportionally greater barriers to engaging in international trade, some of which are related to logistics and related transactions costs. The eBay case study suggests that some of these barriers could easily be addressed. For example, governments could create a quick win by adopting higher de minimis provisions, allowing goods under a certain threshold value to forgo clearance whenever the amount of duty collected is less than the administrative cost to process the shipment. Currently de minimis levels vary widely; within the APEC region. For example, thresholds vary from US$ 1 to more than US$ 1,000. While a uniform global standard may be difficult to achieve in the short term given differences in per capita incomes and reliance on customs revenue, de minimis standards should be high enough not to make small transactions prohibitively expensive. What matters most is that in “thinking supply chain”, the interests of SMEs are considered explicitly as they may differ in important ways from those of large shippers and logistics providers. Today, trade facilitation measures such as authorized economic operators or trusted trader programmes generally target large traders and shippers. It is important that such initiatives to reduce regulatory compliance costs be complemented by programmes and solutions for SMEs to help them address regulatory complexity and lower their costs.
Note that these policy recommendations apply to high-income countries as much as they do to developing nations. The former have better business environments, infrastructure and border management systems, and thus higher levels of logistics performance. But dealing with regulatory coordination and removing policy biases against small firms are as important for OECD countries as they are for low-income economies. “Think supply chain” is not a policy agenda that is relevant only to developing nations and emerging markets.
Options for International Cooperation
Although much of the policy reform agenda associated with a “whole of the supply chain” approach is national, there are areas where international cooperation – joint action – is needed. Examples include agreement on common standards for documentation; moving toward electronic (paperless) transaction systems; norms regarding sharing of data and privacy; harmonization of de minimis standards for customs clearance; Open Skies agreements for aviation; and convergence on the application of rules of origin. International cooperation may also help address political constraints that prevent reforms from being implemented. Some groups gain from current complexity of procedures or barriers to entry that result from specific policies, and may be powerful enough to block reforms. International agreement to pursue a certain approach can help overcome such resistance. Last but not least, international cooperation can be a valuable mechanism for learning about good practices, obtaining assistance in pursuing reforms, and getting help in financing required investments. Multilateral development banks and specialized international organizations can help countries design, coordinate and implement both national and multi-country trade facilitation and logistics projects.
Policy recommendation 4: Whether through multilateral or regional agreements, governments should agree to pursue a “whole of the supply chain” approach rather than pursuing negotiations in separate pillars or silos.
A “whole of the supply chain” approach toward international cooperation implies bringing together a variety of service sectors and subsectors that are relevant from a logistics perspective. These include cargo handling, storage, warehousing, agency services and related ancillary services, along with freight services (air, road, rail, maritime, express/courier). Negotiating commitments on these various services – treated as a “bundle” or “check-list”– along with parallel negotiations on trade facilitation focusing on border management procedures and disciplines pertaining to product standards and technical regulations, offers the prospect of addressing many of the policies affecting the operation of global supply chains (see appendix, US-Mexico Competitiveness Agenda: The urgency of accelerating the pace). To date the focus of trade negotiation efforts has been on a silo approach: each issue area is addressed independently, rather than being informed by a supply chain perspective. Additional cross-cutting issues such as e-commerce, investment policy, and some elements of competition policy (to address concerns regarding the behaviour of dominant suppliers) should also be taken into consideration.
Two important questions are: 1. Whether international cooperation is best pursued at the global level or within smaller groups such as regional arrangements; 2. Whether cross-cutting/horizontal or sectoral approaches are best. A more integrated approach to reducing policy-induced supply chain inefficiencies can be pursued both at the global level and among smaller groups of countries. It is also important to recognize that binding international treaties are not the only option. Other forms of cooperation may also be effective in addressing bottlenecks. Constraints may be very supply-chain specific – supply chains for electronic products are very different from textiles – and the political forces that drive policies are likely to differ with the level of logistics performance and the short- to medium-term trade potential this implies. While a differentiated approach will be necessary, certain common commitments that are relevant and applicable to all sectors could be pursued through international agreements.
A specific option that could be considered is negotiating an international supply chain agreement (ISCA).49 This could follow the negotiating precedents provided by the Information Technology Agreement and the World Trade Organization’s (WTO) Basic Telecommunications Agreement and Financial Services Agreement. A distinguishing feature of these agreements is that they apply on a most-favoured-nation basis: all countries, whether they join the ISCA or not, would benefit from the outcome. An alternative approach is to limit benefits to signatories in areas permitted by the WTO. Even a non-discriminatory approach may in practice exclude non-signatories that do not satisfy minimum regulatory standards, suggesting that members of an ISCA should provide assistance to non-members to help them benefit from its provisions.
Given the lack of progress in the WTO, cooperation among a group of like-minded countries may be more achievable in the short term. Some progress has been made in recent regional fora; an example is the Asia-Pacific Economic Cooperation (APEC) commitment to improve the region’s supply chain performance by 10% by 2015, a goal articulated under the 2010 Yokohama Vision. In the context of the Trans-Pacific Partnership (TPP) negotiations, business is advocating the elimination of barriers to trade and redundant regulation. Business is also pressing for efforts to enhance cross-border physical connectivity, and for improved communication on and coordination of regulatory practices that affect trade. A major element of the TPP’s proposed approach is regular communication and interaction among officials, regulators and industry representatives with a view to identifying problems and potential solutions and monitoring progress in reducing needless policy-created supply chain costs. A premise is that cooperation needs to centre on the attainment of specific performance targets, such as time-to-release commitments or a common list of data requirements for shipments; agreement on regulatory principles; establishment of consultation processes that allow industry to identify specific choke points; and mechanisms to address these chokepoints in a timely and collaborative manner.
Policy recommendation 5: Launch a global effort to pursue conversion of manual and paper-based documentation to electronic systems, using globally agreed data formats.
Certain sources of supply chain inefficiency require global solutions. Examples include harmonization of data formats, implementation of uniform electronic documentation standards and agreement on common approaches to security objectives. Many of the excess costs and inefficiencies in the operation of supply chains reflect a lack of reliability due to delays and uncertainty stemming from manual paper-based documentation, redundancy in data requirements and the absence of pre-arrival clearance and risk management-based approaches. As a generalization, paper- and human-based systems are more expensive, time-consuming, error-prone, and open to corruption. Given that trade is international, efforts to adopt common documentary and data/information standards should be global.