A. Reducing supply chain barriers to trade could increase GDP up to six times more than removing tariffs. They have been under-managed by both countries and companies

1. Reducing supply chain barriers to trade could increase global GDP by nearly 5% and trade by 15%³

The benefits of improved global trade facilitation far exceed those available from further tariff reduction. Estimates suggest that an ambitious (but still incomplete) improvement in two key components of supply chain barriers, border administration and transport and communications infrastructure, with all countries raising their performance halfway to global best practice, would lead to an increase of approximately US$ 2.6 trillion (4.7%) in global GDP and US$ 1.6 trillion (14.5%) in global exports.⁴ By contrast, the gains available from complete worldwide tariff elimination amount to no more than US$ 400 billion (0.7%) in global GDP and US$ 1.1 trillion (10.1%) in global exports.⁵

Even a more modest improvement in trade facilitation, in which all countries raised their performance halfway to regional best practice, would lead to increases of US$ 1.5 trillion (2.6%) in global GDP and US$ 1.0 trillion (9.4%) in global exports. This is considered a more modest scenario for two reasons. First, it may be difficult for countries to achieve the improvements in border administration and infrastructure envisioned in the ambitious scenario, so it is of interest to show the gains that may be achievable with a less ambitious effort. Second, the improvements in a regional best practice scenario are uneven, since the best practice is different in every region. Thus, the modest scenario reflects a case in which some countries’ efforts in trade facilitation lag behind their neighbours more than would be expected given their current performance.

These estimates are illustrative rather than precise and are meant to provide only a broad indication of the potential impact of the policies being modelled.

 Figure 5: Reducing supply chain barriers has a larger effect than removing tariffs

While the increases in trade from tariff elimination are similar in magnitude to those associated with trade facilitation, the increases in GDP are many times greater. The reason is that the kinds of efficiencies brought about by improved trade facilitation are more powerful than those associated with tariff reduction. Reductions in supply chain barriers improve the efficiency of the movement of goods, in a manner analogous to an increase in transportation productivity, thereby recovering resources that are otherwise wasted. In contrast, tariff reductions primarily represent a reallocation of resources within an economy, while capturing only the more modest inefficiency created by the tax.⁶

Gains in GDP associated with trade facilitation would take place in all regions, though they would be concentrated in those with the greatest improvements. In the more ambitious scenario, these would include sub-Saharan Africa, South Asia, and parts of Central and West Asia (labelled “Rest of Asia” in figures below), as well as other developing regions. Economic gains from barrier reductions are more evenly distributed across countries than the gains associated with tariff elimination, which disproportionately accrue to specific countries, such as Russia and China. 

Table 1: Ambitious scenario

*FSU = Former Soviet Union

Source: Ferrantino, Geiger and Tsigas, The Benefits of Trade Facilitations – A modelling Exercise. Based on 2007 baseline. See text and online Appendix for details.

Trade facilitation leads to expansion of trade in a broader range of sectors than tariff elimination, so global exports would increase for most categories of goods.⁷ The trade-creating effects of tariff elimination are focused on products such as agriculture, processed foods, and textiles and apparel, which currently have tariff peaks. By contrast, a modest amount of trade facilitation would lead to trade expansion in a wider variety of manufactured goods, while ambitious trade facilitation is particularly helpful for trade expansion in technologically complex goods with long supply chains, such as transport equipment, machinery and electronics.

Figure 6: Impact per region varies under the ambitious scenario

Further gains are available if countries improve market access and the business environment. While these gains are not included in the above estimates, they are likely to be substantial. Improvements in market access – which includes not only tariffs, but non-tariff measures, SPS/TBT⁸ requirements, quotas, licenses, rules of origin and other issues – and improvements in the business environment, including the regulatory environment, investment policy, security and related issues, are important complements to improved trade facilitation. A change in market access and the business environment comparable to those modelled above could increase the overall economic gains by about 70%.⁹

Of course, reducing certain supply chain barriers – particularly those related to infrastructure – requires upfront investments, whereas tariffs can be eliminated with the stroke of a pen. The magnitude of the required investments will depend on the specific situation in a given country or region. While it is important to recognize that gains will depend on prior investments and that the estimates of real income increases are gross and not net gains, it is also important to note that many of the barriers that are modelled in the analysis are a reflection of policy – or the absence of policy – and will not give rise to significant implementation costs. This is the case in particular for border administration improvements, but also to some extent transport and communication infrastructure as the latter includes transport and communications services. As shown in this report, detailed analysis can enable policy-makers to prioritize investments that are most critical and cost-efficient.

Overview of barrier quantification in literature

There is a rich existing literature on supply chain barriers to trade. Much of this literature focuses on a selected set of barriers or a particular geographic region and applies a top-down approach to quantification. Previous work has generally been limited to estimating the effects of barrier reductions on trade volume, but not on GDP. This report augments the existing body of research by combining an empirical macroeconomic model with an analysis of individual case studies at the company and industry level, as well as an empirical estimate of the global effects of supply chain barrier reductions on both trade volume and GDP. Below is a table summarizing the scope and results of key papers. The online appendix contains a more detailed review.

Table 2: Literature overview: Impact of change in metric on trade flows, except where specified differently

Table 3: Literature overview: Additional quantification of trade barriers

2. Reducing barriers benefits households by lowering prices and improving employment prospects

The most direct benefit of eliminating supply chain barriers is a reduction in cost to trading firms and thus lower prices for consumers and for businesses that import materials used in their production activities. Although both supply chain barriers and tariffs increase the cost of trade, barriers create greater inefficiencies than tariffs because they often represent a pure waste of resources rather than simply a transfer payment to the government.¹⁰ Therefore, as discussed in the previous section, the net gain to aggregate welfare (GDP) from removing supply chain barriers is greater than the gain from lowering tariffs. Even the modest scenario of supply chain barrier reduction yields a global increase in GDP of 2.6%. This increase in income is equivalent to creating over 76 million jobs worldwide, based on global GDP per employed person (a GDP increase of 4.7%, as in the ambitious scenario, is equivalent to creating 137 million jobs).¹¹

Of course, GDP increases can manifest itself in multiple ways, and the actual impacts of lowering trade costs are highly dependent on the specific circumstances in a country or region. Supply chain barrier reductions will improve living standards by reducing social waste and lowering prices. It is also reasonable to expect that increases in aggregate income of the order of magnitude suggested by the analysis would stimulate demand for labour in countries with significant unemployment, creating additional jobs and reducing short-term unemployment.¹² Indeed, the relationship between unemployment and output has been a consistent fixture in macroeconomics since the 1960s. 

Precise estimates of the employment impact are complex and beyond the scope of this report. But an illustrative calculation may be useful. A recent study of the statistical relationship between GDP and employment found that, for a majority of the 167 countries studied, estimated employment elasticities were between 0.3 and 0.8. In other words, a 1% increase in GDP is associated with a 0.3% to 0.8% increase in employment.¹³ By applying the lower bound of the range to a modest scenario of a 2.6% increase in GDP, global employment would increase by 0.8%, or approximately 23 million jobs. By applying the range’s upper bound to the ambitious scenario of a 4.7% GDP increase, there would be a global increase in employment of 3.8%, or approximately 110 million jobs. These figures should not be viewed as precise forecasts, but rather as illustrative calculations of potential impacts. Any employment gains, of course, would not occur instantaneously, but would be realized over time.

Figure 7: Growth in global income can also stimulate employment

 In the long run, the primary employment benefit of a reduction in supply chain barriers is better, higher paying jobs. By facilitating trade, a reduction in barriers promotes a productivity-enhancing reallocation of workers and capital within the economy. There is substantial empirical evidence in the literature, for example, that freer trade increases competition, which weeds out inefficient firms and shifts resources (labour and capital) to those that are most productive.¹⁴ Studies have shown that exporting firms tend to pay higher wages than non-exporters.¹⁵ The shift of resources from less to more productive industries and from less to more productive firms improves aggregate productivity across countries, further increasing wages, long-run GDP and overall welfare.¹⁶

Citizens also gain in ways that may be difficult to incorporate into GDP. For example, a reduction in trade barriers supports economies of scale, which in turn enable greater product differentiation and variety.¹⁷ Although the welfare gains of variety are more difficult to measure than productivity gains, they can be substantial.¹⁸ The pharmaceutical industry offers a clear illustration. The development of a new drug requires enormous upfront costs, which a firm will incur only if it can realize substantial profits after launch. In smaller countries, a particular disease may not be common enough to sustain such an investment. Patients with this disease would benefit greatly if the drug could be imported from abroad. However, the case studies here indicate that many countries impose barriers to drug imports – such as requiring local clinical trials – that sometimes cause pharmaceutical companies to neglect or underserve that market altogether. These policies may benefit domestic pharmaceutical companies, but at a tremendous cost to the patients who are left without access to the best available treatment.

Why, if trade increases overall income and consumer welfare, do countries not do more to dismantle barriers? The reason reflects the distribution of gains and losses among stakeholders. A key tenet of modern trade theory is that not every worker, firm or community will necessarily benefit.¹⁹ For example, a reduction in tariffs may harm a domestic or established multinational firm that produces a certain product and now faces greater competition from importers, even while it benefits a domestic firm in another industry that uses the product as an input. Consumers as a whole, of course, consistently benefit from access to a greater variety of goods at cheaper prices. The complication is that the benefits of trade are less direct, less immediate, and more widely spread across the population, whereas the costs of trade liberalization are concentrated on a visible (and vocal) few.²⁰

A key dimension of the supply chain barriers that are the focus of this report is that the gains from reforms that reduce supply chain inefficiencies are much larger than the gains from lowering tariffs and are much more widely spread: almost everyone benefits from lower transaction costs. How much different groups in society benefit from lowering supply chain barriers will depend on the degree of competition that prevails on the markets for the goods that are affected by supply chain costs. In cases where competition is constrained or firms have market power, the benefits may be captured disproportionately by certain groups. For the gains to accrue primarily to households, it is necessary that markets be contestable so that the prices of goods and services reflect the costs of production.