Executive Summary

This report examines supply chain barriers to international trade and concludes that they are far more significant impediments to trade than tariffs. In fact, reducing supply chain barriers could increase world GDP over six times more than removing all tariffs.

The report combines empirical macroeconomic analysis with a series of in-depth case studies on individual companies and industries. This ground-level understanding informs a general set of lessons relevant to governments and companies as they attempt to promote trade and economic growth. The authors of the report offer specific policy recommendations with the lessons in mind. 

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

Reducing supply chain barriers to trade could increase GDP by nearly 5% and trade by 15%

If every country improved just two key supply chain barriers – border administration and transport and communications infrastructure and related services – even halfway to the world’s best practices, global GDP could increase by US$ 2.6 trillion (4.7%) and exports by US$ 1.6 trillion (14.5%). For comparison, completely eliminating tariffs could increase global GDP by US$ 0.4 trillion (0.7%) and exports by US$ 1.1 trillion (10.1%). The estimates of the impact of barrier reduction are conservative; they reflect improvements in only two of four major supply chain categories.

Why is lowering barriers so effective? The reason is that it eliminates resource waste, whereas abolishing tariffs mainly reallocates resources. Moreover, the gains from reducing barriers are more evenly distributed among nations than the gains from eliminating tariffs. 

Of course, reducing supply chain barriers requires investment, while tariff reductions require only the stroke of a pen. However, many barriers can be traced to regulation. Detailed analysis can enable policy-makers to prioritize the investments that are most critical and cost-efficient.

Reducing barriers benefits households by lowering prices and improving employment prospects

The welfare gains from a trade increase would be substantial, though not every individual or company would benefit. Reducing supply chain barriers lowers costs and hence lowers prices, both to consumers and to firms that import production inputs. Consumers gain access to a wider variety of goods. Workers benefit as well, as the boost to GDP is likely to stimulate employment growth. In the long run, trade facilitation promotes a shift in resources to more productive industries and firms, thereby increasing productivity and wages. 

Trade increases from reducing supply chain barriers can be achieved only if specific “tipping points” are reached

The effects of reducing barriers are not gradual; changes occur when tipping points are reached

Most macroeconomic trade models assume that the relationship between removing a supply chain barrier and the resultant effect on trade is a continuous function. But the case studies in this report suggest that removing barriers has an effect only when the effort reaches a tipping point. Companies conduct rigorous analyses to determine profitable geographies for production and sale of their goods. These analyses are generally binary: the company either chooses to produce and/or sell in a specific market or does not. Incremental reductions in trade barriers thus may have no impact until a certain “set” of barriers is removed. For example, Brazil adopted an electronic freight system but failed to invest sufficiently in supporting information and communications technology (ICT) infrastructure. Agriculture Co., a global agribusiness, experiences multiple delays each week when government servers crash. The company estimates that unreliable ICT systems and processes cut its truck fleet’s operating efficiencies by some 4%. 

However, once barrier reductions reach a tipping point, the impact on trade and foreign direct investment can be immense. For example, by addressing the different barriers and the complexity faced by small Internet merchants, the number of merchants selling internationally can increase significantly.

A barrier’s consequences vary by industry

The effect of supply chain barriers on companies differs from one industry to another; it depends on product characteristics such as time sensitivity, exposure to regulation, and value-to-bulk ratios, as well as supply chain complexity. Companies commonly respond to delays and unreliability by holding additional inventory. For example, a company highlighted in this report active in rubber products holds 120 days of inventory instead of 30 as a result of supply chain barriers. Individual companies must balance the cost of higher inventory levels against the opportunity costs of lost revenue or reputational damage if barriers leave them under stocked. 

Barriers are harder to overcome for smaller businesses

Supply chain barriers make it particularly difficult for smaller businesses to enter foreign markets. Despite being integral parts of most national economies, small- and medium-sized enterprises (SMEs) have been largely excluded from export markets. Overcoming supply chain barriers often requires significant upfront investment – for example, understanding varying country regulatory requirements – and SMEs may find it difficult to generate enough revenue to compensate for these fixed costs. SMEs are also unable to realize the economies of scale associated with international shipping. For example, a survey of eBay’s small German merchants shows that one-third of the significant barriers to exporting outside the European Union have to do with the number of regulatory regimes or with difficulties in international shipping. 

Clear regulations and better coordination among agencies are needed

One key element of supply chain barriers is heterogeneity in country policies, and even among agencies within any one country. A lack of uniform customs rules, for example, makes it significantly more costly for a company to operate in multiple foreign markets. The variation requires companies to invest in understanding many different regulations, and to complete far more paperwork than would be required under uniform standards. In extreme cases, companies must alter product specifications or reorganize their supply chain to deal with conflicting requirements. Coordination can also be lacking within nations, particularly when an industry falls under the jurisdiction of multiple government agencies. For example, when importing chemical products into the US, Chemical Co. must, on average, comply with regulations from five different agencies that often fail to coordinate and communicate effectively with one another. The company’s shipments of acetyl products, for example, are delayed a staggering 30% of the time. 

Recommendation to countries and companies – the devil is in the details 

Main country lesson: Governments need to remove the sets of barriers relevant to their industries

Given the heterogeneity in supply chain barriers, governments must understand their existing industries and potential future industries, and prioritize which barriers are most costly to those industries. Governments can then develop tailored strategies to address them, with an emphasis on reaching the tipping points that will unlock trade and investment. Singapore provides a good example: its strategic initiatives to reduce barriers have made it one of the most open economies in the world, placing it at the top of the Enabling Trade Index. 

Some companies have a vested interest in preserving barriers

In engaging with stakeholders, governments should recognize that some may have a vested interest in preserving barriers. Some companies will be local firms seeking protection from import competition. The remainder may include firms whose added value exists because of barriers, firms that have already made significant investments to address barriers, and firms that perceive the status quo as inevitable. Governments should also realize that some of the stakeholders might not exist yet or might not have voice.

Main company lesson: Companies may not recognize costs where they should

In dealing with a global supply chain, companies must account for costs beyond traditional factor costs – for example, the costs associated with greater inventory or an increased risk of theft. When making decisions on which markets to produce and sell in, companies should recognize that costs associated with supply chain barriers may offset more obvious savings, such as lower labour costs. Many companies, after making large investments, have been surprised to find that supply chain barriers completely eliminate the cost advantages on which the investments were based. 

Policy implication: Think Supply Chain!

Given the significance of supply chain barriers, the international community should actively manage supply chain costs, particularly since tariff discussions have stalled. Governments need tailored strategies to address these barriers, but certain general policy recommendations should inform their strategies: 

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.
   Governments must work with businesses and analysts to determine the policies and procedures that will help reach key tipping points. A central component of this effort should be the creation of mechanisms to collect data on factors affecting supply chain operations. This data can then be used to identify clusters of policies that jointly determine key supply chain barriers, identify priorities for action, and assess progress.
2. Create a focal point within government with a mandate to coordinate and oversee all regulation that directly affects supply chain efficiency.
   Given the importance of tipping points, governments need to design policy with an economy-wide vision and the recognition 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. Governments should create a high-level body to oversee all regulation directly affecting the supply chain. 
3. Ensure that SME interests are represented in the policy prioritization process and that solutions are designed to address specific constraints that impact SMEs disproportionately.
   Because SMEs face proportionally more barriers, governments should pay special attention to the needs of smaller businesses. 
   For example, one relatively straightforward policy would be to raise de minimis provisions to facilitate small-business engagement in international markets; another is to ensure that initiatives to reduce regulatory compliance costs such as trusted trader programmes are open to smaller firms and are complemented by programmes to help them address regulatory complexity and lower their costs.
4. Whether through multilateral or regional agreements, governments should agree to pursue a whole of the supply chain approach to negotiating barrier removal.
   Greater coherence of domestic policies is important, but a key insight derived from the case studies is that coordination across countries matters as well. Joint action will increase the overall gains from lower supply chain barriers. International trade negotiations usually take a silo approach, addressing policy areas in isolation. Lowering supply chain barriers requires a more holistic approach that spans key sectors that impact trade logistics, including services such as transport and distribution, as well as policy areas that jointly determine supply chain performance – in particular those related to border protection and management, product health and safety, foreign investment, and the movement of business people and service providers. A whole of the supply chain approach can be pursued through both multilateral and regional trade agreements.
5. Launch a global effort to pursue conversion of manual and paper-based documentation to electronic systems, using globally agreed data formats.
   Many of the inefficiencies in supply chain operations 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 policy implementation. A global effort to adopt common documentary and electronic data/information standards would reduce administrative costs, errors, and time associated with moving goods across borders.

 Summary of company case examples

 Detailed case descriptions can be found in the report.