The need for practical responses
The mechanisms linking trade and growth are complex, yet there is an important role for national institutions in determining positive outcomes.9 This is particularly true since the traditional nature of trade as production in one country and consumption in another continues to erode. As countries increasingly find niches to specialize in tasks or individual steps of the value chain, rather than products, and value is added across many countries, institutional capabilities are put to the test. Further, as emerging and developing countries provide a larger share of global economic output and become the drivers of trade, the issues of administrative and regulatory capabilities become more prominent, associated as they are with overall economic development.
For individual businesses, regardless of nation or region, practical reforms to international trade and investment can be crucial for success. This is true both for large multinationals, and local small and medium enterprises (SMEs), as made clear in WTO’s most recent World Trade Report.10 Hoekman and Shepherd have explored the distributional effects of facilitating global value chains and show that the benefits accrue not just to lead firms, as had been postulated, but also to SMEs throughout the chain.11 As firms in more advanced economies innovate in response to rising costs, new opportunities to access global value chains emerge in other countries.
Competitive businesses can more effectively serve large markets; this implies that avoiding excessive market fragmentation is beneficial. Where open borders are not achievable, if governments make deliberate policy choices to restrain flows, traders look to at least remove unintended or frictional barriers to flow. Practical global trade reform narratives are therefore strongly focused on addressing management issues at the border, as well as barriers behind the border, with simplicity and commonality as key, underlying objectives.
Long-held industry practices and legacies, such as incompatible IT systems, can also play a role in creating process bottlenecks. However, commercial pressures tend to iron these out relatively quickly, and those that remain often trace a dependency to a legal requirement, such as the need for a signature on a paper form.
The rationalization of regulatory procedures and the elimination of unnecessary red tape—along with the availability of suitable infrastructure—is vital to enabling trade. These measures can be grouped under the umbrella term trade facilitation. Broadly defined, trade facilitation is any measure that contributes to lowering trade transaction costs and creating standard efficiencies. This broad approach guided the development of the Enabling Trade Index, which is outlined and explained in Chapter 2. For the WTO, the scope of trade facilitation is narrower and consists of “expediting the movement, release and clearance of goods, including goods in transit”, as highlighted in both the Doha Declaration and the Trade Facilitation Agreement (TFA).
The costs of inaction on trade facilitation are several. There are the direct and administrative costs to traders, the direct administrative cost to governments, the time cost, which results in higher working capital needs, and the uncertainty cost. The latter two are particularly important for modern lean production strategies in which inventory holdings are minimized. For example, excessive variance in border hold times can result in wasted product or missed sales, the cost of which may be many times that of the direct cost. Ultimately these transaction-specific costs can result in forgone trade or investment with attendant economic cost to nations and revenue loss to governments. Box 1 presents three case studies of traders in Ghana, Kenya and Colombia who face those challenges on a daily basis, thus highlighting the importance of trade facilitation.
In recognition of these issues and of the potential impact of addressing them, trade facilitation has been high on the agenda of governments, businesses and development partners since the beginning of the 2008 global recession. The adoption in 2013 of the TFA has provided trade facilitation with new impetus and momentum (see The Trade Facilitation Agreement in a nutshell). This heightened interest represents a window of opportunity for policy-makers, especially in developing countries, to push through trade-enabling measures.
Beyond anecdotal evidence, empirical research lends support to the positive impact of trade facilitation on trade and economic growth. A 2013 study by the World Economic Forum, for example, estimated that if all countries improved their performance in terms of border administration, trade infrastructure and services to just halfway to the optimum level of global best practice, this could yield an increase of approximately US$ 1.6 trillion (14.5 percent) in global exports and of approximately US$ 2.6 trillion (4.7%) in global GDP. Developing regions and smaller enterprises would see the largest relative gains.12 Other studies have estimated that the TFA could provide a US$1 trillion boost to the world economy13 and that reducing trade costs by half globally could bring a US$1.2 trillion gain by 2020.14 The OECD finds that specific trade facilitation activities with the largest impact on trade are: improving information availability, expediting border documentation, process simplification and automation, and enhanced customs transparency and governance.15
Reform of border and domestic barriers is less straightforward than changes to explicit outward-facing trade policy. Collaboration is needed among multiple government departments, outsourced providers, infrastructure investors and other actors.
To help in this effort, significant capacity-building work has already been done by international organizations including the World Bank, WTO, United Nations Conference on Trade and Development (UNCTAD), International Trade Centre, World Customs Organization, United Nations Economic Commission for Europe (UNECE) and others. Many businesses, too, have supported their national governments in improving trade management through best-practice sharing as well as investment in supply chain operations and assets.
For greatest impact on trade facilitation, the World Bank suggests leveraging the dynamism of the private sector via public-private partnerships to strengthen trade capacity.16 Such partnerships could strengthen impact through (i) project identification, (ii) project conception, (iii) project implementation, and (iv) project management and evaluation.