This chapter explores how specific border measures affect trade and the functioning of supply chains and what policy makers can do to optimise their operation. What are the trade facilitation policies and measures that have the strongest impact in reducing trade costs and enhancing trade flows? Which policies and measures matter most for boosting country participation in global value chains? The assessment focusses on the impact of trade facilitation measures on developing both the supply and the demand side of value chains.
Trade Facilitation and the Global Economy
Chapter 6. Trade facilitation, trade and global value chains
Abstract
While successive rounds of multilateral trade negotiations have contributed to a steady decline in conventional trade barriers, much remains to be done to lower the costs associated with the conduct of trade. Trade costs arise in getting to the border (such as transport or logistics costs); at or crossing the border, such as documentation and customs compliance requirements, lengthy administrative procedures and other delays; or behind the border, such as non-tariff regulatory measures, and general impediments on doing business (Figure 6.1). While the policies to address trade costs should be comprehensive and address costs at all three stages, the focus of this chapter is on costs arising at the border.
Figure 6.1. Trade cost diagnostics
The internationalisation of production through global value chains (GVCs) has given rise to complex cross-border flows of goods, know-how, investment, services, and people. This has created a “magnification effect” for trade costs, as goods may be traded across borders multiple times, first as intermediates and then as final products, before reaching the consumer. Every time unfinished goods are shipped to another country for further processing, they encounter costs associated with border procedures. These costs accumulate and, by the time a finished good reaches its final consumer, these layers of additional costs may affect demand, as well as production and investment, at all stages of the value chain. Participation in a GVC means that trade facilitation actions on both the export and the import side matter for production and competitiveness. Firms involved in GVCs are affected not only by costs incurred at their own borders, but also by those between third countries at points upstream and downstream on the chain. The proliferation of GVCs means that national policies are increasingly interdependent (OECD, 2013).
Lengthy customs procedures or inefficient border infrastructure also add costs in the form of increased uncertainty, in turn constraining the ability of firms to engage in just-in-time production or to react quickly to demand shifts. This can have an impact on inventory management at each stage of production, increasing costs and tying up working capital which could be used more efficiently (OECD, 2013). The more products cross borders during their production, the more significant trade facilitation policies become. Trade in components is particularly time-sensitive: the cost of an extra day spent in transit is 60% higher for importers of intermediate goods than for importers of final goods (Hummels and Schaur, 2012).
Trade facilitation policies can be instrumental in minimising such costs and delays and improving the efficiency of GVCs, especially if undertaken by a large number of countries simultaneously. Such a collective effort could also help ensure that domestic firms in all countries benefit from further opportunities to participate in GVCs (OECD, 2013).
Against this background, this chapter draws on OECD Trade Facilitation Indicators (TFIs) data to explore the impact of implementation of the WTO Trade Facilitation Agreement (TFA) on trade costs, and on countries’ participation in GVCs. Beyond the overall impacts of trade facilitation on reducing trade costs, it explores how specific border procedures impact trade costs, trade flows and the functioning of supply chains and the implications for policy.
The impact of the Trade Facilitation Agreement on trade costs
In order to determine how implementation of the TFA affects trade costs, two scenarios are explored: a) “full” implementation, where WTO Members implement all the provisions of the TFA, including those formulated on a “best endeavours” basis; and b) “limited” implementation, where WTO Members implement only the mandatory provisions of the TFA, leaving aside discretionary provisions, but where countries that already implement best practices would continue to do so. These two scenarios provide the upper and lower bounds of the potential reductions in trade costs likely to be achieved through implementation of the TFA (a brief description of the methodology for measuring trade costs is at Annex A). The effects of TFA implementation are considered for a wide range of countries, broken down by income and OECD membership (Figure 6.2) and also by regional grouping (Figure 6.3).
Figure 6.2. Implementation of the TFA lowers trade costs for all countries, but especially for lower income countries
Potential trade cost reductions by income group (%)
Note: In the “limited” scenario for OECD economies, only their non-OECD trading partners are considered to be implementing solely the mandatory provisions of the Agreement; OECD partners are considered to be undertaking full implementation. Trade costs are estimates from the World Bank – UN ESCAP International Trade Costs Database.
Source: OECD estimates.
Full implementation of the TFA has the potential to reduce trade costs by around 12% to 18%, varying across country groupings, but with the largest gains accruing to countries in the lower income groupings. By contrast, limited implementation of only the mandatory provisions of the TFA leads to potential reductions in trade costs ranging from 10% to 14% across country groupings, between 2 and 4 percentage points less that than from full implementation. Opportunity costs from less than full implementation are particularly significant for low and lower middle income countries.
Broken down by geographic region, potential trade cost reductions for countries again range from between 14% to 18% (Figure 6.3), with the largest gains accruing to countries in Sub-Saharan Africa and Asia.
Figure 6.3. Sub-Saharan Africa and Asia stand to gain most from trade facilitation reforms
Potential trade costs reductions by regions (%)
Source: OECD estimates.
These estimates by income grouping or by region are conservative; benefits may be substantially larger, depending on the scope and pace of implementation of the TFA. Assessment of gains is strongly influenced by whether developing countries will require additional time and technical assistance to implement various measures, and by the timeframes for implementation.
Which trade facilitation measures matter most in reducing trade costs?
Beyond the overall impacts of trade facilitation on reducing trade costs, how do specific border procedures impact trade costs?
While their precise contribution varies, across all income groups, the policies that contribute most to reducing trade costs are the harmonisation and simplification of trade documents, the automation of border processes, the streamlining of trade procedures and formalities and the availability of information.1 These same measures also have the strongest impact on reducing trade costs when countries are considered by geographical group (Figure 6.4).
Figure 6.4. Some trade facilitation measures are particularly important for cutting trade costs
Potential trade costs reductions for the “top” sets of measures (%)
Source: OECD estimates, based on a scenario of full implementation of the TFA.
The combined effect of implementing all measures under the TFA is greater than the sum of the individual components.2 This shows the additional benefits that can accrue when reforms are taken together and underscores the importance of undertaking trade facilitation in a comprehensive manner. It also underscores that potential cost reductions stand to benefit stakeholders as a whole, including both traders (importing and exporting firms), as well as public administrations.
The potential impact of trade facilitation on the operation of supply chains
The potential of trade facilitation measures to reduce trade costs can also affect participation in supply chains.3 That is, they can shape the extent to which a given country’s exports are used by firms in partner countries as inputs into their own exports (forward linkages, or selling into GVCs) and they can influence the extent to which foreign intermediate inputs are used in the exports of a given country (backward linkages, or buying from GVCs). (A brief description of the methodology for analysing impacts on GVCs participation is found in Annex A).
Trade facilitation can boost the demand side of value chains
The “demand” side of GVC activity (buying from GVCs, or backward linkages) is captured by imports of value-added. These backward linkages show the origin of foreign value-added components of final goods consumed in a given country, and the extent to which final users are connected to suppliers abroad. A country where inputs can be imported quickly and reliably is attractive to companies looking to build or integrate into GVCs: a relatively small increase in a country’s trade facilitation performance (as measured by the TFIs) of 0.1 units can generate increases in imports of value-added ranging from 1.5 to 3.5% (Figure 6.5). The trade facilitation measures that appear to be most important in encouraging these “backward” linkages in GVCs are (in order of magnitude): availability of advance rulings; streamlining of border procedures and controls; proportionality and transparency of import and export fees and charges; and automation of border processes.
Figure 6.5. Trade facilitation can boost participation in GVCs
Improvements in TFIs and GVC participation
Source: Moïsé and Sorescu (2015).
Advance rulings bring higher certainty, predictability and reliability to the supply chain: the ability to know in advance how goods will be treated on a number of Customs issues, and that these determinations will be binding on all customs offices over a specified period of time, allows companies to minimise policy-related risks in their sourcing decisions. Similarly, it is the predictability afforded by the TFA’s disciplines on fees and charges rather than the direct cost they represent for the trader that is most important in explaining the importance of these measures for GVC participation.
Streamlined border procedures and controls enable faster movement of imported value-added through measures such as submission of trade documents through Single Windows; processing of documents prior to arrival of goods; rationalisation of physical inspections; and efficient use of guarantees or post-clearance audits (PCAs) to allow faster release of goods. In particular, the trend towards Single Windows and grouping of documents required by various border agencies is generating impressive efficiency gains. Additional facilitation measures offered to trusted traders under Authorised Operators (AO) programmes, such as single customs declarations for all imports and exports in a given period, or goods clearance at the trader’s premises, also help ensure the timely availability of imported inputs. Finally, automation of procedures also leads to greater speed and efficiency, by reducing the compliance costs associated with transmitting and processing trade information, and by enabling targeted controls based on risk management approaches.
Box 6.1. Trade facilitation is particularly important in some sectors
The impact of trade facilitation is most significant when imported inputs feed into a high or medium-high tech sector in GVCs. This is the case whether the input is relatively low or medium-tech, such as basic metals, or mining and quarrying, or medium-high or high tech, such as transport equipment, chemicals and electrical and optical equipment.
The trade facilitation measures that seem to matter most in terms of the backward linkages in these GVCs are the availability of trade-related information; opportunities for dialogue with the trade community; availability of advance rulings; simplification and harmonisation of trade documents; and streamlining of border procedures and controls.
Sufficient and easily accessible, up-to-date trade-related information, as well as simplified and internationally harmonised documentary requirements appear also to be particularly important in the case of foreign sourcing of inputs for the transport equipment, chemicals, and electrical and optical equipment sectors.
Trade facilitation can bolster the supply side of value chains
The “supply” side of the value chain activity (selling into GVCs, or forward linkages) is captured by exports of value-added. These forward linkages show how firms export value both through direct exports of final goods and indirectly, via exports of intermediates to other countries which then process them and sell or export them to final users. The most important trade facilitation measures in terms of how efficiently a country can export value-added into GVCs are: availability of trade-related information; opportunities for dialogue with the trade community; proportionality and transparency of import and export fees and charges; automation of the border process; and streamlining of border procedures and controls. In terms of forward linkages into GVCs, a 0.1 units improvement in trade facilitation policies (as measured by the TFIs) can generate increases in a country’s value-added exports ranging between 1 and 2.5% (Figure 6.5).
Trade facilitation is central to countries’ ability to benefit from GVCs
Both forward and backward linkages matter for GVC participation. Countries can increase their GVC participation both by increasing the imported content of their exports (increasing their backward linkages) and by creating more value-added through goods and services for use as inputs in the exports of third countries (increasing their forward linkages). Moreover, there can be a virtuous circle between importing and exporting in GVCs: evidence (OECD, 2013) suggests that the use of foreign value added is one of the most important factors in determining growth in domestic value added in exports across all types of activities (agriculture, manufacturing and services) for developed and emerging economies alike.
In a world of GVCs, where exports competitiveness requires import openness, border processes are crucial for lowering trade costs, participation in GVCs and overall competitiveness (OECD, 2013) – with significant benefits to be gained from the pursuit of even greater procedural efficiency. Policies promoting transparency and predictability and removing unnecessary transmission and processing costs are the most critical in supporting participation in GVCs. However, these findings also show that the decision to segment production across countries in a GVC is facilitated not only by the predictability and speed of the border process from advance rulings and streamlined procedures, and the harmonisation and simplification of trade documents, but also by the climate of trust that comes from a transparent, accountable regulatory environment, open to dialogue with economic operators.
Moreover, there appears to be a strong positive correlation between participation in GVCs and growth (measured in GDP per capita). By helping to promote participation in GVCs, trade facilitation reforms have significant potential to help generate higher growth. The question of the impact of trade facilitation on the economy as a whole building on the insights from GVCs is taken up further in the following chapter.
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Notes
← 1. Other measures under the TFA are: dialogue with the trade community; the existence and operation of advance ruling mechanisms; the availability and performance of appeal procedures; disciplines on fees, charges and penalties; co-operation among domestic agencies responsible for border controls and trade procedures; and cross-border co-operation among countries’ agencies responsible for border controls and trade procedures (Box 6.1)
← 2. This is the case even when all elements of the WTO TFA (outlined in the footnote above) are included in the calculation.
← 3. The impact of trade facilitation improvements on GVC participation can be tested using OECD-WTO Trade in Value Added (TiVA) indicators. TiVA indicators track both the direct and indirect flows of value added associated with international trade, thus revealing bilateral trade in value-added even when bilateral gross trade flows might be zero.