Breaking the Next Great Trade Barrier
November 15, 2016
By Irina Bit-Babik
While in the past, issues such as tariffs and duties have significantly slowed down trade, today’s biggest burden falls under the umbrella of what is known as trade facilitation. Over the past decade, this often neglected topic has soared to one of the top priorities for organizations such as the World Trade Organization, Inter-American Development Bank, and various U.S. government agencies.
What is trade facilitation?
According to the World Trade Organization (WTO), trade facilitation entails the “simplification and harmonization of international trade procedures.” Essentially, this entails anything that cuts down the red tape associated with the physical act of transporting goods from one place to another. Barriers could include anything from fees and charges to availability and clarity of information. Trade facilitation became a hot issue when it entered the agenda of the Doha Round of WTO trade negotiations in 2001 – in fact, it was one of the few concrete achievements to come out of this round. In 2013, the WTO debuted its Trade Facilitation Agreement (TFA) as part of a larger Bali Package. This agreement includes a set of commitments for each country to expedite goods movement, reduce clearance times, encourage customs cooperation, and address other issues related to trade facilitation. U.S. agencies such as the International Trade Administration are working with foreign governments and commercial representatives to ensure that these commitments are met. The results are hugely beneficial – full implementation could decrease global trade costs by between 12.5% and 17.5% . Below are estimated cost reductions divided by region and specific trade facilitation area:
Why is it important?
For U.S. companies, trade facilitation significantly reduces costs of doing business abroad. Inefficient import processing increases both monetary and time-related costs of moving goods. Today, in an era where duties are some of the lowest the world has seen and free trade agreements abound, these obstacles pose one of the greatest threats to trade. Indirect costs (those from procedural delays, lost business opportunities, etc.) can lead to costs ranging from 2% to 15% of the value of traded goods. Trade facilitation can cut down on the time and subsequent costs of such delays. For instance, the introduction of single window document submission in Costa Rica reduced clearance times for dairy products from 10 to 1.5 hours, and for agrochemicals from 27.5 to 2.2 hours. Beyond making the movement of goods faster, cheaper, and more predictable, more efficient and transparent services reduce opportunities for corruption and ensure greater security for businesses. For countries themselves, trade facilitation promotes increased movement of goods and can help boost the economy. In fact, one day saved in transit is equal to a 0.6 to 2.1% tariff reduction in the destination country, reducing trade costs significantly and triggering increased trade volumes. According to OECD, if we reduced global trade costs by just 1%, worldwide income would increase by more than $40 billion USD. For low income countries in particular, full implementation of the TFA could reduce trade costs by up to 14.5%, subsequently resulting in a potential worldwide income boost of $580 billion.
Why is it so difficult to achieve?
Many U.S. businesses are simply unaware of the many costs that lack of trade facilitation imposes. Not only is it an enormous, complicated topic, but much of the business community may lack the knowledge to press for reform, believing other trade barriers to be of greater concern. This is why agencies such as the U.S. Department of Commerce and the World Bank are working towards creating tools to educate the business community about the benefits of trade facilitation. Further, many developing countries worry about the costs of making these changes. Much revenue is generated from large fees and charges paid at various border posts. For governments struggling to collect income, it is hard to see the long term benefits of increased trade flows and economic growth that could be generated from cutting down on these fees. Moreover, many countries may not realize that poor trade facilitation practices may harm their businesses at home as well. Clearance times for exports can considerably affect the competitiveness of national industry – Indian companies, for example, suffer a 37% cost disadvantage in shipping clothing from Mumbai to the U.S. compared to Shanghai for this reason only. This is why educating country representatives themselves is also essential to pushing forward on trade facilitation reform.
What are the next steps?
The TFA will enter into force once two-thirds of its members ratify the agreement domestically. Further, recent trade agreements such as the Trans Pacific Partnership now include specific sections on trade facilitation – however, congressional approval remains uncertain. In the meantime, education is key. It is important to make both the trade community and government officials aware of the benefits of trade facilitation as well as the costs of neglecting its implementation. Once countries see that these measures are a worthwhile investment, they will be more willing to push for reform. One of the many subsections with huge potential for improvement is border agency cooperation. Cooperation between neighboring countries saves time, money, and human resources. A great example of this was the establishment of a “one stop” border post between Zambia and Zimbabwe. In three years, this measure led to a 2,500 increase in the average declaration per month and an increase of 130 declarations processed per day , reducing time spent at the border and boosting trade flows between the two countries. In this way, cooperation is an important element in achieving trade facilitation implementation. Through education and positive examples, we can push for reform that makes trade easier, cheaper, and ultimately more beneficial for all.
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