Trade Facilitation, in its broadest sense, can be defined as any measure, or set of measures, that aims to increase the cost-effectiveness of international trade transactions.
The above definition encompasses both strands of trade facilitation; the first generation reforms involving both tariff reduction and the removal of other physical and licensing restrictions on trade, associated with the movement towards membership of the World Trade Organisation. These reforms, which can be characterised as top-down, also highlighted the need for second generation reforms, which focused on improving the actual processes associated with the movement of the consignment, and which involved, inter alia, the harmonization of procedures, greater integration and the strengthening, in terms of skills and knowledge, of the different agencies involved in trade.
The links between both types of trade facilitation and economic development are strong and the impacts are paricularly pronounced on the development of Small and Medium Sized Enterprises, reflecting the direct link between these measures, which result in lower logistical costs, and lower costs, and hence prices, for both imports and export. The former leads to a better range of products, available at lower cost, whilst the latter can lead to increases in exports such as agricultural products, with a direct impact on poverty reduction. The following sections summarise recent work on measuring the benefits of trade facilitation at the two levels.
The Macro Benefits of Trade Facilitation
The potential economic benefits of trade facilitation are high, with one recent study (Wilson et al, 2004) investigating the relationship between trade facilitation in four important categories; port efficiency, customs environment, regulatory environment, and service sector infrastructure, and the impact on flows of traded manufactured goods, predicting an increase of US$377 billion globally, with the benefits falling disproportionately on exports.
Other authors either consider more specific categories of trade facilitation initiatives, or a more limited country set. Hertel, Walmsley and Itakura (2001) find that greater standards harmonization for e-business and automating customs procedures between Japan and Singapore increase overall trade flows between these countries as well as their trade flows with the rest of the world. Hummels (2001) finds that each day saved in shipping time, in part due to a faster customs clearance, is worth 0.5 percentage point reduction of ad-valorem tariff. Freund and Weinhold (2000) find that a 10 percent increase in the relative number of web hosts in one country would have increased trade flows by one percent in 1998 and 1999. Fink, Mattoo, and Neagu (2002) find that a 10 percent decrease in the bilateral price of phone calls is associated with an 8 percent increase in bilateral trade.
UNCTAD (2001) uses advanced macro-economic models (Computerized General Equilibrium) to consider trade facilitation in the broader context of creating an environment conducive to developing e-commerce. The objective of the CGE analysis is to consider the relationship between an exogenous shock of a given size on productivity growth, applied equally to all members of the group, on the GDP of regional groups of countries. The results show that a 1 percent reduction in the cost of maritime and air transport could increase Asian GDP some $3.3 billion. If trade facilitation is considered in a broader sense to include an improvement in wholesale and retail trade services, a 1 percent improvement in the productivity of that sector could increase GDP an additional $3.6 billion.
Global Economic Prospects (2004) clearly outlines the links between trade reform and poverty reduction. Because most poor people live in rural areas, cutting trade barriers in agriculture are among the most important to poverty reduction. A relatively simple program to cut tariff peaks in rich countries to 10 percent in agriculture and 5 percent in manufacturing, reciprocated with cuts to 15 percent and 10 percent respectively in transition and developing countries, coupled with other complementary measures, would produce gains for transition and developing countries of nearly US$300 billion by 2015. The wealthier countries would gain too – up to US$170 billion. This is projected to cut the number of people in poverty by 8 percent or 144 million individuals.
The Micro Benefits of Trade Facilitation
At a micro-economic level, trade facilitation has a direct impact on total logistical costs, the sum of time and money involved in moving traded goods. Lower transport costs can lead to higher wages, thereby having a direct impact on poverty reduction. The associated increasing and broadening of the exports of a country can reduce the vulnerability of the respective economy to exogenous shocks, increase the potential for knowledge spillovers in specific sectors and have a positive impact on Foreign Direct Investment (FDI).
A broad, well-designed, trade facilitation program can also impact positively on SME development, which have been found to be the engines of economic development in many transitional countries (see World Bank, 2002), growing faster, engendering more employment opportunities and making a substantive contribution to the objective of broad based economic growth.
Where to Start
- Global Economic Prospects 2004, Realizing the Development Promise of the Doha Agenda
- Development, Trade and the WTO
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