The Impact of Trade Facilitation on Developing Countries
Trade facilitation measures currently negotiated in the WTO can bring a welcome boost to the world economy, reducing the costs of trading by 14% to 16% in the case of developing countries.
The World Trade Organization (WTO) negotiations on trade facilitation are among the central elements of the Doha Development Round and right now one of the main potential deliverables at the Bali WTO ministerial. Their stated objective is to clarify and improve WTO provisions on trade regulations, import and export fees, and formalities and freedom of transit “with a view to further expediting the movement, release and clearance of goods, including goods in transit”. Contrary to some of the traditional areas of trade negotiations, the whole endeavour is not targeted at the exchange of concessions, but at enhancing the efficiency and reducing the cost of trade procedures so as to increase worldwide benefits of trade for economic growth and development.
Unduly complex processes and documentation raise costs and cause delays not only for businesses, but also for the consumers, and finally for the whole economy. This is true for all economies, but today affects particularly the developing countries. Based on a series of trade facilitation indicators, designed to measure the relative economic and trade impact of the measures under negotiation in the WTO, the Organisation for Economic Co-operation and Development (OECD) found that lower middle income countries stand to gain the most from a comprehensive trade facilitation reform, which could reduce trade costs in this group of countries by 15.5%. Potential cost reductions are almost 14.5% for low income countries and 13.2% for upper middle income countries (1), while they can reach 10% for OECD countries (2). Keeping in mind that a reduction of global trade costs by 1% would increase worldwide income by more than US$40 billion (3), these are reforms that could bring a very welcome boost to developing countries’ economies.
Some of the measures that would contribute the most in reducing trade costs, such as the harmonisation and simplification of trade documents, or enhanced availability of trade information, are quite easy and inexpensive to put in place. Extensive harmonisation work in the UN family has produced standard trade documents, which are still not as widely used as they could be, in particular in Africa. A wider acceptance of existing internationally harmonised documents could reduce trade costs for African countries by 2.7%.
Other measures, such as the simplification and streamlining of border procedures or the automation of data exchange and control systems, may entail more significant investment and operating expenses. Yet, even those are relatively low, compared to the potential benefits they bring to the economy. A recent OECD review in a number of developing countries found that the total capital expenditure to introduce trade facilitation measures ranged between US$5 and 25 million, while annual operating costs directly or indirectly related to trade facilitation did not exceed US$3.5 million. Furthermore, considerable technical and financial assistance is available to countries that need it. Donor support, directed to simplifying and modernising border rules and procedures, has increased by 365% in real terms between 2002 and 2011. The largest beneficiary was Africa, which received US$200 million in 2011, a 17-fold increase over a ten-year period.
The benefits from trade facilitation are of course linked to improvements in import procedures, which not only can lower the price of consumer products, but also enhance the competitiveness of domestic production by reducing the costs and improving the access to imported intermediate inputs. However, the OECD Trade Facilitation indicators show that they are equally linked to the increased efficiency of export procedures, making trade facilitation a central factor to upgrading the export performance of firms in reforming countries.
Participation in global and regional value chains offers developing economies an opportunity to add more value within their local industries, drive employment and raise incomes. However, as goods cross borders many times, first as inputs and then as final products, fast and efficient border procedures are essential. Whatever the advances in addressing domestic obstacles to firm competitiveness, they can be stifled if border inefficiencies persist. Trade facilitation is critical in allowing developing economies both to improve their productivity and to reap the benefits from international trade.
The significance of trade facilitation measures is increasingly clear to all countries, and significant improvements have been realised in recent years. The conclusion of the WTO trade facilitation negotiations could lend additional momentum to these efforts and support an important and much needed boost to widespread economic growth and development.
Evdokia Moïsé is a Senior Trade Policy Analyst in the OECD Trade and Agriculture Directorate.
Footnotes
1. Moise, E. and S.Sorescu (2013) “Trade Facilitation Indicators: The Potential Impact of Trade Facilitation on Developing Countries’ Trade”, OECD Trade Policy Papers no 144, OECD Publishing.
2. Moise, E., T.Orliac and P.Minor (2011) “Trade Facilitation Indicators: The Impact on Trade Costs”, OECD Trade Policy Papers no 118, OECD Publishing.
3. Overcoming Border Bottlenecks: The Costs and Benefits of Trade Facilitation (2009), OECD Trade Policy Studies.
This article was published in GREAT Insights Volume 2, Issue 8 (November 2013).
