Unlocking Export Competitiveness: the Role of Trade Facilitation

9thtrapcaannual Conference 2014

“Unlocking Export Competitiveness: The Role of Trade Facilitation”

20 – 21 November 2014

Arusha, Tanzania

SELF-FINANCING TRADE FACILITATION

1. Introduction

Examining all the measures in the WTO’s Trade Facilitation Agreement and considering the implementation costs as revealed in literature by UNCTAD[1] and the World Bank[2], it is without doubt that financial resources will be needed in order for member countries to be able to reach the capacity to be fully compliant with the measures. It is important to state that not all the measures will require financial resources before they could be implemented. Some of the measures would definitely require high costs to implement while others would also require low costs to be implemented. For example, it is estimated that implementation costsfor single window range from4.5 to 10 million USD and Test Procedures range from 3.4 to 8.1 million USD, whereas the costs of implementing Penalty Disciplines is 1,100 USD and that of Interval Public Entry ranges from 2,400 USD to 24,000 USD.[3]

However, if the Trade Facilitation measures are implemented correctly and strategically, they will pay for themselves. This can happen in a broad and narrow sense. In a broader sense, Trade Facilitation will generate wider economic benefits as a result of lower trade costs, increased competitiveness, and higher volumes of trade. In a narrow sense, Trade Facilitation measures that improve transparency and simplify procedures will reduce contact with customs officials and other bureaucrats and cut the scope for corrupt practices. Hence, the government will be able to retain revenue that was otherwise leaking out.

Achieving these potential benefits will however require substantial investment to modernize customs and other border-related services.[4] The ability of developing countries to maximize these benefits will also depend on the existence of complementary policies such as education policy and macroeconomic policy.[5]Measures to actively facilitate trade are increasingly seen as essential to assist developing countries in expanding trade and benefiting from globalisation.[6]

The WTO website defines trade facilitation as ‘the simplification and harmonisation of international trade procedures … for collecting, presenting, communicating and processing data required for the movement of goods in international trade’. In reference to trade facilitation, the Doha Declaration refers to ‘expediting the movement of, release and clearance of goods, including goods in-transit’. In different contexts (e.g. World Bank and APEC), trade facilitation refers to a much broader spectrum of issues including technical barriers to trade (TBT), competition policy, government procurement and transparency in general. Following the existing empirical literature, a relatively narrow definition of trade facilitation (TF) which focuses on measures that essentially ease and speed the process of importation (e.g. reforms to valuation and Customs procedures) and exportation will be adopted in this research within the framework of the WTO Trade Facilitation Agreement.

1. Trade Facilitation and the Need for Financial Resources

The WTO Trade Facilitation Agreement is arguably costly to implement due to a number of reasons as some critics of the agreement have noted. First of all, the need for financial resources is also dependent on the level of development of the member countries concerned. Unlike the developed countries, many of the developing countries and the least-developed countries (LDCs) do not have the capacity to fully implement the TF Agreement. A study of 26 countries by UNCTAD suggests that less than 50 per cent of the considered trade facilitation measures are currently fully implemented in the majority of the participating developing countries.[7] None of the countries considered that it had reached the level of full implementation[8] of all the analysed measures. Mostly, the LDCs have requested for financial assistance in order to be able to reach the full implementation level of the TF measures. Secondly, most of the developed countries already have in place good infrastructure, strong institutions and legislations, as well as financial capacity to implement the TF measures. A few of the developing countries have also embarked on customs reforms and modernization programmes where they may already have the legislative framework, institutions, and the infrastructure and therefore may not require huge financial resources to fully implement the all the measures. However, from the WTO Needs Assessment programme carried out by some countries, most of the LDCs do not already have in place single window system and test procedures, which are the two most expensive TF measures to implement, according to UNCTAD (2013). This therefore calls for technical assistance in the form of financial resources to assist these developing and LDCs to be able to implement the TF measures.

2.1The Financial Implementation Costs

During the work on the national implementation plans, UNCTAD and the trade facilitation stakeholders in the participating countries assessed the implementation costs of the WTO Trade Facilitation measures. While in some participating countries the monetary cost of the analysed trade facilitation measures could not be estimated, 10 out of 26 countries seized the opportunity to investigate the financial costs of reaching full compliance with the WTO Trade Facilitation Agreement, as demonstrated in figures 1 and 2below. It is important to note that this implementation cost assessments were undertaken prior to the conclusion of negotiations of the WTO Trade Facilitation Agreement in Bali, 2013: therefore, the current cost of full implementation of the TF measures might change, probably lesser than what is discussed here.

According to the UNCTAD report, the estimated total costs of reaching the full implementation status of the considered trade facilitation measures range widely, going from $136,000 to $15.4 million.[9] It is said that being an LDC does not seem to have a decisive impact on the total implementation costs and of course, this does not mean that the required financial resources, however modest in size, are easily mobilized.[10]

Figure 1. Estimated total implementation costs (LDCs and non-LDCs) (millions of $)

Source: UNCTAD (2013), p.34

From the estimation, the costs were estimated to be under $10 million for six countries; for two countries between $10 million and $15 million; and for two slightly above $15 million.

Figure 2.Distribution of the estimated total costs (millions of $, number of countries)

Source: UNCTAD (2013), p.34

The findings above are consistent with the findings gathered by other annex D organizations in separate field research. The 2011 study by the World Bank focusing on three developing countries came up with a comparable range of total cost of implementation (respectively, the total maximum costs in $ millions of 2.4, 8 and 10.5 for the three participating countries).[11] There was no linear correlation found either between the percentage of the implemented measures and the estimated implementation costs.[12] The OECD recently also reported that the estimated implementation costs for four developing or transition countries it had a study on were, respectively (in $ millions), 4.5, 9, 15.5 and 24.[13] The country with the lowest estimated costs was an LDC and the country with the highest estimates was not an LDC.[14]

From the UNCTAD report, there is no linear correlation between the level of the current implementation and the total implementation costs. There is also no established tendency for overall costs to become higher if more ambitious implementation times are considered, as shown in figure 3.

Figure 3. Estimated costs and the level of compliance

Source: UNCTAD (2013)

As in the case of the estimated implementation times, the costs of implementing the individual trade facilitation measures vary largely depending on the country. Moreover, the costs of implementation for some of the trade facilitation measures will be far higher than others and will require relatively high financial resources to be able to reach full implementation, as shown in the table below. Overall, the cost estimates could be made for the following 36 measures (Table 1 and Figure 4).

Table 1. Estimated costs of trade facilitation measures (thousands of $)

Measure / Minimum / Median / Average / Maximum
1. Publication / 24 / 100 / 785 / 3000
2.Information on Internet / 25 / 100 / 382 / 1280
3.Enquiry Points / 40 / 82 / 228 / 1000
5.Interval publ entry / 2.4 / 10 / 12 / 24
6.Comment on New Legis / 5 / 24 / 55 / 250
7.Consultations / 12 / 28 / 62 / 250
8.Advance Ruling / 4.5 / 35 / 63 / 200
9.Right of Appeal / 1.1 / 18 / 34 / 100
11.Import/Rapid Alerts / 4.5 / 180 / 588 / 2400
12.Detention / 1.1 / 9 / 18 / 50
13.Test Procedures / 3.4 / 277 / 2428 / 8100
14.Disciplines on Fees/Charges / 10 / 36 / 235 / 1000
15.Penalty Disciplines / 1.1 / 1.1 / 1 / 1.1
16.Pre-arrival Processing / 1.1 / 59.5 / 47 / 66
17.Sep/Release/Payment / 1.1 / 10 / 12 / 25
18.Risk Management / 2.3 / 98.25 / 234 / 1000
19.Post-clearance Audit / 1.7 / 73.5 / 96 / 310
20.Av. Release Times / 1.7 / 26.875 / 39 / 100
21.Authorized Operators / 1.7 / 100 / 117 / 250
22.Expedited Shipments / 1.7 / 22.5 / 37 / 100
24.Border Agency Cooperation / 6 / 32 / 635 / 4000
25.Decl on Transhipped Goods / 200 / 850 / 850 / 1500
26.Review of Form/Docs / 14 / 30 / 28 / 39
27.Reduction of Form/Docs / 5.6 / 40 / 320 / 2000
28.Int Standards / 4.5 / 34 / 28 / 50
29.Single Window / 4.5 / 200 / 3133 / 10000
30.Elim Pre-PostShip Exp / 45 / 68.5 / 69 / 92
31.Customs Brokers / 12 / 110.5 / 133 / 300
32.Com Border Proc / 16 / 23 / 23 / 30
33.Uniform Forms Doc / 24 / 24 / 24 / 24
34.Opt Return Goods / 24 / 62 / 62 / 100
36.Inward Outward Proc / 1.1 / 1.1 / 1 / 1.1
37.Freedom of Transit / 24 / 32 / 54 / 107
38.Customs Cooperation / 3.4 / 18 / 24 / 50
39.Nat TF Committee / 4 / 50 / 45 / 100

Source: UNCTAD (2013), p.35-36

Figure 4. Average costs of trade facilitation measures (thousands of $)

Source: UNCTAD (2013)

As seen from the figure 5 below, the average cost of the large majority of the trade facilitation measures (63 percent) is estimated at less than $100,000, but to implement two of them (6 percent of the total) investments ranging from $2 million to $4 million may be needed. These two measures are single window and test procedures (including, for the latter, test equipment and facilities as required).

Figure 5. Distribution of measures based on their average costs (thousands of $)

Source: UNCTAD (2013), p.36

The following measures, which again represent a combination of the measures requiring intensive domestic, cross-border or regional cooperation and/or infrastructure and ICT investments, were estimated to be the most costly to fully implement (see table 2 below).

Table 2. Ten measures with the highest estimated implementation costs (average)

Rank / Measure / Measure No.
1 / Single Window / 29
2 / Test Procedures / 13
3 / Declaration on Transhipped Goods / 25
4 / Publication / 1
5 / Border Agency Cooperation / 24
6 / Import Alerts/Rapid Alerts / 11
7 / Information on Internet / 2
8 / Reduction of Form/Documents / 27
9 / Disciplines on Feeds and Charges / 14
10 / Risk Management / 18

Source: Modified from UNCTAD (2013)

According to UNCTAD, this ranking mostly coincides, excluding again the misperceived needs regarding test procedures, with other experts’ and countries’ qualitative assessments of the set-up cost of selected trade facilitation measures, reported in the earlier studies, which ranked single window, risk management, online publication, and border agencies cooperation as the measures with highest expected set-up costs.[15]

As UNCTAD reveals in their study, it is also important to bear in mind that for some measures and, in a few cases, for a large number of the measures, the implementation costs seem to have been clearly over estimated by including actions which are not necessary for reaching compliance with the proposed WTO requirements.[16]The best example of this is the measure on test procedures (measure 13), already mentioned before, where many countries included costly upgrading of the existing test laboratories in customs, ministries of agriculture and other agencies concerned, although the WTO text, in its analyzed version, can be easily implemented through simply adjusting the existing procedures regarding the administrative acceptance of the results of a confirmatory test in an existing accredited test laboratory.

From UNCTAD’s study, most of the countries considered themselves to be in a position to implement all the measures within a five-year period.[17] In addition to UNCTAD’s estimates for the costs of full implementation of the WTO TF measures, which range from US$136,000 to US$15.4 million, the World Bank has also provided estimates for the implementation of the trade facilitation measures. Ensuring compliance with the Trade Facilitation Agreement itself will imply limited costs; according to a World Bank study, these would be in the range of €123,000 - €970,000 per country for capacity building and technical assistance (not including equipment and staff).[18] However, in order to benefit from the full potential of trade facilitation measures, the Organisation for Economic Cooperation and Development (OECD) estimates funding needs from €3.5 to €19.7 million over 3-5 years (i.e. €11.6 million on average). The bulk of the cost (70-90%) would be linked to the establishment of a single window for submission of documents, notably costs for staff and equipment. Costs related to procedural issues would be unlikely to exceed an estimated €1 million per country.[19]Based on the WTO's estimate of two thirds of its membership being developing countries (approximately 100 countries, including emerging economies and commodities-rich countries), one can extrapolate that €100 million worth of funding is needed to implement the procedural elements of the Trade Facilitation Agreement. Also taking into account the cost of staff and equipment, funding needs would climb to a total of roughly €1 billion over five years.[20]

2.2Initiatives to Finance Implementation Costs

Funding has been one of the main challenges facing the implementation of the TF Agreement, according to Capaldo 2014.[21] The WTO has promised to help countries obtain funding from other sources and that it will offer some financial support but only when other sources fail to materialize and only for investments in “soft” infrastructure of up to $200,000.[22] Three main initiatives were identified earlier on, including the WTO Trade Facility Agreement Facility, the World Bank Trade Facilitation Support Programme, and other international organizations, including the OECD and the UN Agencies.

2.2.1WTO’s Trade Facilitation Agreement Facility (TFAF)

To prove WTO’s support to offer technical assistance to developing countries and LDCs for the implementation of the TFA, it has launched a new Trade Facilitation Agreement Facility (TFAF) with contributions coming from some international organizations, including ITC, UNCTAD, World Bank, OECD, WCO, etc.[23] According to the WTO Director General, through this Facility the WTO will enhance technical assistance programs, support coordination between donors and recipients, and provide a source of funding for countries that are not able to access the assistance they require.In this way the Facility will ensure thatLDCs and developing countries receive the support they need in order to reap the full benefits of theTrade FacilitationAgreement, said the Director General.[24]

The new Facility will complement existing efforts by regional and multilateral agencies, bilateral donors, and other stakeholders to provide Trade Facilitation-related technical assistance and capacity-building support. It will act as a focal point for implementation efforts. It will become operational when the protocol to insert the Trade Facilitation Agreement into the existing regulatory framework is adopted by WTO Members. The functions of the Facility will include:

• Supporting LDCs and developing countries to assess their specific needs and identify possible development partners to help them meet those needs
• Ensuring the best possible conditions for the flow of information between donors and recipients through the creation of an information sharing platform for demand and supply of Trade Facilitation-related technical assistance
• Disseminating best practice in implementation of Trade Facilitation measures
• Providing support to find sources of implementation assistance, including formally requesting the Director-General to act as a facilitator in securing funds for specific project implementation
• Providing grants for the preparation of projects in circumstances where a Member has identified a potential donor but has been unable to develop a project for that donor’s consideration, and is unable to find funding from other sources to support the preparation of a project proposal

2.2.2The World Bank Trade Facilitation Support Programme

The World Bank Trade Facilitation Support Program offers US$30 million to help countries “devise and implement large scale reform[s]”. Consistently, the World Bank estimates that “hard” infrastructure, such as ports and other large facilities, will be the main source of the gains from trade facilitation.[25]

On June 10, 2014 the World Bank Group (WBG) Office in Geneva, together with the European Commission, the United States Agency for International Development (USAID), Canada, Switzerland, the Australian Department of Foreign Affairs and Trade, and the Norwegian Ministry of Foreign Affairs announced the establishment of a new Trade Facilitation Support Program (TFSP), which will help countries reform their trade facilitation practices in a manner consistent with the main components of the new TFA. The Program will focus on the effective implementation of trade facilitation reforms in developing countries to enhance private sector competitiveness, thus leading to increased trade, investments and job creation. It will have two main components – the provision of Technical Assistance (TA), where the WBG will help developing countries reform their trade facilitation laws, procedures, processes and systems in a manner consistent with the WTO TFA; the second component will focus on Knowledge, Learning and Measurement.[26]

Bank Group trade facilitation projects typically align closely with TFA measures:[27]

•Trade Information Portals and National Single Window systems

•Legal and regulatory framework review and modernization

•Procedural simplification and harmonization

•National Trade Facilitation Committees – to improve inter-agency coordination and public/private dialogue

It is important to mention that the World Bank Trade Facilitation Support Programme is often part of broader trade and transport projects.

2.2.3Other International Organizations Support

Other international organizations, including OECD and various branches of the United Nations, offer coordinated assistance for implementation of the WTO Trade Facilitation Agreement. This initiative provides technical assistance in designing the multiple policies required to implement the Agreement.[28]

On 22 July 2014, a group of major international organizations came together to recognize the development potential of the Trade Facilitation Agreement and to offer their assistance to WTO members in implementing their commitments under the Agreement. In a joint statement the organizations declared their intention to work together to assist developing and least-developed Members through a range of technical assistance and capacity-building initiatives. The organizations declared: