1 COSTS AND BENEFITS OF TRADE FACILITATION By Anthony Kleitz Trade Directorate, OECD International Forum on Trade Facilitation Geneva, May 2002

2 I. INTRODUCTION A. OECD and trade facilitation Inter-governmental co-operation in economic and social policy: Major interest in world trade and a strong multilateral trading system; Analysis and sharing of ideas to deepen understanding of major trade policy issues and support policy-makers. B. Objectives of this presentation Define “trade transaction costs”; Look at the nature, level and effects of trade transaction costs and the benefits of trade facilitation, qualitatively and quantitatively. Consider implications for further research and for understanding how to achieve benefits, including through capacity-building.

3 C. Definition: Trade transaction costs Direct costs: Compliance costs related to supplying information and documents Charges for trade-related services (e.g. trade insurance, port management). Indirect costs: Procedural delays, e.g. time for customs clearance and cargo handling; Lack of predictability in the nature, application or interpretation of regulations; Lost business opportunities.

4 II. COSTS AND BENEFITS OF TRADE FACILITATION: QUALITATIVE ANALYSIS A. General Transaction costs are higher for international trade than for domestic transactions. Even a fairly small level of trade transaction costs may serve as a significant bias against trade. Benefits of trade facilitation are equivalent to trade transaction costs that can be saved (part of these costs are unavoidable). Trade facilitation involves costs for training and introducing new procedures, equipment and infrastructure; yet because of their dynamic effects, the longer-term benefits will outweigh costs. Conclusion: avoidable trade transaction costs are a deadweight loss, while trade facilitation brings net benefits.

5 A. Costs and benefits for the economy 1. Excessive transaction costs represent rents to the domestic sector: inefficient procedures are equivalent to a trade tax discriminating against foreign economic activity. 2. Benefits of lower transaction costs: –increased trade in goods and services; –greater competition, efficiency, technology transfer and productivity; –increasing international investment, economic growth and living standards.

6 B. Costs and benefits for the public sector 1.Trade transaction costs accrue to public sector from running customs and other trade-related public services. 2. Benefits of trade facilitation come from more efficient implementation of customs and related regulations: –Reduction in paperwork and in the number of customs officials in ports of entry; –Increase in revenue; –Reinforced security measures can be less costly.

7 III.QUANTITATIVE ANALYSIS OF COSTS AND BENEFITS A.Methodologies for empirical measurement 1.Inventories of procedures considered excessively costly or inefficient. 2.Detailed firm-level surveys: Can provide a fuller and more systematic picture, about administrative and procedural barriers taking account of such factors as: –Particular cost elements; –Special characteristics of countries; –Product life (sensitivity to delays); –Size of international trade business (rather than size of firm); –Extent of intra-firm trade (which could reduce transaction costs). Such surveys tend to be time-consuming and costly, which generally leads to limiting their scope -- also their usefulness.

8 SITPRO template project: OECD is co-operating with SITPRO in a project to devise a methodology for measuring the regulatory costs of international trade. Object is to identify: Regulatory requirements imposed on importers or exporters that entail costs; What those costs are; What commercial practices may help to reduce them. Methodology: confirm elements of a template through systematic interviews with firms experienced in a number of markets. Initial results expected later this year.

9 3. Modeling trade and welfare effects Significant data problems have so far limited work along these lines. However, there have been interesting efforts to use GTAP models, e.g. to quantify the impact of automating customs procedures or to assess the cost of delays in particular countries.

10 B. Results of quantitative work to date 1. Most existing studies are based on unclear data and methodologies, often drawing on past work of questionable soundness. 2. Some studies focus on particular costs: results are diverse and limited to the specific parameters of the study, and do not lend themselves to extrapolation, e.g: –Compliance costs in intra-EC trade estimated at 1.5% (Cecchini); –Each day saved in shipping time is worth 0.8% ad valorem for manufacturers (Hummels); –Customs automation lowers traded goods prices 0.2% (MRI).

11 3. A few studies provide overall estimates, e.g.: Trade transactions costs are seen to range from 7-10% of trade. Benefits of trade facilitation are seen as about 1-5% of total world trade value (1994 Columbus Declaration cited 2.5%). These estimates may be too high. However, even small figures can have significant trade and welfare impacts, due to supply chain linkages in the globalised economy. Asymmetrical effects on SMEs and enterprises in developing countries: –Small-value consignments attract disproportionately high cost. –Trained human capital may be at a premium for small firms and developing countries.

12 IV. ASPECTS THAT MERIT FURTHER RESEARCH AND REFLECTION A. How to reduce excessive trade transaction costs and realise trade facilitation benefits? 1. Private sector approaches a. Exploit economies of scale; b. Make increased use of information and communications technology; c. Making use of global logistic chain supply services. 2.National and Multilateral policy approaches a.Simplifying and harmonising customs procedures (e.g. reduce filing frequency, use risk assessment, audit-based controls). b.Benchmarking or defining minimum standards. c.Ensuring effective dispute mediation mechanisms.

13 B. Capacity building 1) SMEs and developing country firms may be particularly susceptible to certain costs. 2) Cost savings are likely to be more accessible to larger firms that trade more. 3)Yet benefits may be relatively greater for SMEs and developing country firms, justifying special efforts in areas such as: –Risk assessment techniques to facilitate more selective control of imports and exports; –Separate treatment of documentation from the physical movement of consignments; –Greater separation of release and clearance procedures.

14 V. CONCLUSIONS There exists a significant volume of business complaints and compelling quantitative arguments for addressing trade facilitation at national and multilateral levels. Quantitative information on costs and benefits appears patchy and unconvincing. Supply chain linkages mean that small costs can have big effects. There is great potential for further empirical research and modeling to demonstrate the importance of trade facilitation. It will be important to pay special attention to weaker members of the international economy through capacity building.