Creating Global Value Through Efficient Trade Logistics Warren H. Hausman Hau L. Lee Uma Subramanian

Overview Motivation for logistics indicators research Methodology for developing logistics indicators Cross country comparisons of selected logistics indicators Logistics indicators as determinants of bilateral trade Supply chain-based logistics index

What Determines Bilateral Trade?

Past Studies on Bilateral Trade GDP Distance Institutions Infrastructure Country characteristics Institutions Infrastructure Country characteristics

Our Focus GDP Distance Institutions Infrastructure Country characteristics Institutions Infrastructure Country characteristics Logistics Frictions (Time and Cost Metrics)

Research Opportunities Institutional quality and infrastructure variables have been based on subjective indices or expert assessments. Quantifiable and measurable logistics performance indicators have not been used. Variables used are not easily translated into operations i.e. not directly actionable. Best results without using country-specific dummy variables explain 66% of variability in bilateral trade.

Objectives of Research Determine the significance of logistics performance in influencing bilateral trade through the use of measurable and quantifiable logistics indicators. Perform a critical assessment of logistics performance of countries globally. Develop supply-chain logistics index to guide resource allocation and deployment for improving logistics efficiency.

Snapshot of Methodology 2005 Survey Focus on containerized imports & exports 140 Countries Detailed Questionnaire Survey Survey responses from practitioners/ intermediaries (Panalpina) Textiles/ Apparel Coffee, tea, cocoa, spices Extensive follow- up through and phone calls by World Bank

Global Logistics Indicators Dimensions of measurement: Examples Total time for a trade transaction Document processing time Customs clearance Technical control Vessel turnaround Vessel waiting time for berth CSI related time Time Total cost for a trade transaction Port & terminal charges Document Processing Customs clearance cost Inland freight Cost Signatures for a trade transaction Number of documents per transaction Percent of containers inspected Level of inspection Criteria for inspection Complexity No. of containers unloaded per berth hour Port shutdown days Inland transport speed Frequency of vessel calls at port Efficiency Source: World Bank Global Logistics Indicators Survey

Methodology Framework… Process 1 Process 14 Process 2 Process 3 Process 4 Process 5 Pre-Arrival or Pre-Shipment Activity Inland Transportation Border Clearance Port & Terminal Handling Activity Exports Imports

Methodology: Assumptions Private, registered limited liability company Medium size (200 employees or more) Located in the most populous city Domestically-owned with no foreign ownership Subject to commercial laws and regulations Exports >10% of sales to international markets Interaction of firm with external parties All legal procedures required for trade, including those that may be “side-stepped” in exceptional circumstances Formal costs; no informal payments included in cost figures Port of entry and exit is a sea-port Port is the one that serves the most populous city Manufactured or processed products (SITC 65; 84; 07)* Medium valued product Transported in dry cargo 20-ft (FCL) Not: hazardous product, military equipment Does not require refrigeration or special envir. Does not involve any special phyto-sanitary or environmental standards Firm Procedures Port Product

Germany United States Japan New Zealand Dominican Republic Philippines France Chile Turkey Senegal ArgentinaChina NepalNicaragua Nigeria Zimbabwe Mongolia Kazakhstan Niger Burundi Kyrgyz Republic Days for an Import Transaction GDP per capita (thousands of dollars) Poorer countries take longer to process trade transactions Source: World Bank Global Logistics Indicators Survey

Days OECDEAPLACMENASASECAAFR Source: World Bank Global Logistics Indicators Survey By region Average Time for a Typical Import Transaction

Germany Singapore Japan United Kingdom Dominican Republic Philippines ChinaIndonesiaArgentina Guatemala NicaraguaItaly Sierra Leone Togo Colombia Nigeria Bangladesh Austria Czech Republic Hungary Paraguay Nepal Botswana Lesotho Zambia Burkina Faso Mongolia Kazakhstan Rwanda Burundi Uzbekistan Days for an Import Transaction GDP per capita (thousands of dollars) Median=30 Median=61 Landlocked Countries face bigger constraints Italy Coastal countriesLand Locked Countries Source: World Bank Global Logistics Indicators Survey

Coastal Countries Port and Terminal Handling 9% Inland Transportation 24% Customs and Inspection 15% Pre-arrival 52% Port and Terminal Handling 12% Inland Transportation 9% Customs and Inspection 17% Pre-arrival 62% Landlocked countries Of the total time to import a container, hard infrastructure accounts: About a fifth About a third Source: World Bank Global Logistics Indicators Survey

Total Cost for a Typical Import Transaction Thailand Norway Sweden Spain Ireland Malaysia South Africa Brazil India United States Korea China Kazakhstan Algeria Zambia Cameroon Source: World Bank Global Logistics Indicators Survey US $

Regional Variations in Cost for a Typical Import Transaction ,0001,5002,000 US Dollars OECD MENA EAP SAS ECA LAC AFR Percent (Cost/ Per Capita GDP) OECD LAC MENA ECA EAP SAS AFR Source: World Bank Global Logistics Indicators Survey

Number of Signatures Singapore Finland France Indonesia Korea Ireland Italy United States Venezuela China Colombia Senegal Bangladesh Lao PDR Mongolia Nigeria Azerbaijan Congo, Dem.Rep. Number of Signatures for Typical Export Transaction Source: World Bank Global Logistics Indicators Survey

Number of Signatures for Imports High incomeUpper middle incomeLower middle incomeLow income Higher Hurdles for Poorer countries TotalFor Customs Source: World Bank Global Logistics Indicators Survey

Percent EAPECAMENAAFRLACSAS Source: World Bank Global Logistics Indicators Survey By region Percent of Import Containers Inspected Trade/GDPPercent of Containers Inspected

Percentage of Import Containers Inspected Malaysia Germany USA Japan South Africa Mexico Jordan Bangladesh Columbia Dominican Rep. Turkey Pakistan Sri Lanka Nigeria Source: World Bank Global Logistics Indicators Survey

Percent High incomeUpper middle incomeLower middle incomeLow income Bureaucracy inversely related to income Percent of Containers Inspected Source: World Bank Global Logistics Indicators Survey

Criteria for Selection of Containers for Customs Inspection (Sample countries) India Mozambique Pakistan Vietnam Sri Lanka Nigeria Kenya Egypt Ghana Honduras Germany Sweden Spain Australia France Thailand Latvia Serbia-Montenegro Slovak Rep Bosnia & Herzegovina Routine Inspection of all containers Containers Selected for Inspection Based on Risk Analysis Source: World Bank Global Logistics Indicators Survey

Augmented Gravity Model Basic Attraction Logistics Indicators Institutional Quality Exporter GDP Importer GDP Distance Bilateral Trade Time Cost Variability Exporter’s corruption index Importer’s corruption index Regional trade agreement dummy

Critical Global Logistics Indicators Time Cost Variability Exporter’s average time for all procedures Importer’s average time for all procedures Total costs for import-related procedures Exporter’s Max Time – Average Time for all procedures Importer’s Max Time – Average time for all procedures

Augmented Gravity Model Results Log GDP exporter Log GDP importer Log distance Log Exporter’s Avg Time for Procedures Log Importer’s Avg Time for Procedures Log of Importer’s Total Cost for Procedures Log Exporter’s Max Time – Avg Time Log Importer’s Max Time – Avg Time Exporter’s Corruption Perception Index Importer’s Corruption Perception Index Regional Trade Agreement Dummy Adjusted R-Squared Observations F-Statistic Coefficient t-Statistic

Observations Measurable and quantifiable logistics indicators improve explanatory power of gravity model for bilateral trade. Logistics indicators results show efficient logistics in time and cost can contribute to increased trade. Variability matters – higher variability in processing time can be a deterrent to bilateral trade.

Supply-Chain Based Logistics Index A single metric to evaluate and measure logistics efficiencies Weights of each variable in the Logistics Index show relative benefits Use weights to guide resource allocation and deployment of logistics improvements A single measure enables quick and easy benchmarking

Supply Chain-Based Logistics Index Distance Total Cost of Processing Total Time (Freight + Ports) Shipping Cost Trade-Related Costs Inventory Cost (In-Transit) Total Landed Cost Coefficient of Variation of Total Time Inventory Cost (Safety Stock) Product Cost

Three-Stage Logistic Index Estimation Log Exporter GDP Log Importer GDP Exporter’s Corruption Perception Index Importer’s Corruption Perception Index Regional Trade Agreement Dummy Stage 1 Stage 2 Bilateral Trade Stage 1 variables plus Logistics Index Stage 3 Bilateral Trade Residual from Stage 1 Log Distance Log Total Processing Cost Total Time Coeff of Variation of Total Time Logistics Index

Stage 1 Logistics Index Model Results Log GDP exporter Log GDP importer Exporter’s Corruption Perception Index Importer’s Corruption Perception Index Regional Trade Agreement Dummy Adjusted R-Squared Observations F-Statistic Coefficient t-Statistic

Stage 2 Logistics Index Model Results Log Distance Log of Total Trade Related Costs Total Trade Related Time Coeff of Var for Total Time Adjusted R-Squared Observations F-Statistic Coefficient t-Statistic

Stage 3 Logistics Index Model Results Log GDP exporter Log GDP importer Exporter’s Corruption Perception Index Importer’s Corruption Perception Index Regional Trade Agreement Dummy Logistics Index Adjusted R-Squared Observations F-Statistic Coefficient t-Statistic

Model Comparisons Number of Variables Adjusted R-Squared F-Statistic Augmented Gravity Model Logistics Index Model

Implications for Logistics Improvements* “Distance” (surrogate for shipping cost) Trade-related cost Trade related time (average) Standard deviation of proc. time 1.415% 0.251% 0.143%** 0.308%** A one percent reduction in: * Based on Stage Two and Three Regression Results ** Calculations based on exports from Brazil, China and Pakistan to US and UK Results in this % increase in trade:

Logistics Index Observations It is possible to derive a single logistics index that captures all the explanatory power of all the logistics indicators. The logistics index is a significant determinant of bilateral trade. The logistics index is derived from distance, time, cost and variability measures.

Summary Logistics indicators are a significant determinant of bilateral trade. A single Logistics Index has equal explanatory power to the set of logistics indicators. Private enterprises and government agencies should collaborate to improve logistics performance and reduce logistics friction in order to foster trade. The Logistics Index can be used to guide resource allocation and deployment for such improvement projects.