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Talking Trade blog

Finally - faster, cheaper movement of goods

Published 23 February 2017

Finally-some very good news on the trade front! The long-stuck World Trade Agreement (WTO) arrangements on trade facilitation have been approved by just enough members to enter into force.

The Trade Facilitation Agreement (TFA) was struck in Bali in December 2013.  It is an unusual deal in the WTO that provides more flexibilities to members than we normally see.  But the overall objective is to move goods faster and cheaper across borders.  The bottom line benefits for growth could be larger than tariff cuts.

Trade facilitation is not the sexiest sounding topic.  Eyes tend to glaze over whenever it gets mentioned.  But the ability to move cargo across borders faster and cheaper is extremely important.  Obstacles at the border are unpleasant for bigger firms and can be catastrophic for smaller companies. Consumers pay more for products than necessary.

It is not that governments have been ignorant to the benefits of facilitating trade at the border.  They have tried for years to be more efficient.  At the global level, early rules dealt with freedom of goods in transit and tried to address issues of fees attached to importing and exporting products.  Some countries struck out on their own to reduce barriers at the border. 

Yet the obstacles to reform can be significant.  For instance, even with excellent intentions, standard operating procedures can be devilishly hard to shift.  Existing systems have to be modified or scrapped.  Technology needs to be upgraded.  Many of these problems require a commitment for reform plus—often—money. 

Even countries that might be counted on to facilitate trade well continue to have challenges.  As an example, facilities for loading and unloading container ships in the biggest ports in major economies can be open for business from 6 am to 6 pm during weekdays.  Ships run 24/7 and delays at the port due to limited office hours by staff members onshore are deeply problematic. 

Many countries have similar bureaucratic problems coordinating policy at borders.  Some have customs officials that work longer hours, but the agriculture ministry staff who must inspect food items may not have similar schedules, leaving perishable food items waiting for clearance. 

Companies face a myriad of obstacles at the border.  Customs officials have to inspect goods.  In some countries, inspection rates can reach 100%, meaning that every single item or container (or perhaps all food shipments or all health products) have to be looked at by someone before goods can cross borders.  In others with improved risk assessment programs, the percentage of goods that are checked is closer to 1 percent because they can do a better job of screening goods first before inspection and zero in on only potentially problematic items.  This saves time and money for governments too.

Similar variations can be found in nearly every aspect of crossing borders.  The kind and type of paperwork demanded by customs and other ministries is also often different.  For any firm trying to use one of the hundreds of existing free trade agreements, the paperwork requirements are different again. 

The rules that have to be followed for companies claiming benefits under free trade deals vary as well.  In many cases, border officials struggle to cope with the complexity.  The classification of goods becomes critical, as customs agents can have tremendous flexibility in deciding which rules will apply depending on how they define a good. 

The time needed to get over land, sea and air port clearance processes also varies tremendously.  Singapore can clear cargo destined for the shipyards in as little as 23 seconds.  Other places can take days or weeks.  Each hour of delay at the border adds to the costs for the firm as merchandise is tied up in containers or in warehouses waiting for processing.

The procedures for declaring cargo also vary depending on countries.  ASEAN members have been quite progressive in aiming to create “single windows” under which (in the ideal world), a trader inputs data once on the items that need clearance.  This information is automatically sent out to all the various agencies that need to know about the arrival of goods (customs, port officials, agriculture, health, security, and so forth).   All paperwork gets seamlessly processed, with high risk shipments flagged for inspection and the rest quickly moved through the border on arrival. 

But even in ASEAN the application of the single window concept is quite uneven.  All 10 member countries are supposed to have the system in place already as part of the ASEAN Economic Community (AEC), but this is still a work in progress.  Eventually, the members are hoping to knit their systems together so a trader in one country could have cargo data automatically routed to all 10 members without the need to do anything further. 

The desire to create larger groupings with unified systems is driven by the need to ensure consistency and ease of doing business for companies.  This same pressure lead the World Trade Organization (WTO) to focus intensively on trade facilitation.

In December 2013, the (now) 164 members of the WTO announced conclusion of what is called the “Bali package.”  It contained a set of rules on facilitating trade (plus a few other items) with the goal of harmonizing and streamlining the procedures for moving goods. 

Particularly for countries with firms enmeshed in global value chains or supply chains, any delays or unnecessary costs at the border are very damaging.   Countries with high barriers to entry will struggle to be competitive.  Firms that have to fill out up to 30 different forms (some or all of which need to be submitted in person or in multiple hardcopies) and wait 6 weeks for cargo clearance are not going to be able to meet delivery times and costs demanded by firms participating in supply chains. 

The Bali package goes some of the way towards addressing these issues.  For example, it requires countries to post information about all forms, documents and fees associated with moving cargo.  This information should be put online as much as possible.  Firms should be given an opportunity to comment on any proposed changes in rules or procedures with sufficient time to respond. 

Companies can ask for what is called an “advance ruling.”  This is where customs decides the classification of the good ahead of time and the officials at the border cannot suddenly reclassify an item or decide that it does not meet the rules of origin.

Bali contains a lot of language about clear posting of fees and charges, since important obstacles to trade are informal charges, shifting charges or straight out bribes demanded at the border. The scheduled fees, duties and so forth can be paid online as much as possible. 

Some of the processing of goods clearance can take place ahead of the arrival of goods.  Countries can use schemes for Authorized Operators which allows trusted trading firms with a solid track record to have fewer inspections and faster processing times. 

In short, the rules negotiated in Bali should be extremely helpful for companies in getting costs down and delays shortened. 

Hence the excellent news that after a rather long pause, the Bali package has finally entered into force.

For developed economies, the whole packages applies at once.  But, frankly, for most developed economies, the Bali commitments may actually provide less coverage than is actually practiced currently.  Thus the difference, post-Bali, for efficient countries is probably modest.

Where Bali really matters is for developing countries that tend to have uneven implementation of trade facilitating measures, higher costs, and longer times for clearance.  For developing countries, Bali comes in three parts:  some elements (Category A) kick in immediately, some elements (B) will be phased in over time on a clear timetable provided by the member country, and some elements (C) are supposed to start pending the receipt of sufficient capacity building to implement the agreement.

The WTO website sorts out which member states put which elements of the agreement into which categories.  The agreement applies only to the 110 members that have signed on to the commitments.  Again, for developed economies, everything is Category A and the entire agreement takes effect now.  But for developing economies, firms need to see which commitments will be phased in over time.  Category C pledges do not come with timelines as implementation depends on funding.  Least Developed Economies (LDCs) have different obligations.

The OECD estimates that full implementation of the agreement will have significant gains—particularly for low income countries.  The cost reduction could be 14.1 percent.  Partial implementation delivers a lot fewer benefits for countries and firms trying to operate across these borders.

It is now critically important that developing countries implement Bali as completely as possible.   This may not be easy, but the agreement includes promises for capacity building.  Firms should do what they can to assist along the way.

For companies trying to operate in a world of patchwork rules and, often, little transparency in procedures, full implementation of Bali is badly needed.  In fact, much of the Bali package ought to be viewed as a floor rather than a ceiling.  Some of the trade agreements in Asia including RCEP are trying to go beyond Bali and to capture the gains that come from unilateral, bilateral, and regional efforts to improve trade facilitation.  It is important for governments, firms and consumers.

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Dr. Elms is Head of Trade Policy at the Hinrich Foundation in Singapore. Prior to joining the Foundation, she was the Executive Director and Founder of the Asian Trade Centre (ATC). She was also President of the Asia Business Trade Association (ABTA) and the Board Director of the Asian Trade Centre Foundation (ATCF).

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