Trade facilitation matters!

by Gary Clyde Hufbauer, Martin Vieiro and John S.Wilson

Vox
September 14, 2012

Economists celebrate trade not only because they love watching ships cross the Pacific and cargo planes land at Paris Charles-de-Gaulle but also because increased trade demonstrably raises income and improves living standards. This column argues that a powerful way to boost trade is by focusing on trade facilitation, i.e. improving both hard infrastructure like ports and railways, and soft infrastructure such as shipping logistics.

Once upon a time, most economists thought that tariffs, quotas and exchange controls were the alphas and omegas of trade policy. Hence their consensus recommendations: slash tariffs, eliminate quotas, float the exchange rate and commerce would blossom. Not quite so! It turns out that trade costs decisively separate countries that participate fully in the world economy and countries that are marginalised. Perhaps the biggest new idea is that trade transaction costs are not simply a matter of geography and fate. Targeted policies – grouped under the label of trade facilitation – can sharply cut the burden even for landlocked countries. Singapore takes first place in trade facilitation rankings, not only because of a fantastic natural port but also because of superb governance. More surprising, perhaps, is that landlocked Austria ranks 11th, entirely owing to government emphasis on quality infrastructure and efficient border management.

Even the international politics of trade facilitation are positive. The potential gains from trade facilitation are so large and 'self-balanced' that it has been one of the brighter spots of the otherwise dim Doha Round of negotiations at the WTO. Even 'narrow' investments in trade facilitation lead to enormous rates of return. Helble et al. (2009) estimate that every dollar spent in aid-for-trade recipient countries on reforming trade policy and regulation (e.g. customs clearance, technical barriers, etc.) increases the country’s trade by $697 dollars annually.

While agreement on trade facilitation tops the list of any potential 'early harvest' package, Brazil, South Africa, and India have led a push against this proposal, arguing that any deal on trade facilitation must be coupled with an agreement on agriculture reform. Most recently, support is gathering for a stand-alone trade facilitation agreement outside the auspices of the WTO.

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