2nd generation trade reforms

What must be done to facilitate trade

The ongoing expansion of the 146-year old Suez Canal, the fastest trade shipping route between Europe and Asia handling seven percent of the global sea-born trade, is a clear manifestation of how important is the issue of trade facilitation.

The plan is to double the capacity of the canal by building a new lane parallel to the current waterway, which would enable the two-way flow of traffic, making it more time and traffic efficient.

Easing out of the border restrictions and liberalising merchandise trade fall in the category of ‘first generation’ trade reforms and these have been on the agenda of developing countries since long. But, over time, these countries have learnt that for the successful integration into the world economy, they have to work on some intricate behind the border measures that fall under the heading of trade facilitation. They may be termed as ‘second generation’ trade reforms.

The Organisation for Economic Co-operation and Development (OECD) estimates that cost reductions under a “full implementation” scenario of the Trade Facilitation Agreement (TFA) under the umbrella of WTO could reach 15 percent

So what actually defines trade facilitation? Generally speaking, trade facilitation is a set of measures aimed at improving the process of administrative and physical procedures involved in the transport of goods and services across international borders. Countries having inadequate trade infrastructure, cumbersome administrative processes, or limited competition in trade logistics services are less capable of benefiting from the fruits of expanding global trade. And it is equally true for rich countries as well as developing countries.

Why is trade facilitation important? According to The Heritage Foundation (25-09-2014), trade facilitation involves cutting red tape at border crossings and smoothing customs and border procedures to reduce waste and speed up import and export processing. It is estimated that “the average customs transaction involves 20–30 different parties, 40 documents, 200 data elements (30 of which are repeated at least 30 times) and the re-keying of 60–70 percent of all data at least once.” These redundancies and overlapping measures increase the transaction costs of cross-border trade that are eventually passed on to the consumers and producers.

Quoting Peterson Institute for International Economics, The Heritage Foundation writes that it is estimated that trade facilitation could have long-term economic benefits for the global economy of nearly $1 trillion and support 20 million global jobs. The Organisation for Economic Co-operation and Development (OECD) estimates that cost reductions under a “full implementation” scenario of the Trade Facilitation Agreement (TFA) under the umbrella of WTO could reach 15 percent. Indeed, even reductions under a “limited” scenario would still save around 12 percent. These reductions would make cross-border trade more efficient and goods cheaper.

Although food security is definitely an issue for a greater chunk of India’s poor population, it should definitely revisit its stance on TFA, because it’s been more than a decade now that Doha Development Agenda (DDA) is in limbo

So what is the current status and importance of trade facilitation in the world’s trade agenda? All the member countries of WTO had to reach a consensus by agreeing on the TFA in Bali in December 2013. It never happened because of the India’s last minute about face from its earlier negotiated position of supporting the TFA. This was done by the previous Congress-led government on the condition that India would have immunity from the WTO’s subsidy rules until 2017.

India’s ambassador to the WTO Anjali Prasad stated in Bali, “My delegation is of the view that the adoption of the TF (trade facilitation) Protocol be postponed till a permanent solution on public stockholding for food security is found.”

Although food security is definitely an issue for a greater chunk of India’s poor population, it should definitely revisit its stance on TFA, because it’s been more than a decade now that Doha Development Agenda (DDA) is in limbo and halting of TFA would only set a bad precedent for future negotiations.

India should also understand these two issues are not at all interlinked and they can be taken up in separate negotiations in the WTO. In case of a persistent deadlock if India remains adamant, a plurilateral course may be adopted, as it only requires the consensus among three-quarters of the WTO members and not a consensus among all members in case of a multilateral agreement.

It remains to be seen whether its developing or developed countries that should be concerned more about trade facilitation measures. Moreover, what is the importance of trade facilitation in the context of South Asian regional trade in general and between India and Pakistan in particular?

Note: This is the first of a two-part article. The second part will appear in the same space next week.