Trade Facilitation Agreement

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Benefits and challenges

 

Pakistan has ratified the World Trade Organisation’s (WTO) Trade Facilitation Agreement (TFA), becoming the 51st WTO member around the world to ratify the agreement.

TFA implementation offers various benefits and challenges for developing countries. Being a developing country, while Pakistan will be reaping significant benefits by implementing the TFA, it may also be confronting with multiple challenges to fully utilise the benefits the agreement offers.

According to the WTO’s World Trade Report (WTR) 2015, when we appraise of the benefits of the TFA, we see that trade costs in developing countries are higher and they are equal to applying a 219 percent ad valorem tariff on international trade vis a vis the high-income countries, which would face an ad valorem equivalent of 134 percent in trade cost for the same product. Speeding up the clearance of goods across borders would be vital for trade in perishable agricultural goods and the intermediate manufactured goods and the latter factors in prominently in global value chains where lead time (the time between when a process starts and when it is completed) and predictability in delivery time are critical.

According to WTR, full implementation of the TFA has the ability to reduce members’ trade costs by an average of 14.3 percent. The range of trade cost reduction will be between 9.6 per cent and 23.1 percent. Full implementation will reduce trade costs of manufactured goods by 18 percent and of agricultural goods by 10.4 percent, and have an ability to reduce time to import by over a day and a half (a 47 percent reduction over the current average) and time to export by almost two days (a 91 percent reduction over the current average).

The report says that by implementing TFA, not only the export of already existing companies would increase, but also it would enable new companies to come in and export. The report says that according to one analysis, export gains from the TFA will be between US$ 750 billion and over US$ 1 trillion dollars per annum. And another analysis shows that full implementation of the TFA may increase the global exports by between US$ 1.8 trillion and US$ 3.6 trillion. From 2015-30, implementation of the TFA can add up to 2.7 percent a year to world export growth and more than half a per cent a year to world GDP growth.

Developing countries’ exports are expected to increase between US$ 170 billion and US$ 730 billion per annum. Further, the WTR says that full and accelerated implementation of the TFA could enhance developing countries’ economic growth by 0.9 percent annually and boost their exports by an additional 3.5 percent annually between 2015-30. Developing countries will also be benefitted in terms of export diversification from trade facilitation related reforms which would prevent developing countries and LDCs from adverse trade shocks, which they experience when they have limited or specific exports and destinations.

Moreover, trade facilitation is crucial for trade of time-sensitive goods and time is of essence when it comes to the global value chains, especially for the clothing and textiles industries, which are subject to rapid fashion cycles.

Trade facilitation enhances participation by small and medium-sized enterprises (SMEs) in trade. Burdensome trade procedures, customs and trade regulations present a huge barrier for SMEs as opposed to large multinational firms, who are well equipped to navigate through such complex procedures. The WTR says that there is evidence to show that the longer the time to export, the more exporting is dominated by large firms. By reducing delays in export time, the TFA has the capacity to boost SMEs’ role in exports.

Furthermore, in the case of small economies, trade facilitation not only leads to more trade but also ensures greater inflows of foreign direct investment (FDI). Apart from this, trade facilitation reforms boost government revenues by increasing trade flows, hence expanding the tax base, increasing tax collection efficiency for any given level of imports, and increasing detection of customs fraud and corruption. The incentives to engage in fraudulent practices at the border are greater with the longer time needed to complete trade procedures. Since trade facilitation is expected to shorten the duration of these procedures, it creates an atmosphere for reducing the incidence of trade-related corruption.

Let us see now what kind of challenges the developing countries need to face while implementing the TFA.

WTR suggests that the developing and LDC economies attach a great importance to the implementation of TFA, but they are also very shaky about the benefits and costs of the TFA. The report tells that donor countries and agencies expect to increase aid for trade facilitation, but are apprehensive that political will may be lacking in partner countries. Nearly 65 percent of developing economies and 77 percent of landlocked developing countries ranked trade facilitation in their top three aid priorities out of 12 possible choices according to an Aid for Trade questionnaire.

Single window and border agency cooperation are believed to be given the highest priority by developing countries. However, when asked how the TFA would affect their trade costs, almost half of developing countries replied “Unsure” or “No capacity to estimate”. A majority of developing countries (55 percent) and LDCs (nearly 60 percent) identified “border agency cooperation” as the provision of the TFA that they would have the most difficulty implementing. Regarding the agreement as a whole, low-income countries and African countries anticipated the greatest difficulty in implementation. On the other hand, developed economies identified absence of political will as a major obstacle to implementation of the TFA.

As per the WTR, the available information on the cost of implementing trade facilitation reforms is quite limited. The cost of implementing TFA is difficult to quantify for two main reasons. First, trade facilitation reforms are rarely carried out independently of other broader policy objectives, such as customs modernisation. Second, costs may vary considerably depending on the type of trade facilitation measures considered. The main cost categories are diagnostic, regulatory, institutional, training, equipment and infrastructure, awareness-raising, political, and operational.

The available data on trade facilitation costs suggests that the start-up costs are different for the different trade facilitation measure examined. The start-up cost of a given trade facilitation measure also vary significantly between countries depending on the initial state of trade facilitation, the needs and priorities, and the level of ambition. Human resources and training costs are often viewed as the most important element in implementing trade facilitation measures, since trade facilitation reform is mainly about changing border agencies’ practices and behaviours.

Trade facilitation measures related to transparency and to the release and clearance of goods generally have lower implementation costs than those of border agency cooperation and formalities, which may require investments in information technology, infrastructure and equipment. While information and communication technology (ICT), equipment and infrastructure are not prerequisites in implementing most trade facilitation measures, they tend to be the most expensive components of trade facilitation reform. However, it is important to note that in many cases ICT investments serve other purposes besides trade facilitation, such as improving regulation enforcement by preventing corruption and smuggling, enhancing customs operations productivity, and improving revenue collection.

Finally, the WTR reveals that availability and sustainability of financial resources doesn’t alone assure the positive outcome from the implementation of trade facilitation reform. Strong political will at the highest levels and commitment to the process of trade facilitation are often identified as the most important success factors of any trade facilitation reform. Besides national ownership, other key success factors include cooperation and coordination between ministries and border management agencies, private sector stakeholders’ participation, and adequacy of human and material resources, including technical assistance. Another factor critical to the success of trade facilitation initiatives is the correct sequencing of reforms.

Sufficient time is often needed to prepare the ground, bring all stakeholders on board and build internal capacity through training activities and investment.