Benefits Of Trade Facilitation: A Quantitative Assessment

Trade transaction costs (TTCs) related to border procedures vary depending on the efficiency and integrity of interacting businesses and administrations, the characteristics or kind of goods, and the size and type of businesses. Total costs may be seen as being composed of directly incurred costs, such as expenses relating to supplying information and documents to the related authority, and indirectly incurred costs, such as those arising from procedural delays. Empirical studies suggest that directly and indirectly incurred TTCs each amount to 1- 15 percent of traded goods' value.Moreover, empirical evidence suggests that TTCs for agro-food products are higher than those for manufactured goods, as agro-food shipments are subject to special border procedures, such as sanitary and phytosanitary controls. Also, small and medium-sized enterprises face cost-disadvantages. In light of this diversity in TTCs, the potential for the realisation of benefits from trade facilitation varies across economies, sectors, and types of traders. In cases where best practices are already applied, further efficiency gains will be difficult to achieve. But if border clearance costs are substantially above those encountered under best practices, room for improvement through suitable measures of trade facilitation will tend to exist.The model-based analysis of the economic impacts of trade facilitation carried out in this study differs from earlier research by taking several salient features of import and export procedures into account. In particular, the differing characteristics of direct and indirect TTCs are represented, and economy-specific differences in trade facilitation potential are reflected according to empirical information on border waiting times and survey-based evidence on the quality of border processes. In addition, the higher TTCs for agro-food products and small and medium-sized enterprises are incorporated into the analysis.The analysis does not evaluate the economic and trade impact of specific trade facilitation measures or instruments, such as those that might result from a possible future WTO agreement on trade facilitation. Instead, the aim of the assessment is to better represent empirical characteristics of the border process in model-based analysis and to identify those features that crucially affect the results and that, therefore, deserve to be further explored in future analysis. Several scenarios of hypothetical, multilateral trade facilitation efforts are evaluated, focusing on the comparison of scenarios rather than the overall welfare gains that might result from trade facilitation.For the purposes of this study, trade facilitation was assumed to lead to a reduction in TTCs by 1 percent of the value of world trade. This assumption is maintained across scenarios, in order to make it possible to meaningfully compare results. On this basis, aggregate welfare gains are estimated to amount to about US$40 billion worldwide, with all economies benefiting and non-OECD economies experiencing the biggest gains in relative terms. If the impact of trade facilitation on TTCs is taken to be more pronounced, then the welfare benefits will also be higher.Earlier analysis often focused on the cost savings to traders and did not reflect the conceptual differences between direct and indirect TTCs, thereby ignoring macro-economic adjustment needs, such as re-deployment of redundant employees in the logistics sector, associated with direct TTCs. Incorporating these adjustment needs into the analysis provides a more nuanced assessment of the broader impact of trade facilitation and avoids creating inflated expectations concerning the potential benefits from reductions in TTCs. Moreover, the presence of these adjustment costs suggests that trade facilitation measures that focus on reducing indirect TTCs, notably border waiting times, might have a more marked impact on economic welfare than measures that aim at reducing documentation requirements and related direct TTCs. Furthermore, if the existing diversity of TTCs across economies, sectors and traders is represented, a larger share of the global benefits of trade facilitation of up to two-thirds of the total gains is obtained by developing economies than under an assumption of flat reductions in TTCs. Developing economies are also the prime beneficiaries from trade facilitation if the facilitation-generated welfare gains are related to GDP, as they tend to have considerable potential for reductions in TTCs and a relatively high trade to GDP ratio, so that reductions in the costs of importing and exporting affect them to a larger extent than many OECD members. However, the magnitude of the reported welfare gains has to be seen as an upper boundary of the actual gains that might be achievable, as investment needs to realise the assumed reductions in TTCs have not been incorporated into the quantitative analysis, due to lack of consistent, cross-economy information on the full range of costs associated with the implementation of trade facilitation measures.