Revisiting the Sizable Gains from the Trade Facilitation Agreement

This week the World Trade Organization (WTO) released a comprehensive report that confirms there are sizable potential gains from implementing the final Trade Facilitation Agreement (TFA). Implementing the TFA would be a signal achievement for the WTO: As the most important of ten agreements reached at the ninth ministerial held December 2013 in Bali, the deal addresses administrative and logistical barriers to doing trade—lesser known barriers compared to tariffs and quotas, but equally, if not more, important for keeping trade costs high.¹ The TFA commits WTO members to customs cooperation “with a view to further expediting the movement, release and clearance of goods, including goods in transit.” Put simply, this would mean significantly reduced transactions costs, red tape, and corruption at ports and cargo airports. Such improvements will support global value chains and over the long term could deliver a positive uptick in the sluggish growth of international trade.²

The road to implementing the TFA has been rocky. The fate of the agreement became uncertain in mid-2014 after India reneged on the bargain made in Bali, blocking the passage of the TFA until a separate agreement was negotiated on food security—the United States and India reached a bilateral compromise at the eleventh hour.³ The TFA will formally enter into force once two-thirds of WTO members ratify the agreement—currently, just 50 of the 161 members have done so.

As the first major multilateral agreement to be concluded in decades, the TFA provides a glimmer of hope that the WTO remains relevant as a negotiating forum after years of disappointment surrounding the Doha Round. But the TFA is also notable for its potential impact on the global economy. Hufbauer and Schott (2013) estimated that full implementation of trade facilitation reforms could deliver some $1 trillion in global export gains, based on gravity model estimates of the impact of countries improving both “hard” and “soft” infrastructure in categories like ports and services and customs administration, at least halfway to the region’s top performer in each category. Zaki (2013) calculated a similar magnitude using a computable general equilibrium (CGE) model to simulate the impact of removing administrative barriers. To reach his results, Zaki first converted the barriers into ad valorem tariff equivalents, revealing that they often exceed traditional tariffs by a large margin. Several other empirical studies consider the estimated reduction of trade costs and importing and exporting times (for example, Hillberry and Zhang 2015 and Moïsé and Sorescu 2013), and increased trade from implementing trade facilitation reforms (see WTO 2015 for a summary).

The WTO report confirms a similar magnitude of the potential gains. The findings are based on full and expeditious implementation of the TFA over a 2015–30 horizon. Some highlights include:

• Reduced trade costs by an average of 14.3 percent (ranging between 9.6 percent and 23.1 percent)—with the largest reduction for Africa and least developed countries.
• Reduced time to import by an average of 1.5 days, implying a 47 percent reduction compared to the current average, and about 2 days for the time to export or a 91 percent reduction.
• Increased global merchandise exports by $750 billion to $1 trillion per year, an overall boost to world export growth of 3 percent per year, based on CGE modeling. By contrast, gravity model estimates suggest global export gains ranging from $1.8 trillion to $3.6 trillion.
• The largest gains accrue to developing countries and least developed countries, with estimated export gains of between $170 billion and $730 billion per year, depending on the scenario, and substantial export diversification (measured by the number of destinations by product).

The WTO highlights several channels through which the TFA will facilitate gains: increased participation in global value chains for developing economies in particular, greater export capacity and integration into trade networks for small and medium sized enterprises—which often suffer more from administrative barriers than larger companies, and the attraction of new foreign direct investment inflows as a complement to the increased trade.

Of course, fully implementing the TFA will be key to realizing the gains. The agreement specifies different tiers of obligations for developed and developing countries. For developing countries, the obligations are broken down between those implemented upon entry into force, those subject to a transition period, and those to follow with additional technical assistance. This built-in flexibility is important, but also serves as a reminder that the gains will take time to materialize. Making reforms will entail costs, and measures like investment in information technology and transport infrastructure, while not prerequisites, are important complements to trade facilitation reforms. Once the agreement is ratified, the challenge for the WTO will be monitoring progress towards implementation and ensuring political commitment to deliver the reforms.

Notes

1. Trade costs are broadly the “set of factors driving a wedge between export and import prices”—that is, factors like transport costs, information costs, tariff and nontariff barriers, customs fees, etc.; for more detail, see Arvis et al. 2013. The WTO puts it simply: “Compared to a tariff, inefficient trade procedures weigh more heavily on economies, since in the case of a tariff, part of the difference between what the importer pays and what the exporter receives ends up as tariff revenues to governments. If a country improves its trade procedures so that trade costs are reduced to zero, this price wedge disappears. As a result, importers benefit from a lower price at the same time that exporters receive a higher price for the traded good.” In other words, lowered trade costs improve the terms of trade for both exporting and importing countries.

2. Since 2012, world trade has grown at less than 3 percent, departing from a relatively consistent growth trend of roughly double global GDP growth (WTO 2015, 14).

3. India’s demands related to food stockholding programs, in which developing country governments purchase food at high prices, distribute it to poorer regions, and export whatever is left over. The US-India compromise allowed food stockholding programs to be carved out from WTO dispute procedures until a permanent agreement is reached.