How the Trade Facilitation Agreement can help reduce trade costs for LDCs
The recently concluded Trade Facilitation Agreement (TFA) provides an ideal opportunity to narrow the scope of aid-for-trade (AfT) activities to heed the call for “Managing for Development Results” (MfDR).
This paper reviews the evidence on trade costs by different country groupings, distinguishing between least-developed countries (LDCs) and landlocked LDCS (LLDCs), including new estimates of time in transit for international parcel data that is measured relatively accurately. This review is accompanied by new estimates that provide support for allocating a greater share of AfT funds toward LDCs and particularly toward LLDCs, both groups showing higher trade costs than comparators and less progress in reducing trade costs since 1995.
On average, time in customs for imports and exports are also significantly higher for both groups than for their respective comparators. LDCs and LLDCs have systematically lower values for the components in the Organisation for Economic Co-operation and Development’s (OECD) new Trade Facilitation Indicators (TFI).
New estimates suggest that a successful implementation of the TFA, defined as moving halfway toward the frontier value of the TFI for the respective country grouping could reduce trade costs for imports of LDCs by 2.4 percent and by 4.5 percent for LLDCs. Estimates of time in transit for parcels sent by post are also higher for LDCs than for other developing countries.
Even though there is more to trade costs than customs management, monitoring implementation of the TFA would be part of the Istanbul Programme of Action for Least-Developed Countries (IPoA) and a stepping stone toward the concrete trade performance targets that have lacked in AFT activities so far. At the same time, the TFA should take on board the preservation of the environment by monitoring and preventing trade in endangered species.
Aid-For-Trade: Where do we stand?
The Aid-For-Trade (AfT) Initiative launched in 2005 was part of the Millennium Development Goals (MDGs) – goal 8 “developing a global partnership for development” – with as objectives, a rules-based, open, multilateral trading system; improved market access, including duty-free, quotafree (DFQF) market access for least-developed countries (LDCs); and above all reduce poverty by half in 2015 relative to the 1990 level, a target that has been reached in most countries. Now that the Sustainable Development Goals (SDGs) have been adopted by the United Nations (UN) General Assembly in September 2015, the main trade performance objective with a target is the doubling of the global share of LDC exports by 2020 – which was already part of the Istanbul Programme of Action (IPoA). Now that World Trade Organization (WTO) members have endorsed the TFA agreement signed in Bali in 2013, what is the role of AfT? In Melo and Wagner (2015), we focused on the tradeenhancing and poverty-reducing effects of AfT that were an objective of the MDGs. Here, we focus on the benefits from a successful application of the Trade Facilitation Agreement (TFA): a move toward results-based AfT and an evaluation of the benefits from reduced trade costs with a focus on LDCs and landlocked least-developed countries (LLDCs).
With approximately US$40 billion disbursed a year, AfT represents about 30 percent of official development assistance (ODA) financial flows to developing countries, and what is entered as trade facilitation in the Organisation for Economic Co-operation and Development (OECD) Credit Reporting System (CRS) accounts for only about 1 percent of AfT disbursements. In a recent paper, we find a lack of correlation between disbursements and the World Bank’s Doing Business (DB) data or with the OECD Trade Facilitation Indicators (TFI) of the functioning of customs discussed here. If anything, trade facilitation disbursements have been directed more often than not toward countries that are the closest to the TFA targets as captured by the OECD TFI index that covers all aspects of the functioning of customs. In addition, the geographical pattern of disbursements of trade facilitation assistance does not correlate significantly with any of the usual proxies for trade facilitation – DB time in customs or the Logistics Performance Indicators (LPI).
Together with new estimates, the evidence surveyed here suggests that a shift in trade facilitation disbursements toward LDCs and LLDCs would provide the highest returns for AfT funds. Successful implementation of the TFA would reduce uncertainty related to trade, streamline market access procedures, and provide greater transparency at customs, all factors leading to lower transaction costs. Higher trade volumes would then be an engine of growth and poverty reduction.
Implemented jointly by ICTSD and the World Economic Forum, the E15Initiative convenes world-class experts and institutions to generate strategic analysis and recommendations for government, business, and civil society geared towards strengthening the global trade and investment system for sustainable development.