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Cutting the Red Tape: The Future of Trade Facilitation

June 29, 2012

The ability to trade is a key component of economic prosperity. When goods and services cross borders, jobs are created and consumers are given access to a wider variety of products, increasing the standards of living and stimulating economic growth. Trade also has a developmental aspect as well: countries that have improved the openness of their markets have seen notable increases in life expectancy and disease control, coupled with large decreases in child mortality.

Given the benefits of trade, it has been particularly alarming to see a rising tide of protectionism sweep across globe. Since 2008, an independent monitoring group of the WTO has noted that G-20 members alone have implemented no less than 326 separate measures that restrict trade with other countries. Although the measures were a natural reaction to the global financial crisis, they are disappointing, given the closure to markets they represent.

The three pilars of trade facilitation.

What is to be done? A promising front is the realm of Trade Facilitation. Put simply, trade facilitation is the simplification, harmonization, and standardization of international trade practices, particularly those concerning import and export procedures. As a newly developing trend, trade facilitation differs from the more conventional trade policy in the sense that it is concerned with eliminating “red tape” under existing trade rather than the creation new agreements. Facilitation is also more administrative in nature, better insulating it from trade politics and protectionist maneuvering.

Potential gains from trade facilitation are enormous. In a comprehensive study of 155 countries, the World Bank found that improving trade logistics by lowering transaction costs and increasing trade speed and predictability can increase national GDP by 1 percent and two-way merchandise trade by 2 percent. The growth may seem small at first, but it is actually quite large.  In fact, trade facilitation could increase trade flows to a greater level than multilateral tariff reductions, such as the collapsed Doha round. All things considered, a full implementation of trade facilitation could enlarge global trade flows by $468 billion annually.

The countries that stand to gain the most from trade facilitation are the ones with emerging economies. In the African region, the average customs transaction requires 20 to 30 different parties, 40 documents, and the entry of 200 data elements. Needless to say, the multiplicity of requirements makes trade in the region a cumbersome process, creating bottlenecks at borders. The costs add up: exporting a cargo container overseas from Africa costs about $2,000. The same shipment would be $900 in Southeast Asia.

As the 21st Century unfolds, trade facilitation will become more prominent in the global trade regime.

How can countries streamline their trading practices? A particularly important aspect of trade facilitation is the modernization of trade infrastructure. The integration of technology into the customs process is particularly useful. By automating documents, countries can eliminate a large portion of the paper trail used in the import/export process, saving valuable time and resources. As society progresses towards the digital age, countries should utilize information technology to garner a competitive edge in trade.

Countries also need to scrutinize the documentation and transportation constraints they impose. Too often, the losses businesses suffer because of opaque and redundant documentation requirements and border delays exceed the costs of tariffs themselves. The simplification of the documentation process and reduction of transportation constraints can yield significant results. A remarkable success story in this field is the partnerships formed between USAID and various countries. By focusing on customs and transportation efficiency in Georgia, Macedonia, Afghanistan, Egypt, Guatemala, and Ghana, USAID was able to cut the average time to ship, process, and deliver goods by 31 days.

Collaboration between countries can also go a long way in expediting trade. A recent development has been the creation of one-stop border posts. Instead of processing imported or exported products–once as it leaves a country and again as it enters another–both countries jointly process the goods with the same documents. In 2009, Zambia and Zimbabwe, in cooperation, created a one-stop border post at the Chirundu border crossing. Before the post was put in, wait times for commercial trucks at the busy border crossing took up to five days. After the consolidation, the wait time was been reduced to a mere two hours.

The advantages of trade are undisputable. Countries searching for ways to open their borders to imports and strengthen their export markets can gain large economic benefits through trade facilitation.

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