Transmission channels
1. Channels of international and domestic trade
The reduction of transaction costs of exports and imports associated with trade facilitation measures is transmitted to the poor mainly through the channels of international and domestic trade, which operate both on the production and on the consumption sides.
On the production side, the competitiveness of exported goods is likely to increase in the short term due to the cheaper imported inputs as well as reduced costs to export.
Therefore, wages and/or employment in these sectors are likely to increase. SMEs are likely to benefit the most from these measures as they generally bear disproportionate trade transaction costs, especially in developing countries. As trade procedures are streamlined, SMEs can be encouraged to become more involved directly in imports and exports.
On the consumption side, the channel of international trade also affects the poor through changes in the prices and variety of goods consumed. When markets are functioning efficiently, the domestic price of imported goods is reduced; furthermore prices of domestic substitutes may fall because of reduced opportunities to capture rents by domestic producers. However, prices of domestic goods could also increase on some occasions, for example, if these goods are also exportable and their price in the world market is higher than the domestic one. Consequently, a rush to export in order to capture the higher price will reduce supply in the domestic market and cause a rise in domestic
Note:The bold green lines show the strongest impacts. The solid line shows that the impacts are also expected to be strong. The dotted lines show that the impacts are likely to be on a lower scale.
Figure 3. Transmission channels from trade facilitation to the poor TRADE FACILITATION OTHER IMPACTS GOVERNMENT INTERNATIONAL TRADEDOMESTIC TRADE FDI
COMPLEMENTAR Y POLICIES (CAP ACITY-BUILDING, SOCIAL
SERVICES, SAFETY -NETS ETC.)
CONTEXTUAL F ACTORS (MACROST ABILITY , EXCHANGE RA
TE, INFRASTRUCTURE ECT .)
• [Changes in employment [(directly related to TF [measures) Improved leaving stardands • Better access to social [services and local markets • [Other benefits Worsened leaving standards • [Drugs, prostitution, gambling • [Land expropiation
•[Savings from increased [efficiency •[Changes in duties collected 1)[Price changes 2)[More variety of goods 3)[Increased price [volatility 1)[Lower prices of inputs 2)[Changes in wages [and/or employment 3)[Increased price volatility
ConsumptionProduction•[Better and faster access [to local markets •[Savings from efficiency [in communication •[Increased competition
•[Employment •[Technology transfer •[Spill-over effects GDP growth Poverty and inequality
prices. Last, previously unobtainable goods or varieties could become available, with associated welfare gains. Ultimately, the extent to which the poor can benefit depends on the degree of competition and product differentiation within the markets as well as on the types of goods whose trade is facilitated.
The channel of international trade can also affect domestic trade and, in turn, the poor. As the competition faced by domestic producers in import-competing sectors increases and the price of imported inputs decreases, the same process of specialization and reallocation of resources towards activities that reflect the country’s comparative advantage and exploitation of economies of scale is likely to occur in the domestic trade.
Moreover, most of the exporters are likely to supply part of their production to the domestic market, and trade facilitation measures can therefore contribute to increasing their competitiveness in the domestic market. Trade facilitation measures can also benefit domestic producers due to the reduction in cost and the time to reach local markets (for example, in the case of upgrading infrastructure); this, in turn, can benefit the consumers.
Trade facilitation measures involving the improvement of ICT can also help the poor producers to save time and money due to more efficient communications, the supply of strategic information on market prices, and enabling better planning and delivery of the goods to local markets.20
In the short term, the processes of adjustment can imply a fall in wages and/or employment in certain sectors. However, in the medium to long term a more efficient trading environment is likely to increase the welfare of the country. Firms would be encouraged to specialize in exporting goods that reflect the country’s comparative advantage as well as the exploitation of economies of scale. According to the Heckscher-Ohlin model, wages and/or employment in the production of goods whose exports are cut (partially or totally) will decrease, while they will increase for goods whose exports increase.
The effects on the poor depend on the mobility in the labour market and the characteristics of the distribution chain21 as well as on the political willingness22 of the Government to provide safety-nets along the adjustment process.
Finally, through the channel of international trade, price volatility is likely to increase as there will be more exposure to international price fluctuations (Winters and others, 2004). This can affect poor consumers as well as producers, who will respond by taking action to reduce risk exposure. For example, increased vulnerability to price fluctuations may lead poor farmers to diversify, at times to sub-optimal crops, to reduce risk (Bird and Vandemoortele, 2009). Also, the price to insure from increased exposure to price fluctuations is likely to be higher for SMEs.
20 For example, Larson (2000) demonstrated, based on household surveys, that farmers’ access to a public telephone was positively related to the price they received in district markets for their output, e.g., decreasing the distance to a telephone by 10 per cent led to a 1.6 per cent increase in prices received.
21 This range of factors includes the integration of markets over time and space, world prices, exchange rates, domestic taxes, transportation and storage costs as well as – where they exist – centralized marketing boards (sometimes also operating as cooperatives) (Higgins and Prowse, 2010).
22 This is connected to the government channel discussed in the following subsection.