Defining trade facilitation

There is no uniform definition of trade facilitation. During the initial stages of GATT the focus was on harmonization and simplification of customs procedures and documentation. This was due to the fact that the cost of compliance at the border was high.

However, with the strong reduction of tariffs during the past 60 years, more significantly due to the outcome of the Uruguay Round, the focus has gradually shifted to other significant costs that restrict international trade. Therefore, with the reduced tariffs, the focus has now shifted to addressing other measures that can reduce the trade costs, of which trade facilitation is one such measure that has gained importance in this regard. The minimization of these trade transaction costs has been widely recognized as the main objective of trade facilitation (ADB and ESCAP, 2009; Economic Commission for Europe, 2002; OECD, 2001), as it is expected to reduce uncertainties in the trade transactions and establish a more transparent regime for promoting the inclusive participation of the private sector in international trade (ADB and ESCAP, 2009). The existing literature confirms that cost

Multidimensional

reductions from trade facilitation measures account for a high fraction of total trade transaction costs (Sohn and Yoon, 2001; ADB and ESCAP, 2009).⁹

Despite the general consensus over the main goal, international institutions diverge about the extent of trade facilitation coverage. The term lends itself to a variety of interpretations from a narrow focus on at-the-border issues to a broader coverage of issues that can cover the entire trading process. The WTO approach to the topic has been defined as “traditional” (World Bank, 2011) as it focuses on removing obstacles to trade in goods at, and in the vicinity of borders. Trade facilitation is, in fact, defined as “the simplification and harmonization of international trade procedures, where trade procedures are the activities, practices and formalities involved in collecting, presenting, communicating, and processing data and other information required for the movement of goods in international trade”.¹⁰

Trade facilitation was first discussed at the WTO Singapore Ministerial Conference in December 1996. After several years of exploratory work, WTO members formally agreed to launch negotiations on this topic in July 2004.¹¹ New issues have since been discussed during WTO negotiations, such as documentary requirements, transparency of customs clearance and transit procedures, with the intention of clarifying and improving GATT Article V (Freedom of Transit), Article VIII (Fees and Formalities Connected with Importation and Exportation) and Article X (Publication and Administration of Trade Regulations). The negotiations also aim to enhance technical assistance and capacity-building in this area, and to improve effective cooperation between customs and other appropriate authorities on trade facilitation and customs compliance issues. Annex 1 to this chapter lists a number of trade facilitation measures consistent with the ongoing WTO negotiations on trade facilitation, together with the related GATT Article. The list was proposed by ESCAP and ADB (2009). In a recent study, the Organization for Economic Cooperation and Development (2013), using the ESCAP-World Bank international trade cost database, estimated that comprehensive implementation of all the measures negotiated in the WTO Doha Development Round would reduce total trade costs by 10 per cent in advanced economies and by 13-15.5 per cent in developing economies.

The World Customs Organization (WCO) also has focused on harmonization and simplification of customs procedures in order to enhance the efficiency and effectiveness of customs administration.¹² This approach has also been preferred by some other international institutions. The Asia-Pacific Economic Cooperation (APEC) group, for example, defines it as “the simplification and rationalization of customs and other

9 Many other studies (e.g.: Hummels, 2001; Wilson and others, 2004; Hausmann and others, 2005; Nordas and others, 2006) show that the improvement of trade facilitation results in the reduction of trading time and transaction costs.

10 Global Trade-Related Technical Assistance Database, which falls under the WTO spectrum. Available at http://gtad.wto.org/trta_subcategory.aspx?cat=33121.

11 See http://wto.org/english/tratop_e/tradfa_e/tradfa_e.htm.

12 WCO defines trade facilitation as “to secure the removal of unnecessary restrictions by applying modern techniques and technologies, while improving the quality of controls in an internationally harmonized manner”

(ADB and ESCAP, 2009).

administrative procedures that delay or increase the cost of moving goods across international borders” (ADB and ESCAP, 2009). Increasingly, however, the focus of the trade facilitation debate has shifted towards a more comprehensive approach that encompasses the transaction costs associated with the movements of goods along the entire international supply chain. The International Chamber of Commerce, for example, defines trade facilitation broadly as “to improve the efficiency of the processes associated with trading in goods across national borders”. This more pragmatic approach is based on the assumption that trade facilitation measures applied at-the-border would be less effective if there were important barriers in other steps of the chain. Indeed, various ARTNeT studies on trade facilitation (e.g., ESCAP and UNDP, 2007)¹³ have revealed that a narrow focus on customs facilitation does not meet the need of traders well in developing countries. The trade facilitation measures should, therefore, also cover behind-the-border issues, such as the costs of transportation and logistics, the conditions of physical infrastructure, e-commerce, business facilitation, trade finance, domestic policies and additional market entry variables. A sample of actions to promote trade facilitation, and which reflect this wider approach, is presented in annex 2. The list is an outcome of the Asia-Pacific Trade Facilitation Forum 2009 held at ESCAP (2009).

A broad approach has also been followed by the United Nations Centre for Trade Facilitation and Electronic Business (UN/CEFACT) which defines trade facilitation as “the simplification, standardization and harmonization of procedures and associated information flows required to move goods from seller to buyer and to make payments”. Similarly, the Organisation for Economic Co-operation and Development defines trade facilitation as “the simplification and standardization of procedures and associated information flows required to move goods internationally from seller to buyer and to pass payments in the other direction” (OECD, 2001). Under this definition, trade facilitation covers all the steps of the

“Buy-Ship-Pay Model” (figure 2), allowing optimization of regulatory procedures, government controls and an overall improvement of business processes (ADB and ESCAP, 2009).

ADB and ESCAP (2009), while opting for a balance between the narrow and broad approach, have included in the spectrum of trade facilitation all the policies and processes that reduce the cost, time and uncertainty associated with engaging in international trade, except traditional trade instruments such as tariffs, import quotas and similar non-tariff barriers. Similarly, in order to exchange information efficiently, the Economic Commission for Europe (2002) circumscribes the focus of trade facilitation to (a) the simplification (and elimination where possible) of formalities and procedures, (b) the harmonization of applicable laws and regulations, (c) the improvement and standardization physical infrastructure and facilities, and (d) the standardization of the use of information and communications technologies.

13 Trade Facilitation Beyond the Multilateral Trade Negotiations: Regional Practices, Customs Valuation and Other Emerging Issues (ST/ESCAP/2466), available at <www.unescap.org/tid/artnet/pub/tipub2466.asp>

Despite the various specifications of the term, trade facilitation measures are guided by the belief in the benefits of enhanced trade, especially for least developed countries (LDCs) and landlocked developing countries (LLDCs) that are struggling to integrate into international production networks.¹⁵ Transit problems are especially severe for LLDCs, where impeded transit rights increase transportation and importation costs, and significantly slow down trade transactions, thereby also reducing their export competitiveness on world markets. Trade facilitation measures can greatly benefit those countries, especially when designed in a way that promotes inclusive growth.