Who profits from trade-facilitation initiatives?

Bernard Hoekman, Ben Shepherd 03 June 2013

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Analyses continue to accumulate that demonstrate that the global gains from trade facilitation – understood as measures that reduce the overall costs of the international movement of goods – are potentially very large (Hufbauer et al 2012). For example, the World Economic Forum (2013) uses available data on trade-facilitation performance in a computable general-equilibrium model of the world economy to show that the global income gains from raising average trade-facilitation performance half way to the level of Singapore could be six times larger than those resulting from the removal of all remaining import tariffs. Similarly, econometric studies, such as Djankov, Pham, and Freund (2010), find that reducing the time required for trade transactions can significantly boost exports. Concretely, one day less spent in inland transit and export handling could increase trade by at least 1%. Saslavsky and Shepherd (2012) show that trade facilitation and logistics performance matter significantly more for trade in parts and components – which typically circulate within global value chains – than for trade in final goods (Figure 1).

One criticism of earlier research on trade facilitation is that it tends to focus exclusively on the benefits, without considering the sometimes significant upfront costs. Although some trade-facilitation initiatives only require the stroke of a pen – for example, reducing the number of documents required for exports – others can involve significant investments in fixed capital, such as building or upgrading trade-related infrastructure including ports, airports, and road and rail links. More recent research has shown, however, that even when these large costs are netted out, the global benefit-cost balance of trade-facilitation reforms remains strongly positive. For example, Buys et al. (2010) find that road upgrading could expand overland trade among sub-Saharan African countries by up to $250bn over 15 years. Using a road-costing model based on extensive data from World Bank road projects, they estimate that the initial investment cost would be of the order of $20bn, and that an additional $1bn would be required annually for maintenance. There is thus a strong net benefit from trade facilitation by improving road connectivity, even once substantial upgrading costs are accounted for. Computable general-equilibrium evidence from Mirza (2009) confirms this finding in a more general setting of infrastructure investment.

Figure 1. Logistics performance vs. trade in parts and components

Source: World Bank Logistics Performance Index – Arvis et al. 2010.

Distributional issues and global value chains

The papers on costs and benefits of trade facilitation reviewed above take a ‘macro’ perspective. They are interested in overall impacts on the volume of trade of changes in trade costs, or in overall welfare changes, compared with the total costs of improving trade facilitation. They do not address how the net benefits are allocated across different groups in society or across different countries. Basic theory – premised on competitive markets – suggests that all exporting firms should gain from improved trade facilitation by being able to export more, and that consumers should gain from lower prices. However, these predictions are less certain in the case of imperfect competition. That case is potentially an important one in the computable general-equilibrium model context, where large groups of small supplier firms interact with a small number of lead firms.

In policy circles concerned with the evolution of computable general-equilibrium models from a north-south perspective, the concern has been expressed that imperfect competition might prevent small firms, workers, and consumers from seeing the full expected benefits of trade-facilitation initiatives (e.g. Sexton et al. 2007, Chauvin and Porto 2011, and Mayer and Milberg 2013). The fear is that large firms could be in a position to appropriate some or all of the potential gains from trade facilitation as rents. For this mechanism to operate, however, one of two empirically relevant situations would need to hold. One possibility is that there is a lack of effective competition among lead firms, with the result that they act as oligopsonists vis-à-vis their small suppliers. The second possibility is that suppliers must incur large sunk costs to adapt their production methods to the standards required by the lead firm, which inhibits switching from one lead firm to another. The result is again that lead firms can act as oligopsonists with respect to small suppliers.

Empirical evidence

If the distributional issue surrounding trade facilitation is taken to its simplest logical conclusion, it should mean that only large firms benefit from trade-facilitation initiatives. If so, one implication is that firm-level data should reveal that large firms, but not smaller ones, export more in response to improved trade facilitation. We investigate that contention in Hoekman and Shepherd (2013), using firm-level data for a range of developing countries taken from the World Bank’s Enterprise Surveys.1

Following Shepherd (2013), we estimate a model of firm-level export behaviour in which the average time taken to export goods – as recorded by each firm – is used as an independent variable. In addition to controlling for a range of factors typically used in the literature, we introduce interaction terms between export time and firm size. We distinguish between micro (fewer than ten employees), small (between ten and 50), medium (between 50 and 250), and large firms (more than 250).

For the pooled sample, we find no evidence that the effects of improved trade facilitation differ by firm size: average export time is negatively associated with the percentage of sales that are directly exported. When we disaggregate the data by sector, we find weak evidence that size matters only in the case of the garment industry: small firms’ exports are less responsive to trade-facilitation improvements than large firms, but there is no differential effect for micro or medium firms. This lack of consistency in the garments data, as well as the statistical weakness of the result for small firms, tends to suggest that the result may not be a robust one. Given that it is not repeated in other industries or for the pooled sample, the analysis suggests that the gains from trade facilitation are not limited primarily to large firms.

Conclusion and policy implications

In a global sense, trade facilitation is a ‘good deal’ for countries, in that it has the potential to bring economic benefits at least on a par with, and perhaps well in excess of, those that would come from a major round of tariff cuts in manufacturing. However, from a negotiating standpoint, as well from the point of view of development policy, it is not just the global economic gains that matter, but also their distribution. Two questions are important.

  • First, is it primarily developed countries that stand to reap significant gains from improved trade facilitation, or will developing countries also gain?
  • Second, and tied to the first, in the context of computable general-equilibrium models, is it only large firms (mostly headquartered in developed countries) that benefit from trade facilitation, to the exclusion of small suppliers (mostly located in developing countries)?

On the first question, the available research suggests that both developed and developing nations stand to gain from improved trade facilitation, and that exports are expected to increase for both country groups.

The second question is also empirical in nature, but has not been subject to any rigorous testing. In Hoekman and Shepherd (2013), using a large dataset from a variety of developing countries, we find that firms of all sizes benefit from improved trade facilitation by exporting more in response to improvements like reductions in the time taken to export goods. Thus, except under special circumstances that do not appear to hold widely in practice, small firms stand to benefit from trade facilitation through the same mechanism that large ones do. As a result, countries where small, supplier firms are prevalent and lead firms are few or non-existent – which is the case for many developing countries – also stand to gain from improved trade facilitation.

In terms of policy, our results and review of the literature suggest two main conclusions:

  • First, those interested in supporting small producers and exporters in developing countries – policymakers, researchers, and the development community – should actively support improved trade facilitation in developing countries.

It flows from this that the same parties should welcome a WTO Agreement on Trade Facilitation.

  • Second, one of the main arguments put forward by some in the policy community as a reason for developing countries to be wary of the trade-facilitation debate does not stand up to empirical scrutiny.

The fact that small firms can benefit in the same way as large firms from improved trade facilitation means that economies where supplier firms are prevalent but lead firms are not still stand to gain from trade-facilitation reforms. This is not to deny that gains from trade facilitation could be distributed unequally or that governments should monitor the impacts of trade-facilitation initiatives. Distributional issues are, of course, important to the political economy of trade negotiations, and to their development implications. In this area – as more generally – it is important that reforms and projects are designed in a way that allows assessments of impacts over time. But the available firm-level data suggests that distributional concerns do not undermine the wealth of evidence showing that trade facilitation can boost trade and real incomes across the globe.

References

Arvis, J-F, M Mustra, L Ojala, B Shepherd, and D Saslavsky (2010), Connecting to Compete 2010: Trade Logistics in the Global Economy, Washington, DC: The World Bank.

Buys, P, U Deichmann, and D Wheeler (2010), “Road Network Upgrading and Overland Trade Expansion in Sub-Saharan Africa”, Journal of African Economies 19(3), 299-432.

Chauvin, N and G Porto (2011), “Supply Chains in Export Agriculture, Competition and Poverty in Sub-Saharan Africa”, VoxEU.org, 11 March.

Djankov, D, C Freund, and C Pham (2010), “Trading on Time”, Review of Economics and Statistics 92(1), 166-73.

Hoekman, B, and B Shepherd (2013), “Who Profits from Trade Facilitation Initiatives?”, CEPR Discussion Paper 9490, May.

Hufbauer, G, M Vieiro and J Wilson (2012), “Trade Facilitation Matters!”, VoxEU.org, 14 September.

Milberg, W, and D Winkler (2010), “Financialisation and the Dynamics of Offshoring in the USA”, Cambridge Journal of Economics 34(2), 275-293.

Mirza, T (2009), “Infrastructure and Trade in Sub-Saharan Africa”, GTAP Resource 3127, Purdue University.

Saslavsky, D, and B Shepherd (2012), “Facilitating International Production Networks: The Role of Trade Logistics”, Policy Research Working Paper 6224, World Bank.

Sexton, R, I Sheldon, S McCorriston, and H Wang (2007), “Agricultural Trade Liberalisation and Economic Development: The Role of Downstream Market Power”, Agricultural Economics 36, 253-70.

Shepherd, B (2013), “Trade Times, Importing, and Exporting: Firm-Level Evidence”, Applied Economics Letters 20(9), 879-883.

World Economic Forum (2013), Enabling Trade: Valuing Growth Opportunities, Geneva, World Economic Forum.


1 Of course, appropriate data would make it possible to examine a range of other empirical conjectures, such as the size of sunk costs involved in supplier adaptation, or the effective market power exercised by lead firms. However, such data are not generally available on a firm-level, cross-country basis, and we are therefore limited to examining the simpler hypothesis discussed in this column.

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Topics:  International trade

Tags:  IMF, trade facilitation

Director, Global Economics at the Robert Schuman Centre for Advanced Studies, European University Institute; CEPR

Principal of Developing Trade Consultants Ltd.