Supply chains and behind-the-border trade barriers: Implications for developing nations

Michael J Ferrantino 11 February 2012

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In recent decades, it has become increasingly common to produce goods in a number of geographically dispersed stages linked by international trade. At the same time, there is an increasing interest among policymakers in addressing barriers to trade other than tariffs, known as non-tariff measures (see eg Cernat and Madsden 2011 and Baldwin and Evenett 2009 on this site). As tariffs have declined steadily since the 1940s, government interventions to restrict imports have increasingly taken non-tariff forms. These include quantitative restrictions, technical barriers to trade, sanitary and phytosanitary measures, and price-based measures.

Quantifying the effects of these policies on world trade is challenging. ‘Price gap’ or ‘tariff equivalent’ methods seek to estimate the level of ad valorem tariff that would have an equally trade-restricting effect to the non-tariff measure in question. An alternate method is to estimate ‘quantity gaps’ – ie the difference between actual trade flows and trade flows predicted by a statistical model of trade. However, when there are multiple measures in place, policymakers want to know which are more restrictive.

Decomposing the effects of non-tariff measures

One idea for decomposing the effects of non-tariff measures is to study goods as they move through supply chains (Ferrantino 2012). Ideally, one would follow a typical exported good from its location of production through multiple steps in the process of shipping and delivery. At each stage in the process the price of the good increases, as additional costs are imposed (Figure 1). Different policies apply to each part of the supply chain. Market distortions in international shipping specifically affect the difference between the free-on-board and cost-insurance-and-freight prices; import customs procedures then affect the landed duty-paid price; and restrictions on the size or hours of retail operations affect the difference between the wholesale and retail price. Thus, it is possible to have a common metric to compare the restrictiveness of different types of non-tariff measures.

Figure 1. Traded-goods prices along the supply chain

Markups along the supply chain

The limited available evidence suggests that total markups along the supply chain can be substantial. Anderson and Wincoop (2004) estimate that among developed countries, the typical cost increase from the factory in an exporting country to the retailer in the importing country amounts to 170%. An even higher estimate is given by Tempest (1996), which suggests that the mark-up on Barbie dolls produced in China and sold in the US is around 900%.

With a supply-chain decomposition, it would be possible to identify where the greatest rents and inefficiencies are, and to identify policy priorities. However, many modern supply chains are complex, involving different stages of production in different countries, and gathering components together from many locations for final assembly. This is particularly true for electronics and motor vehicles.

A classic example of this is the production of a computer disk drive, as discussed in Hiratsuka (2005) and Baldwin (2006). The disk drive is assembled in Thailand, which acts as the hub of the supply network, using 43 components from ten other countries and 11 components produced in Thailand. The disk drive is shipped to China, at which other major components are gathered before the final move of the finished product to the consumer.

There are a number of positive statements that can be made about the way non-tariff measures and supply chains affect the global economy, and these have normative implications.

  • There are low-level development traps associated with non-tariff measures and lack of trade facilitation, and these are manifest on both a national and a regional basis.

Since the effects of non-tariff measures compound along the supply chain, non-tariff measures can have a discontinuous effect on trade flows. Increased levels of trade costs can lead to a ‘tipping point’ beyond which the operation of a modern supply chain becomes simply infeasible (Yi 2003). Since global supply chains seek to minimise transactions costs, they often operate on a regional basis, eg East Asia for electronics, North America for motor vehicles. For the supply chain to be successful, it is necessary that both physical and government-induced trade costs be minimised. The near absence of electronics and automotive trade in sub-Saharan Africa can be attributed in part to trade costs associated with non-tariff measures.

  • Time barriers are particularly important.

The operation of regional supply chains requires the close coordination of the steps of production taking place in different countries, with a smooth coordination of inventories of intermediate goods, delivery of final goods, and return of defective products. In the old days of large integrated manufacturing, mammoth facilities such as Ford’s River Rouge auto factory in Michigan accomplished the objective of just-in-time manufacturing by physically locating operations side by side. When the ‘factory’ for a single disk drive extends from Japan to Indonesia, any delays at border checkpoints have a magnified effect on technical inefficiency. In many cases it would be possible to disperse manufacturing over a large geographical area, but government-induced delays at borders make it impossible.          

  • The role of standards varies by the stage of development. Non-tariff measures of the standards type can either promote or inhibit trade, depending on the situation.

The way that product standards interact with international trade is complex. Harmonised standards can promote trade, and also make supply chains more efficient. The cost of non-harmonisation can be easily viewed in a laptop power supply, which bears many small symbols printed in white indicating various government and private entities that must test the power supply for such reasons as radio non-interference. When harmonisation takes place, it is possible for a producer of intermediate goods to follow its customers into more markets and participate in the supply chain in more locations Some standards add production costs in order to enhance product quality. These act more like traditional non-tariff measures and have a trade-reducing effect which can be measured as a tariff equivalent. Do the social benefits of higher product quality and safety outweigh the costs of imposing the standard?

As the centre of gravity of the global economy shifts to large developing economies such as China and India, the demand for unprocessed and intermediate goods changes. This means not only that poorer suppliers of raw materials are pushed ‘upstream’ in the supply chain, but that their goods are expected to meet lower product standards than they would if they were sold in developed countries. Industrial strategy in developing countries, whether private or public, needs to take this into account. Is it better to sell larger volumes to big developing economies, and save the costs of complying with elaborate product standards, or is it better to bear the costs of standards compliance, sell to developed economies at higher unit values, and possibly retain more steps of the production process at home? Are there sufficient economies of scale at the national level to permit both types of markets to be served simultaneously?

  • Regional initiatives can help bring supply chains to new parts of the world.

The gains from improving efficiency of customs procedures, reducing the number of non-automatic licences required, reducing corruption, improving physical conditions in ports, and similar measures can be multiplied if several countries in a region undertake such reforms together. Just as many regions are on the wrong side of the ‘tipping point’ and do not attract global supply chains at present, the simultaneous reduction of trade costs in several neighbouring countries is likely to have benefits over and above the benefits to each individual country.

  • Non-tariff measures affecting logistics and related services are particularly important.

In almost all cases, the successful operation of supply chains is facilitated by third-party logistics firms, which provide coordinated services in supply-chain consulting, transport management, freight transport services, trade finance, express delivery, wholesale trade, packing, product returns, customs brokerage, and other areas (USITC 2005). In many countries national policies create barriers to entry for logistic services, which inhibits the growth of supply chains and thus international trade. This suggests one direct connection between trade policy and supply chains. Measures to liberalise market access in logistic services, whether unilateral, embodied in free-trade agreements, or in the form of General Agreement on Trade in Services commitments, can substantially enhance the feasibility and lower the costs of operating supply chains, with a concomitant growth in international trade.

Author’s Note: A wide range of additional resources on Non-tariff measures and trade facilitation, including databases, quantitative methods, working papers, and research ideas of all sorts, can be found on the NON-TARIFF MEASURE Network Wiki at http://i4ide.org/NON-TARIFF MEASUREwiki.

Disclaimer: This article represents solely the views of its author, and is not meant to reflect the views of the WTO or its Members, the official position of any WTO staff members, nor the views of the US International Trade Commission or any of its Commissioners.

References

Anderson, James, and Eric van Wincoop (2004), "Trade Costs." Journal of Economic Literature 42: 691–751.

Baldwin, Richard (2006) “Managing the Noodle Bowl: The Fragility of East Asian Regionalism”, Discussion Paper No 5561, Centre for Economic Policy Research.

Baldwin, Richard and Simon J Evenett, eds (2009), The collapse of global trade, murky protectionism, and the crisis: Recommendations for the G20, VoxEU.org eBook, 5 March.

Cernat, Lucian and Marlene Rosemary Madsen (2011), “‘Murky protectionism’ and behind-the-border barriers: How big an issue? The €100 billion question”, VoxEU.org, 23 March.

Ferrantino, Michael (2012), “Using Supply Chain Analysis to Examine the Costs of Non-Tariff Measures (Non-tariff measures) and the Benefits of Trade Facilitation”, Staff Working Paper ERSD-2012-02, World Trade Organization.

Hiratsuka, Daisuke (2005), "Vertical Intra-Regional Production Networks in East Asia: A Case Study of Hard Disk Drive Industry", IDE Working Paper.

Hummels, David, Peter Minor, Matthew Reisman, and Erin Endean (2007) “Calculating Tariff Equivalents for Time in Trade” Working Paper, Nathan Associates for US Agency for International Development.

Tempest, R (1996) "Barbie and the World Economy", Los Angeles Times, 22 September: A1 and A12.

US International Trade Commission (2005), Logistic Services: An Overview of the Global Market and Potential Effects of Removing Trade Impediments. Publication No. 3770, Washington, DC: USITC.

Yi, Kei-Mu (2003), "Can Vertical Specialization Explain the Growth in World Trade?" Journal of Political Economy 111: 52–102.

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Topics:  International trade

Tags:  supply chains, Trade barriers, non-tariff measures

Michael J Ferrantino

Lead Economist, World Bank International Trade Unit