Trade Facilitation

Reductions in trade costs resulting from infrastructure improvements or expansion are one form of trade facilitation, but trade facilitation through cost reduction can take a variety of forms. In the context of the World Trade Organization, it primarily refers to simplifying or speeding up administrative documentation procedures at border crossings. In broader usage, it includes various measures taken by public and private sectors, reform of non-tariff measures, and physical efforts to facilitate trade by reducing time in transit.

Dee, Findlay, and Pomfret (2008) include in the scope of trade facilitation all factors affecting the time and money cost of moving goods across international borders. Implementation options, including institutional arrangements and particularly regional agreements, can be usefully considered. The success of reforms to facilitate trade depends on their impact on reducing both rent-creating and cost-creating influences. These can be distinguished through use of the price-cost margin as a performance measure to help identify rent-creating barriers, and use of cost or productivity as performance measures to identify cost-creating barriers. The identification is important since the treatment effect (for rent-raising or costraising) can dominate other factors in the estimated height of trade barriers, with consequent policy implications. The extent to which non-tariff barriers, such as regulations, lead to vertical shifts in demand or supply curves with resulting effects on costs and prices can be quantified through antimonde estimation, in which a measure of economic performance is also estimated for the counterfactual case with no non-tariff barriers in a market.

The ability of a nation to finance trade-related infrastructure projects is complicated by the dynamics of trade balances, debt, and reserve accumulation, among other factors that constitute important feedback loops between trade and infrastructure. Demographics, government debt levels, and intergenerational equity are all relevant concerns in the decision making process for infrastructure expansion and financing. Consequently, the modality chosen for financing trade-related infrastructure can have macroeconomic implications which vary depending upon initial conditions (Brooks and Zhai 2008).

Most physical infrastructure outlays are accounted for by public investment, particularly where fixed network infrastructure has public good and natural monopoly characteristics. Francois and Manchin (2007) illustrate the complementarity between greater government involvement, domestic transport and communications infrastructure, and export performance.

Interactions between changes in the composition of trade, mode of product packing (container or bulk, for example), and the capacity expansion effect of new port infrastructure all influence the potential profitability, and hence bankability, of port infrastructure investments. Ocean shipping constitutes 99% of world trade by weight and a majority of world trade by value (Hummels 2007). In planning projects for port expansion or improvement, both the capacity and efficiency effects need to be taken into account when projecting potential benefits. This is true for all modes of transport, through sea-, dry-, and airports, and can have important implications for regional partners and competitors.

Among different indicators of infrastructure services' contributions to trade, port efficiency appears to have the largest influence, reflecting the fact that the vast bulk of developing countries' trade (by weight) goes through sea ports. For example, infrastructure improvements that raise port efficiency from the 25th to the 75th percentile can reduce shipping costs by more than 10% (Clark, Dollar, and Micco 2004). The dominance of sea freight over land transport, and its associated cost savings, emphasizes the need to address, particularly through regional cooperation, the challenges faced by landlocked countries attempting to compete in global markets as well as the importance of improving port efficiency in countries with amenable coastal areas.

Haveman, Ardelean, and Thornberg (forthcoming 2009) confirm through econometric estimation for a subsample of Asian ports that specific types of infrastructure investments are highly correlated with reductions in port costs. While Penang (Malaysia) currently has the lowest costs of ports studied, between 1997 and 2005 Mumbai experienced the greatest improvement in relative costs. Operating with a new harbor, wharf, or terminal is found to decrease port costs by 2%, while procurement of a new crane is found to decrease port costs by 1%. Increasing the number of berths and deepening channels at ports have less effect.

Not only do investments in port infrastructure, and especially the procurement of new cranes, lower costs and raise efficiency for current trade flows, they can also increase port capacity to handle new flows and influence the composition of trade. Port costs vary significantly across products even at a single port and new infrastructure can, for example, differentially influence the costs for loading/unloading containers versus bulk commodities. Given the inherent advantages in containerization for certain product categories, relevant port infrastructure developments can reduce unit costs further as the container share of trade rises.

Information and communication technology (ICT) is a highly productive complement to physical transportation infrastructure. The quality of communication infrastructure services is not only strongly correlated with search costs, but also with costs of entering into contracts with suppliers and monitoring implementation of those contracts. Costs related to the time elapsed between the perception of demand and subsequent supply of products to the relevant retailer(s) can also figure prominently (Nordas and Piermartini 2004).

Fink, Matoo, and Neagu (2002) find that the cost of making a telephone call has a significant and negative impact on bilateral trade flows. In addition, the bilateral costs of telecommunications have a greater effect on trade of differentiated products than on trade of homogeneous products. This reflects the value of access to information and the importance of information technology infrastructure, as well as telecommunications, at the dynamic extensive margin of trade. In particular, as the number of smaller shipments of a wider variety of higher value added products rises, demand for ICT infrastructure services also rises.

Telecommunications infrastructure is also especially important for trade in services, where the main services traded (banking and business services, communications, etc.) are highly dependent on well-developed infrastructure both in the exporting and importing countries and linking the two (Nicoletti, Golub, Hajkova, Mirza, and Yoo 2003). Given the huge value of ICT infrastructure demanded, it is fortunate that ICT is an infrastructure sector that the private sector is especially adept at innovating, expanding, and financing due to its pricing and cost-recovery characteristics, while the need for mutually interfacing logistics services at both ends of the trade route points to an area for regional cooperation to capitalize on externalities in enhancing trade.

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