Scenarios and Results

This section presents the results of three scenarios. Scenario 1 examines the impact of reducing transport costs in the GMS region by 45%. This was the median value found by many of the studies outlined above. The margins for the PRC were also reduced, but by 25% to reflect that smaller amount of trade by land transport that takes place in the two provinces associated with the GMS versus the country as a whole. The effect is to lower the costs of the land transport of goods within the GMS.

The second scenario explores the effects of an improvement in trade facilitation and time costs reducing overall trade costs. We implemented an approach introduced in Hertel, Walmsley, and Ikatra (2001) and further refined in Minor and Tsigas (2008). The approach allows for region specific shift in the Armington demand function, effectively lowering the foreign market price. The market price reduction is simulated by a technical change. Again, based on the studies of expected time savings if the CBTA were to achieve improved facilitation to world standards, we assume a reduction in costs of 25%. We need to differentiate the shock for the PRC to take account of the fact that the entire economy is represented in the model while only the Yunnan Province and Guangxi Zhuang Autonomous Region are part of GMS. According to Chinese national statistics, these two regions account for about 5% of the trade and economic activity of the country (National Bureau of Statistics of China 2007). Therefore, we reduced costs in the PRC by 5% to proxy a reduction on the relevant regions.

The third and final scenario combines the two scenarios outlined above. The first scenario is an attempt to capture the improvements in the physical connectivity associated with the GMS Transport Strategy and three economic corridors in the region. Estimates of the cost savings through reduced VOC, improved efficiency of trucks, and drivers and other cost savings are proxied by a reduction in the international land transport costs in the GTAP model. The second scenario attempts to capture the benefits of the time savings from these road improvements, but more importantly, the implementation of the CBTA. Through improved border crossing, harmonization of registration and other bureaucratic matters, trade facilitation should be improved throughout the GMS. As previously cited, these cost savings have the potential to surpass cost savings in tariff reductions over time.

We have based the estimated cost reductions for first two scenarios on studies which have attempted to quantify such savings in the region. However, it is likely these savings estimates include aspects of each process; i.e., the physical road improvements and the trade facilitation aspects embodied in the CBTA. By applying a straight combination of the two scenarios there is no attempt to account for any potential redundancies. However, given the dynamic effects observed in the anecdotal studies reported here (e.g., Luanglatbandith 2007; Phyrum, Sothy, and Horn 2007; JICA 2007), we believe that the cost reductions we have applied may be an understatement of the true effects. Thus, combining the two may provide a better indication of the potential benefits available to the region. We believe this provides some partial indication of the types of potential benefits from the dynamic changes likely to take place in the region.

Table 10 [ PDF 14.6KB | 1 page ] presents the results of the 45% reduction in the land transport margin on each of the GMS economies, including the PRC (at 25%). Welfare has improved in each economy with Viet Nam benefiting the most in dollar terms. Viet Nam has higher land transport margins on its exports than any other GMS country with significant trade flows, thus it has the most to gain from a reduction in these costs (Tables A4.a and A4.b). Lao PDR and Myanmar, which have the largest trade weighted land transport costs, have smaller dollar value gains due to their smaller trade base (Table A3.A [ PDF 12.7KB | 1 page ] and Table A3.B [ PDF 13KB | 1 page ]).

GDP increased in every country, though albeit by small amounts. These small changes can be attributed to the relatively small level of economic activity being affected by the cost reductions applied.¹³ Imports increase at a greater rate with dollar value trade expanding for every economy. Exports expand to a much lesser extent and even decrease in Lao PDR, Thailand, and Viet Nam, though the latter two by very small amounts.

As the trade in the GMS expands and markets open up due to the full implementation of the CBTA and economic corridors program, gains from reduced transport margins will certainly increase. While CGE models provide abundant insights to the interconnections and detailed workings of the global economy, they do not capture the benefits of the dynamic synergies expected to arise from the investment in the economic corridors in the region. As noted above, our third scenario is an attempt to capture some of this potential.

Table 11 [ PDF 14.8KB | 1 page ] presents the results from the second scenario, measuring the effects of improvements in trade facilitation in the GMS. The gains here are much larger than the first scenario as they impact a much larger share of economic activity. Thailand and Viet Nam gain the most in terms of overall welfare. As shown in Table A3, these two economies have the largest dollar value trade flows in the region.¹⁴ GDP growth is strong across all economies, as is import growth. While Thailand has the highest dollar value increase in imports, Lao PDR has the largest percentage increase. Lao PDR also have the largest percentage decrease in exports. Thailand is the only other economy to experience a decline in exports in this scenario.

Lao PDR's major exports are wood and paper (to Thailand) and textiles and apparel (to Europe). While exports to Thailand in wood and paper increase in this scenario, sales in textiles and apparel to Europe decline. The price differential resulting from improved trade facilitation in the GMS expands regional trade at the expense of trade outside the GMS. Sales to other GMS members such as Thailand and Viet Nam help the overall state of the Lao PDR economy (as evidenced by improvements in welfare and GDP growth) but overall exports do fall.

Thailand experiences much the same effect in its export sales in electronics and other manufacturing. Regional sales increase but sales to traditional markets in North America and Europe fall, leading to a small overall decline in exports.

These results highlight the potential benefits of improved trade facilitation to development within the region. Right now trade within the region is small compared with trade outside. When trade increases within the region, even by large amounts, it is not as yet a significant enough proportion to offset losses in larger markets outside the region. Despite these export declines, GDP and welfare in the region rises due to gains through improved import pricing. This implies that as the share of trade within the GMS countries increases, the gains from improved trade facilitation within the region will translate into much larger impacts on welfare and GDP and subsequently to larger potential export markets.

Taking the two scenarios and putting them together, the results from the third scenario are presented in Table 12 [ PDF 15.6KB | 1 page ]. Here, gains in welfare and GDP are significant but only slightly more than those reported in scenario 2 (Table 11). A possible explanation could be differentiating the gains from “soft” infrastructure versus “hardware” alone. In the first scenario, when physical transport infrastructure costs are reduced, total trade, welfare, and GDP within the region all increase. In the second scenario, costs are reduced due to technological changes owing to improvements in time and other facilitation measures; i.e., the software aspects and all measures increase by even greater amounts. When these are both are combined, we do not see a distinct increase over the “software” analysis alone. Rather, trade increases, GDP growth, and welfare gains are somewhat more than trade facilitation alone. These results provide some insight into the value of facilitation over physical infrastructure improvements alone.

We have argued that a clear benefit of trade facilitation is the expansion of inter-regional trade and the development force which that could be for the GMS. It has also been noted that there is the potential for increases in foreign investment and improved market access to outside the region. Given the small base of intra-regional trade and foreign investment reflected in the base numbers relied upon in this paper, it can be expected that the benefits to the GMS economies of trade facilitation and improved transport facilities will only increase.

That is not to say, however, that physical infrastructure improvements are not as important. Reductions in the costs of operating land transport due to improvements in the GMS' physical infrastructure showed real gains in the region's welfare. Total welfare increased by over US$330 million, and when the PRC is included, that grows to over US$440 million. It is important to keep in mind these numbers are generated based on a costs reduction that affects a small margin of a small proportion of economic activity. If more pervasive measures of land transport infrastructure were available, it is a reasonable assumption that even larger numbers would be generated.

What may be inferred from this result is that once the physical infrastructure is in place, diminishing returns set in rather quickly. Physical infrastructure is a necessary but not sufficient condition for an economy to obtain benefits from trade expansion. Marginal benefits from a physical base are highest when policy programs include trade facilitation.

As a means for estimating the potential increase in regional trade, a base from which synergies and investment benefits can grow, we looked at the change in intra-regional trade flows as a result of the three scenarios. Tables 13 through 15 present the changes in intraregional GMS trade from each scenario. Due to low reported initial values, Myanmar's results are not reported.

As shown in Tables 10 through 12, overall trade within the region expands under all scenarios. Intra-regionally the pattern is more diverse. The PRC experiences a decline in exports to Cambodia and Lao PDR, but an expansion in Thailand and Viet Nam (Table 13 [ PDF 14.6KB | 1 page ]). Lao PDR experiences a slight decline in trade with Cambodia, Viet Nam, and the PRC but these are a reflection of trade diversion to Thailand. All are very small movements and can be expected to improve as trade with Cambodia and Viet Nam grows. Viet Nam experiences the greatest increase in intra-regional imports, while it follows the PRC in export gains.

Examining the second scenario (Table 14 [ PDF 14.6KB | 1 page ]) we see much larger increases in intra-regional trade, with all trading partners increasing the size of their trade in the region. Thailand's exports and imports experience the largest gains in dollar value terms, again being the largest trading partner in the region. Viet Nam also exhibits substantial import gains with trade from Cambodia, nearly doubling over its previous levels. Exports from other GMS members to Viet Nam expanded by over US$4 billion while Thailand alone increases its exports by over US$7 billion, almost half of it going to Viet Nam. The PRC also expands its trade in the region, the vast majority with Thailand.

Examining the effects of both a reduction in land transport costs and improved trade facilitation, we see significant increases in trade flows but not the same level of increase as seen between the first and second scenarios. Thailand and Viet Nam continue to dominate the results, in addition to the PRC. Half of Thailand's increase in exports go to Viet Nam and the majority of Viet Nam's go to Thailand, although the PRC continues to play a large role in Viet Nam's trade. Cambodia and Lao PDR also substantially increases their exports to Thailand while Cambodia doubles its exports to Viet Nam over initial levels.

Table 15: Change in the Value of Intra-GMS Exports (US$M), Scenario #3 [ PDF 14.5KB | 1 page ]

Total trade (imports plus exports) within the GMS expands in all three scenarios. Thailand and Viet Nam expand the most in the two scenarios involving trade facilitation and the PRC in the land transport only scenario. The increasing trade flows for the rest of the GMS are quite large relative to initial values. For example, the US$123.8 million increase in exports from Lao PDR in scenario 3 represents an 82% increase in exports to the region (almost exclusively to Thailand). The trade between Viet Nam and Cambodia alone increases by a factor of three.

To examine in more detail the nature of this intra-regional increase in trade, Table 16 presents changes exports in selected sectors for all three scenarios. These sectors generally have high land transport margins or are significant items of trade within the GMS. Changes for the selected export sector for each scenario are presented by bilateral partners for the GMS economies where such information is available.

A general trend to note is that the change in total exports for each of the countries listed is less than that for intra-regional trade changes. In all sectors there are scenarios where total exports decline while intra-regional exports rise substantially. For example, fruit and vegetable trade in Cambodia, Thailand, and Viet Nam all decline in scenarios 2 and 3 and increase only marginally in scenario 1. In contrast, intra-regional exports increase substantially. Lao PDR experiences a general decline in exports from trading partners other than Thailand. However, exports in textiles and other manufacturing increase substantially across the region for Lao PDR in scenarios 2 and 3.

As noted earlier, Lao PDR exports 84% of its wood and paper to Thailand at a relatively high cost in land transport: 18% of export value (Tables A3.a and A4.a). In scenario 1 in which land transport margins are reduced, this trade expands nearly 15%. However, when both trade facilitation and margins are reduced, trade increases over three times that amount, by 46%.

An example of the potential of trade facilitation can be seen in Viet Nam's exports of fruit and vegetables. These exports incur very high land transport costs; 28% for the PRC and 11% for trade going to Thailand. When land transport costs are reduced, not unexpectedly, Viet Nam's exports to the PRC increase more than twice as fast as those to Thailand: 15.7% versus 6% (Table 16 [ PDF 22KB | 2 page ]). However, when trade facilitation is added, all else equal, Viet Nam's begins to export fruit and vegetables to Thailand at nearly four times the rate as it does to the PRC: 74% increase versus 18%.

Download this Paper [ PDF 1.6MB| 35 pages ].

Comment(s)

There are [0] comment(s) for this entry. Post a comment.