Empirical Analysis

The above discussion outlines the necessity of investing in regional infrastructure projects and the importance of trade facilitation in growth. Along with the physical structures that are needed to improve the flow of goods, services, and workers, there is a substantial need for investment in administrative procedures including regulation, customs processes, and practices to facilitate the growth and expansion of regional business opportunities. Given that these costs tend to be a higher percentage of operating costs for SMEs, the investment in trade facilitation is even more important in support of the growth in these enterprises.

Figure 3 [ PDF 34.9KB | 1 page ] presents a comparison of competitive measures in trade facilitation across a sample of 134 major and emerging economies (Total), for Asia as a whole (Asia) and finally for APEC Asia.⁸ The average rankings are shown for overall infrastructure as well as individual modes of roads, rail, ports, and air facilities. Finally, three measures of administrative costs are given covering the burden of customs procedures (customs), the transparency of government regulation (transp), and the burden of government regulation (regul). As seen in Panel A, APEC Asia performs, on average, better than both the world sample and overall Asia. This superior performance is consistent across all measures and is, in large part, due to the consistently top performance of Singapore and Hong Kong, China.

However, if we look at panel B, we see that the performance across all of APEC Asia is far from consistent. While in most instances (the exception being regulation), performance is less varied than for Asia as a whole, it is often more disparate than for the entire sample. This is observed for all measures of administrative facilitation, and, as already noted, APEC Asia has the most inconsistent government regulation performance. Thus, while on average APEC Asia performs well, it appears there are rather substantial gaps in performance across the region.

To examine trade facilitation at the border, we focus here on how individual pairs of countries interact.⁹ In addition to distinguishing trade costs by partner, the importance of differentiating trade costs by product has also been highlighted in the literature. Christ and Ferrantino (2009) showed how this plays out in Sub-Saharan Africa. The combination of high land transport costs for agricultural products and relatively low costs for metals and high-value products diminishes the ability of Sub-Saharan African countries to participate in exports involving vertically integrated products. They show the diversity of factors influencing transport costs, including weak infrastructure, imperfect information, and of course, the landlocked nature of countries involved. The measures presented support what has been suggested by the graphs presented above; depending on which two countries are involved, the process could be very advanced and efficient, or extremely slow. Thus important insights can be gained by examining the issue from this bilateral flow perspective.

There is no shortage of empirical work on trade facilitation. The World Bank has been particularly prolific on this subject. If one puts the words “trade facilitation” into the World Bank search engine, it yields over 1,700 citations. The methods most commonly applied are some form of the gravity model and, more recently, a computable general equilibrium (CGE) approach. Francois and Wignaraja (2008) provide a list of CGE papers that measure the impact of free trade agreements (FTAs) in Asia, a few of which apply some sort of trade facilitation scenario. The particular plight of landlocked countries has been of interest given their disproportionate dependence on trade facilitation as well as more general issues of market access. Estimates of increased costs for landlocked countries, such as those provided by Limão and Venables (2001), are as high as 70%. Given the large number of landlocked countries in the region, this is of great importance for trade promotion in Asia. As stated above, the growth of production fragmentation and subsequent trade expansion throughout the region means that cooperation and consistency in trade facilities among countries needs to remain a high priority for growth achievement.

As stated above, this paper attempts to expand the existing body of empirical research by examining the role trade cost reductions can play in bilateral relationships by sector. We used version 7 of the global trade analysis project (GTAP) database,¹⁰ covering 113 countries or regions and 57 sectors, with a base year of 2004. The GTAP 7 database was aggregated to cover 15 countries and regions, including all APEC Asia countries. The 57 sectors were aggregated to maintain coverage of sectors of key importance to the region, as shown in Table 4 [ PDF 16.1KB | 1 page ].

We applied a fairly straightforward experiment on enhancing regional trade facilitation within APEC Asia. We kept the experiment simple in order to examine the details of the outcome at the sectoral and bilateral trade levels. The estimates of trade costs by sector are based on Strutt, Stone, and Minor (2008) and include customs delays, document processing, administration procedures, etc., to determine time costs for trade. Table 5 [ PDF 21.7KB | 1 page ] shows the estimates for the time costs of exports from APEC Asia for selected sectors.

In order to determine the impact of these time costs on economic performance, we converted these estimates to tariff equivalents. We assumed that the ad valorem equivalent tariff for time delays in exporting or importing is equal to the per day value (Hummels, Lugovsky, and Skiba 2007), combined with the average time delay for that country (World Bank 2008). The original time costs were applied to a subset of sectors and countries of interest in this paper.¹¹ What is most apparent in table 5 is the variation in costs across both sectors and economies.

For example, the costs of transporting fruits and vegetables are high across all economies examined but are even more so for countries in Southeast Asia. This observation is consistent with the literature as noted above. Again, as described above, differences across countries based on products and level of development are observed. For example, the time costs of trade for fruits and vegetables in Viet Nam are more than three times those in Singapore. On the other hand, the costs of forestry products in Indonesia are less than half of those in Singapore. It is clear from the table that the impacts of improved trade facilitation will vary a great deal, depending on the sector and economy involved.

We have based our estimated reductions in trade costs on several recent studies of transport enhancements in the Asia and Pacific region (see Stone and Strutt 2009 for a review of these studies.) These studies examined the potential impact of reforms (either in process or already underway) in trade facilitation. For example, full implementation of the Cross Border Transport Agreement in the Greater Mekong Subregion is expected to reduce trade costs by as much as 45% (Banomyong 2008). From this review, we have applied a 25% reduction in the cost of transport across the APEC Asian region. We believe that this gives a reasonable estimate of the types of cost reductions that can be achieved through enhanced trade facilitation in the APEC Asian region.

Download this Paper [ PDF 293.2KB| 30 pages ].

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