Introduction

While the impact of the global economic slowdown on trade has been very clear, its impact on progress in trade facilitation is less so. On the one hand, the sharp decline in trade volume and value has contributed to lower transportation costs and reduced waiting times at border crossings, lessening the pressure for improvements in facilitating trade flows. On the other, the urgency of boosting remaining trade flows to support recovery makes improvements in trade facilitation that much more pressing. The recent precipitous drop in world trade has been tied to many problems, not the least of which has been access to trade financing. Thus, in times of economic distress, trade facilitation is more important than ever. Among the hardest hit by the slowdown are Asian small and medium-sized enterprises (SMEs) that export or are trying to gain initial access to international markets.

Trade facilitation holds great potential for helping Asia to increase trade and experience more of the benefits of globalization when the global economy recovers. Francois and Wignaraja (2008) show that linking the three largest East Asian economies of the People's Republic of China (PRC), Japan, and the Republic of Korea (hereafter Korea) to the 10 nations of the Association of Southeast Asian Nations (ASEAN) in a free trade area will bring significant benefits to the participants, ranging from a 2.6% increase in national income to over 12%. Including the South Asian economies in a broader regional agreement increases these gains for both East Asia and South Asia. A pan-Asian regional agreement to link the different subregions is shown in the authors' analysis to cover enough countries and incorporate sufficient diversity in production and incomes to allow for regional gains (US$264 billion by 2017)¹ without substantive losses (about US$3 billion) to third parties. However, achieving the full potential of such an agreement would require considerable political will to avoid protectionist tendencies manifested through stringent rules of origin, nontariff barriers, and exclusionary lists of sensitive sectors. Thus while the potential is large, realizing it will necessitate substantial enhancement of trade facilitation to capitalize on potential complementarities.

Barriers to trade go beyond tariffs to include factors like high freight costs, delays in customs clearance, unofficial payments, slow port landing and handling, and poor governance. Institutional bottlenecks (e.g., administrative, legal, financial, regulatory, and other logistics infrastructure), information asymmetries, and discretionary powers that give rise to rent seeking activities by government officials at various steps of trade transactions also impose costs. These costs can be lowered through cooperation that facilitates trade logistics for merchandise and services in both inbound and outbound shipments.

There is also room for domestic policy reform to achieve broader benefits (the equivalent of unilateral trade liberalization) in areas such as transparency, competition policy, harmonization, and standardization. An export processing zone or similar sort of industrial enclave—with good infrastructure and policy support for trade facilitation allowing profitability to determine industrial restructuring and the balance between agglomeration and dispersion influences—can make a significant difference in a country with otherwise poor infrastructure or cumbersome procedures.

Broadly defined, trade facilitation includes measures taken by both public and private sectors, including reductions in nontariff barriers and improvements in physical facilities, to smooth the movement of goods and services by reducing time or transaction costs in transit. Thus, trade facilitation may encompass both hard and soft infrastructure that facilitates trade. Measures to facilitate trade are likely to have the greatest positive effects in expanding trade from developing countries, where such measures may increase the trade impacts of lowering remaining border barriers by a factor of two or more (Hoekman and Nicita 2008).

Trade transaction costs (TTCs) may be categorized into directly incurred costs and indirect costs. Empirical estimates of TTCs vary substantially, but direct and indirect costs have been shown to be between 1% and 15% of the value of traded goods (Walkenhorst and Yasui 2005). Direct costs (including customs fees, port charges, etc) tend to be relatively clear to traders. Indirect costs, on the other hand, tend to be less clear and may affect traders in terms of the cost of carrying inventory and market depreciation (Minor and Tsigas 2008). In additon, the inconsistency and lack of transparency associated with indirect costs increase perceptions of risk and reduce firms willingness to participate in these markets. Given these high risks and the information costs involved, it is the indirect costs that often act as a more signficant barrier for SMEs to enter new markets.

TTCs vary by trader-type, sector, and economy. Economies with higher per capita incomes tend to have more efficient border processes, though this is not always the case. Conversely, there are instances where relatively poor economies provide a relatively high quality of border services (Walkenhorst and Yasui 2005). The characteristics of traders can also determine the extent of TTCs, with smaller firms tending to conduct fewer international transactions, leading to larger per unit costs. These cost disadvantages may include having a limited customs track record as well as relatively few specialized personnel to deal with trade formalities, and weaker financial reserves to cope with problems including unforeseen stock delays (Walkenhorst and Yasui 2005).

Trade facilitation involves reducing trade costs, reducing risk or uncertainty in trade, or otherwise improving economic efficiency (perhaps through spillover effects). Trade costs can take the form of monetary costs (including the value of lost or deteriorated merchandise, and insuring against risk or uncertainties) or time costs. Trade costs play a central role in determining the amount of trade. A recent study (Jacks, Meissner, and Novy 2008) found that trade cost declines explain more than half of the (1870–1913) pre-World War I surge in trade and roughly a third of post-World War II trade growth, while a steep rise in trade costs explains the entire trade collapse in the inter-war period.

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