STUDIES IN TRADE AND INVESTMENT 84 REDUCING TRADE COSTS IN ASIA-PACIFIC DEVELOPING COUNTRIES The United Nations Economic and Social Commission for Asia and the Pacific (ESCAP) is the regional development arm of the United Nations and serves as the main economic and social development centre for the United Nations in Asia and the Pacific. Its mandate is to foster cooperation between its 53 members and 9 associate members. ESCAP provides the strategic link between global and country-level programmes and issues. It supports Governments of countries in the region in consolidating regional positions and advocates regional approaches to meeting the region’s unique socioeconomic challenges in a globalizing world. The ESCAP secretariat is in Bangkok. Please visit the ESCAP website at <www.unescap.org> for further information. The darker areas of the map are ESCAP members and associate members. Cover design by: Yann Duval, TID/ESCAP Bongkojmanee Kohsuwan, TID/ESCAP ii STUDIES IN TRADE AND INVESTMENT 84 REDUCING TRADE COSTS IN ASIA-PACIFIC DEVELOPING COUNTRIES YANN DUVAL AMANDEEP SAGGU AND CHORTHIP UTOKTHAM iii STUDIES IN TRADE AND INVESTMENT 84 Reducing trade costs in Asia-Pacific developing countries United Nations Publication Copyright © United Nations 2015 All rights reserved Manufactured in Thailand ST/ESCAP/2741 For further information on this publication, please contact: Director Trade and Investment Division Economic and Social Commission for Asia and the Pacific United Nations Building Rajadamnern Nok Avenue Bangkok 10200, Thailand Email: [email protected] The material in this publication may be freely quoted or reprinted, but acknowledgement is required, and a copy of the publication containing the quotation or reprint should be sent to the ESCAP Publications Office. 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Mention of firm names and commercial products does not imply the endorsement of the United Nations. Reference to dollars ($) are to United States dollars unless otherwise stated. A space in used to distinguish thousands and millions. This publication has been issued without formal editing. iv v Table of contents FOREWORD ......................................................................................................................................................................... XIV ACKNOWLEDGEMENTS ...................................................................................................................................................... XV ACRONYMS AND ABBREVIATIONS ................................................................................................................................. XVI INTRODUCTION ..................................................................................................................................................................... 1 PART I: REDUCING TRADE COSTS IN ASIA AND THE PACIFIC: KEY FINDINGS AND THE WAY FORWARD ............ 3 A. Overview of trade costs in developing countries .............................................................................. 3 1. Trade cost trends across Asia-Pacific subregions .......................................................................... 3 2. Intraregional and extraregional trade costs .................................................................................. 7 3. Trade costs across LDCs, LLDCs and SIDS....................................................................................... 8 B. What policies and factors matter most in reducing trade costs? ................................................. 10 1. Sources of trade costs ................................................................................................................. 10 2. Types of trade costs ..................................................................................................................... 11 C. Key findings from micro-level trade process analyses ................................................................... 13 1. Business process analysis for trade facilitation ........................................................................... 13 2. Evidence from the Trade Process Analysis Database .................................................................. 14 3. Meta-analysis and implications for reducing trade costs ............................................................ 15 D. Key findings and recommendations from recent ESCAP studies .................................................. 19 1. Financing, quality certification and reduced clearance times the key to SME participation in trade ............................................................................................................................................ 19 2. WTO Trade Facilitation Agreement important to facilitating transit and reducing trade costs of LLDCs in Asia and the Pacific ........................................................................................................ 20 3. Logistics services and non-tariff measures the key to reducing trade costs in agriculture in Asia and the Pacific ............................................................................................................................. 21 4. Foreign direct investment strongly affected by trade facilitation and trade costs ..................... 22 5. Significant benefits associated with cross-border paperless trade implementation .................. 23 E. The way forward .................................................................................................................................... 24 vi PART II CHAPTER I: FACILITATING PARTICIPATION OF SMES IN TRADE: FINANCING AND COMMUNICATIONS TECHNOLOGY AS KEY ENABLERS ............................................................................................................................................................................. 28 INTRODUCTION ........................................................................................................................................................ 28 A. Review of the literature ........................................................................................................................ 30 B. Exporting SMEs: Preliminary insights derived from firm-level data ............................................ 32 1. Obstacles to business operations ................................................................................................ 34 2. Sources of financing..................................................................................................................... 36 3. Trade facilitation and use of ICT .................................................................................................. 37 C. Key factors in SME participation in exporting and IPNs ................................................................. 38 D. Conclusion and policy recommendations ......................................................................................... 41 ANNEX 1. ECONOMETRIC MODEL: MODELLING EXPORT PARTICIPATION BY SMES ............................................................... 43 ANNEX 2 ................................................................................................................................................................ 44 CHAPTER II: INCLUDING LANDLOCKED DEVELOPING COUNTRIES: TRADE FACILITATION POTENTIALOF EXISTING ASIAN TRANSIT AGREEMENTS ........................................................................................................................................................... 49 INTRODUCTION ........................................................................................................................................................ 49 A. Freedom of transit: A key component of trade facilitation ........................................................... 50 B. Transit facilitation: A complex system of legal instruments ......................................................... 51 C. Transit provisions in preferential trade agreements ...................................................................... 52 D. Trade facilitation potential of selected transport and transit agreements ................................ 53 1. Sample and analytical template .................................................................................................. 53 E. Findings and discussion ........................................................................................................................ 55 1. Definitions of “international transit” ........................................................................................... 55 2. Freedom of transit ....................................................................................................................... 56 3. Modes of transport and trade routes .......................................................................................... 56 4. Charges, regulations and formalities ........................................................................................... 57 F. Conclusion and implications ................................................................................................................ 65 ANNEX DIFFERENCES BETWEEN THE DCNT AND WTO TFA ............................................................................................ 68 vii CHAPTER III: AGRICULTURAL TRADE COSTS IN THE ASIA-PACIFIC REGION: A NEED FOR A SECTORAL APPROACH TO TRADE FACILITATION ........................................................................................................................................................... 71 INTRODUCTION ........................................................................................................................................................ 71 A. Patterns of comprehensive agricultural trade costs ....................................................................... 73 B. Tariff and non-tariff components of comprehensive agricultural trade costs ........................... 75 C. Determinants of comprehensive agricultural trade costs.............................................................. 77 D. Conclusion ............................................................................................................................................... 82 ANNEX 1 ................................................................................................................................................................ 83 ANNEX 2 ................................................................................................................................................................ 84 CHAPITRE IV: FINANCING FOR DEVELOPMENT: IMPACT OF REDUCING TRADE COSTS ON FOREIGN DIRECT INVESTMENT .............. 87 INTRODUCTION ........................................................................................................................................................ 87 A. Literature review: Trade and FDI ........................................................................................................ 88 B. World FDI flows at a glance ................................................................................................................. 90 C. Impact of trade facilitation on FDI: Data and methodology .......................................................... 95 D. Data and model estimation ................................................................................................................. 98 E. Impact of trade facilitation on FDI: Gravity model results and counterfactual simulation..... 99 1. Overall findings ............................................................................................................................ 99 2. South-South FDI and trade facilitation ...................................................................................... 100 3. Impact of trade facilitation improvements on FDI: A counterfactual simulation ...................... 101 F. Conclusion ............................................................................................................................................ 103 ANNEX ................................................................................................................................................................ 105 viii CHAPTER V: ESTIMATING THE BENEFITS OF CROSS-BORDER PAPERLESS TRADE IN ASIA AND THE PACIFIC ............................... 108 INTRODUCTION ..................................................................................................................................................... 108 A. Literature review ................................................................................................................................. 110 1. Estimates of micro-level impacts ............................................................................................... 110 2. Estimates of macro-level impacts .............................................................................................. 111 3. Summary .................................................................................................................................... 112 B. Methodology ....................................................................................................................................... 113 C. Results ................................................................................................................................................... 115 1. Relationship between paperless trade reforms and trade times .............................................. 115 2. Simulated export and import times under reform scenarios .................................................... 116 3. Simulated trade outcomes under reform scenarios .................................................................. 119 D. Conclusion and policy implications ................................................................................................. 123 ANNEX ................................................................................................................................................................ 125 REFERENCES ......................................................................................................................................................... 132 ix List of figures Part I Figure 1. Trade costs of Asia-Pacific subregional country aggregates with large developed economies............... 5 Figure 2. Trade costs of Asia-Pacific subregional country aggregates with large developing Asia-Pacific economies .............................................................................................................................................................. 6 Figure 3. Trade costs of Asia-Pacific subregional country aggregates with their top five trading partners ........... 6 Figure 4. Trade costs of LDCs, LLDCs and SIDS with large developed economies .................................................. 9 Figure 5. Trade costs of LDCs, LLDCs and SIDS with large developing Asia-Pacific economies .............................. 9 Figure 6. Trade costs of LDCs, LLDCs and SIDS with their top five trading partners ............................................. 10 Figure 7. Factors influencing trade costs of Asia-Pacific economies .................................................................... 12 Figure 8. Common barriers for trade facilitation .................................................................................................. 16 Figure 9. Main obstacles to business operations by exporting SMEs ................................................................... 19 Figure 10. Trade facilitation potential of selected transport and transit agreements ......................................... 20 Figure 11. Agricultural and manufacturing comprehensive trade costs, excluding tariffs, between selected economies and Japan, 2008-2013 ........................................................................................................................ 21 Figure 12. Impact of trade cost improvements on FDI in selected Asia-Pacific countries .................................... 22 Figure 13. Simulated export gains under partial (scenario one) and full (scenario two) implementation of cross- border paperless trade ......................................................................................................................................... 24 Part II Chapter I Figure 1. SME employment and SMEs per 1,000 people by income group .......................................................... 28 Figure 2. Ease of doing business and SME density, by income group .................................................................. 29 Figure 3. Percentage of SMEs involved in direct exporting or IPNs ...................................................................... 33 Figure 4. Most important obstacle in SME exporters’ business operations (all sectors)* ................................... 35 Figure 5. Most important obstacle in SME exporters’ business operations (manufacturing sector)* ................. 35 Figure 6. Sources of external financing for direct export SMEs ............................................................................ 36 Figure 7. Sources of external financing for IPN SMEs ........................................................................................... 37 Figure 8. Trade facilitation performance and ICT use of SMEs engaged in direct exporting ................................ 38 Chapter II Figure 1. Trade costs (excluding tariffs) of Asian landlocked countries and their main transit countries with the United States ........................................................................................................................................................ 50 Figure 2. Relatively fewer PTAs include freedom of transit ................................................................................. 52 Figure 3. Distribution of selected transit agreements, by ESCAP subregion ........................................................ 53 Figure 4. Trade facilitation potential of selected transport and transit agreements ........................................... 66 x