Making trade quicker and cheaper: The payoff from the WTO’s Bali Agreement on trade facilitation

09 Dec 2013

Mark Thirlwell, Chief Economist, Austrade

Bali is a long overdue dividend for the WTO and the Doha Round

It’s been a long time coming, but the Doha Round of multilateral trade negotiations has finally delivered a trade agreement.

Launched all the way back in November 2001, Doha has spent many of the intervening years trapped in limbo or, as one Indian trade minister memorably put it, poised somewhere ‘between intensive care and the crematorium.’ Once it became clear that the original approach to the Round was not working, negotiators decided instead to concentrate on harvesting some key elements of the negotiating agenda, leaving other elements for later. So the focus moved to trade facilitation and some parts of the agriculture agenda. Yet even this approach struggled to get traction. Meanwhile, the international trade policy agenda moved on, as a growing number of countries turned to bilateral, regional and most recently so-called ‘mega-regional’ trade deals like the Trans-Pacific Partnership (or TPP) for their trade policy action. Indeed, several of the key participants at Bali, including Australia, were heading off afterwards to Singapore to attend TPP negotiations. Not surprisingly then, more and more observers worried that if even this approach would not work, then both the credibility and the relevance of the multilateral trading system were in serious trouble.

The deal delivers a modest but important boost for the multilateral system

This month’s WTO meeting in Bali was seen by many as a make or break affair: the last chance to secure an important outcome but also put Doha back on track. And, despite some last minute brinkmanship, the WTO’s 159 members have finally managed to overcome their multiple differences and reach a deal.
All of which means that much of the immediate payoff from the agreement in Bali relates to the fact that the WTO has managed to stage a last minute recovery and proved that there is life left in the multilateral system.

And the agreement on trade facilitation offers a potentially significant win for global trade

The agreement on trade facilitation which is at the heart of the Bali deal has the potential to deliver a significant win for international trade at a time when the world economy has been struggling to deliver strong trade growth and when some analysts have been warning about an upsurge in ‘murky protectionism.’ Some estimates even put the possible gain as high as US$1 trillion.

Of course, in practice it’s always difficult to be precise about the likely gains for the world economy from any trade agreement. While they provide a useful guide, the results of modelling exercises should probably be taken with a healthy dose of salt. Nevertheless, several recent studies do suggest that a deal based on trade facilitation like the one reached in Bali is capable of delivering substantial gains.

For example, earlier this year the OECD reported on research showing that a multilateral agreement to cut red tape in international trade had the potential to produce a dramatic reduction in trading costs and hence to deliver a major boost to the world economy, and related work from the same organisation has found that the likely gains arising from implementing trade facilitation measures far outweigh the costs involved.

Likewise, the World Economic Forum (WEF) has estimated that the global income gains from every country improving its border administration and transport and communications infrastructure and related services to just half the level of the world’s best practice could boost world exports by US$1.6 trillion and global GDP by US$2.6 trillion. By comparison, the same WEF report estimated that removing all remaining tariffs worldwide would ‘only’ increase world exports by US$1.1 trillion and world GDP by US$0.4 trillion.

And another, much-cited, study by economists from the US Peterson Institute for International Economics carried out for the International Chamber of Commerce has estimated that a WTO deal on trade facilitation could lift world exports by almost US$1 trillion.

Why trade facilitation was worth the effort

Trade facilitation is a broad term normally used to capture measures designed to reduce the costs associated with international trade or, put slightly differently, to encompass policies which are designed to deliver better access to international markets. At the highest level, these kinds of policies are sometimes broken down into categories associated with ‘hard’ and ‘soft’ infrastructure, where the former refers to factors such as the quality of port and airport facilities as well as road and freight systems, while the latter captures costs associated with excessive paperwork, red tape and other barriers that can create significant delays when goods and services move across national borders.

These kinds of trade costs are particularly important in today’s world of international supply chains, since parts and components are likely to cross multiple national borders over the course of the production process. This proposition has been supported by a range of economic studies that find that reducing the time involved in trade transactions can deliver significant increases in the volume of trade.

In the case of the WTO’s work on trade facilitation, the focus has been on three specific areas: freedom of transit; border fees and formalities; and the publication and administration of trade regulations. WTO members have been asked to agree on issues including rules on how long it should take goods to transit national borders, what documentation customs agencies will require, and the role of ‘single window clearance’ whereby all trade documentation requirements can be consolidated with one office or agency.

So instead of the Bali agreement’s focus being on traditional trade policy measures such as tariffs or quotas, the emphasis has been on customs administration, border regulations, and documentation.

As the estimates cited above suggest, this kind of deal has the scope to deliver some useful gains for international trade. According to the OECD, for example, in the case of some African economies, revenue losses from inefficient border procedures are estimated to be as large as five per cent of GDP, or even more. The OECD also reckons that just by simplifying and harmonising trade documentation, many developing economies could reduce trade costs by up to three per cent, while streamlining procedures could deliver cost reductions to all economies of between one and three per cent.

Similarly, work by World Bank economists looking at the implications of countries’ adopting policies and measures that would move them closer to international best practice in these areas suggests the scope for major gains in trade flows that are at least as large as those that might be expected to come from a substantial round of international tariff cuts, and which could possibly be even greater still. Likewise, the Bank and other institutions also find that ‘aid-for-trade’ deals that involve trade facilitation offer attractive returns.

All of which suggests that, although Bali’s outcome is well short of the ambitious plans associated with the original version of the trade round, nevertheless the WTO’s first major agreement should deliver some substantial gains to the world trading system and to global welfare more generally and perhaps provide the impetus to make the next steps on multilateral trade liberalisation.