Let's Flatten The World

by: Otaviano Canuto

Thomas Friedman's bestseller The World Is Flat highlights the strong forces pushing the world towards a single economic platform. The technology-fueled globalization in the provision of services, and the widespread organization of production processes as global value chains are part of his narrative. The revolutionary potential of services comes out neatly from the persuasive story told in the book.

Yet Friedman himself remarks that the world is not there yet. Drivers of Brazilian trucks loaded with soybeans often jamming on the roads to Brazilian ports, as well as hotel owners in Cape Verde complaining about the dire conditions of air transportation to that beautiful part of the world, would certainly agree with that. It's true that information and communication technologies, combined with rising educational levels in parts of the developing world, have spurred the cross-border production of intangible services, while innovations like containerized shipping have reduced transportation costs for physical goods -- see here -- but trade remains hampered by remaining costly-to-cross hills and canyons.

Geographical distance, language, and contiguity of borders comprise just part of the trade cost factors, along with the tariffs and non-tariff measure. However, the costs from tariffs in particular have relatively fallen in recent decades. In many countries and sectors, barriers in terms of logistics performance, trade facilitation bottlenecks, and international physical connectivity have become relatively higher. As recently noted by Bernard Hoekman and Selina Jackson:

"Improving border management, transport and communications infrastructure services could increase global GDP by up to six times more than removing all import tariffs."

Logistics performance -- costs, delays, and reliability in handling the delivery of goods -- depend on investments in both hardware and "software." In other words, one needs to invest not only in equipment and construction, but also in the acquisition of managerial capabilities. The same applies to international connectivity through regular maritime, air, or terrestrial services. Trade bottlenecks, in turn, stem from border controls and other aspects of the transit system. They all depend substantially on the public policies and rules classified as non-tariff barriers, which raise the cost of cross-border trade.

The World Bank and UNESCAP have implemented a joint data-collection exercise of trade cost measurement over the period of 1995-2010 (Arvis et al, 2013). Strikingly, costs have fallen for all groups of countries but more slowly in low-income countries, and remain inversely related to levels of per capita income (see Chart). This is unfortunate as it means that many developing countries have missed opportunities to participate in the rise of networked production through global and regional value chains, since those chains obviously require a "flattening" of trade transaction costs.

TRADE COSTS - 1996-2009

Click to enlarge
(Click to enlarge)

Note: the chart shows average trade costs for manufactured goods with respect to the 10 largest importing countries, by World Bank income groups, 1996-2009, 1996=100. Source: Arvis et, 2013.

Facilitating trade, facilitating development

Such findings reinforce our lemma that facilitating trade is facilitating development. The pay-off for developing countries has risen substantially through improving policies and regulations regarding trade costs, and corresponding infrastructure investments. A multilateral effort in that direction would also be extremely welcome.

In 2001, trade representatives from around the world first arrived in Doha, the capital of tiny Qatar, for the latest round of World Trade Organization (WTO) negotiations. The goal was ambitious: work to reduce trade barriers, while ensuring that developing countries secure their fair share of global trade growth. After several years of negotiations, however, the Doha Round began to stall, with countries not being able to agree on a variety of measures, particularly on issues related to market access and the extent of new liberalization commitments.

At the same time, the macroeconomic effects of the financial crisis began to set in, making matters worse as global trade volumes experienced the largest decline since World War II. Today, more than a decade into the Doha Round and five years into the Great Recession, WTO members are still struggling to resist protectionist sentiments at home, while at the same time trying to make good on their commitment to link trade liberalization with good development outcomes. In fact, things have not recently evolved well on that front, according to the just released overview of the state of protectionist and trade-liberalizing dynamics by the Global Trade Alert.

Against this background, leaders of the major multilateral development banks last year argued in an op-ed that, "The WTO's best defense of open trade is a good offense." In particular, they argued that a new WTO Trade Facilitation Agreement would be a good way to increase global growth, and simultaneously bolster developing countries' capacity to trade.

The idea of trade facilitation is simple: help developing countries implement measures to reduce the cost of trading across borders by improving infrastructure, institutions, services, policies, procedures, and market-oriented regulatory systems. And the results are huge: it is estimated that for every dollar of assistance provided to support trade facilitation reform in developing countries -- especially on measures to improve border management systems and procedures -- there is a return of up to $70 in economic benefits.

Given these returns, the World Bank and its development partners have continued to support a variety of trade facilitation projects in developing countries. In Lao PDR, for instance, the Bank has worked with the government and development partners to establish a Trade Information Portal (see the video here), and has also led a multi-donor-financed program to develop a National Trade Facilitation Strategy and establish a National Trade Facilitation Secretariat. Work is now even under way to help the government create a National Single Window, with the aim of simplifying and automating the customs process. Another great example of the Bank's trade facilitation at work is the East Africa Trade and Transport Facilitation Project, which has drastically reduced border crossing times between Uganda and Kenya -- from three days to just three hours.

My previous experience as a vice president of the World Bank leading, among others, the bank's work on trade has showed me how even with modest resources and limited capacity, the trade facilitation agenda can proceed when countries have a strong commitment to the cause and access to sound advice. This is precisely why WTO members should press forward on a new Trade Facilitation Agreement, as developing countries want a credible commitment to support implementation costs such as technical assistance and capacity building. The dividends of trade facilitation can be shared by all, so securing such an agreement should be the focus of all.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.